Weekly Market Update - January 12, 2017

Net Job Creation by Industry: In December net job creation was 156,000 which was down from 204,000 in November. October was revised down by 7,000 and November up by 46,000. Using a three month moving average, (3MMA), the result for December was 165,000 down from 182,000 in November. Figure 1 shows the 3MMA of the number of jobs created as the brown bars since 1990. December was the 74th consecutive month of job growth however it looks as though a gradual slowdown is occurring. The high months in 2015 were lower than 2014 and that trend continued into 2016. In the big picture, layoffs are historically low and job openings are close to all-time highs therefore there seems to be no reason for pessimism. Manufacturing data has been disappointing this year as construction has been encouraging. Primary metals have shown signs of life in the last four months after contracting for 21 straight months. The last six months for the road hauling sector are encouraging and job losses in the oil fields have almost halted in the last four months. The results for manufacturing and construction are sign posts for steel sales activity.

Table 1 slices total employment into service and goods producing industries and then into private and government employees. Most of the goods producing employees work in manufacturing and construction. In December manufacturing gained 17,000 which was the best result since January 2016 but for the year as a whole lost 63,000 positions. In December total manufacturing employment was 0.4% less than a year ago and 0.2% lower than two years ago. In the last three months primary metals have been doing better than manufacturing as a whole but much worse on one and two year comparisons. In December oil and gas extraction lost 1,300 jobs bringing the total loss for the year to 9,300 positions. Truck transportation added 1,400 people in December bringing the total for the last 6 months to 19,800. This followed a loss of 9.400 in the first half of the year. Motor vehicles and parts have picked up the pace a little in the last three months with gains of 1,000, 2,000 and 3,000 respectively.

Construction was reported to have lost 3,000 jobs in December with a total gain of 102,000 for the year. In spite of the weak December result, the last four months of 2016 had a total gain of 54,000 therefore there is no sign of a slowdown in the growth of construction employment.

The official unemployment rate, (known as U3) came in at 4.7% which up from 4.6% in November. This number is very misleading and doesn’t take into account those who have stopped looking. The more comprehensive U6 unemployment rate was down from 9.9% in January to 9.2% in December, the lowest since April 2008, (Figure 2). U6 includes workers working part time who desire full time work and people who want to work but have given up the search.

Initial claims for unemployment insurance, reported weekly by the Department of Labor have continued their downward drift this year and in week ending December 31st were 235,000 with a four week moving average of 256,750. This marks the longest streak since 1973 of initial claims below 300,000. (Figure 3).

Figure 1

Table 1

Figure 2

US Fabricated Steel Beam Imports: Data released by the US International Trade Commission reported fabricated beam imports rose 4.1% m/m, as year to date imports through November totaled 443,000 tons (kt), a 27% YTD y/y increase. This year over year increase was led by imports classified under HTS 730890.6000 alloy or partial alloy fabricated beams. Import tonnage was up 62% YTD y/y compared to November 2015 for this product. Figure 4 displays beam and fabricated beam imports. With one month left in the year, YTD all beam imports totaled 999 kt, 153% above 2010 total beam imports. Including beam licenses requested for December importation, the 2016 US beam import market will exceed 1 million tons by year end.

Beam imports from China fell 85% YTD y/y, yet fabricated beam imports from China rose dramatically, up 134% YTD y/y, (Figure 5). Thirty percent of US fabricated beam imports originated from China. While China holds significate import market share, 61% was shipped from within NAFTA. Canada was the largest provider of fabricated beams and increased shipments by more than 50% YTD y/y. Significant imports from Italy, the UAE, Luxembourg and Spain also contributed to 2016 increased imports.

The gulf region received in excess of 170 kt which include fabricated beams from China, UAE and Mexico, (Figure 6). The Great Lakes region received most imports from Canada and Europe, although some fabricated beams were imported from China to this region of the US. The Atlantic region received tonnage from Canada and Europe, while the Pacific US received fabricated beam imports from China and Mexico.

Figure 4

US Steel Long Product Import Licenses: December US import licenses through January 10th, as reported by the US Census Bureau’s Steel Import Monitor, totaled 440,000 tons (44 kt) a 3% increase over preliminary November long product imports. November licenses requested totaled 482 kt, yet preliminary imports totaled only 425 k, leaving 57 kt of unfulfilled import licenses. Unfulfilled licenses that could be utilized within the next 75 days, giving December the potential for imports closer to 497 kt. Year to date imports plus December licenses totaled 6.08 million tons (mt), down 4% y/y. 2016 was the first annual decline in six years for long product imports, (Table 2).

December Rebar licenses were up 9% compared to November preliminary imports. Year to date the US has imported in excess of 2 mt of rebar, up 6% y/y. Monthly rebar imports continued to be erratic with as little as 106 kt tons imported during April and as much as 291 kt imported during July. Figure 7 shows annualized rebar imports, and a clearer picture of the 404% import increase over the last seven years. A total of 85% of the US’s imported rebar is shipped from Turkey.

Wire rod licenses fell 5% m/m, totaling less than 100kt for the month. November preliminary imports had 15 kt tons of unfulfilled licenses that could be used in December. Brazil, Germany, and South Korea were among those countries “sandbagging” November import applications. Japan and Brazil both had significant increases in December wire rod licenses compared to what they exported to the US in November, as licenses from NAFTA, and Europe fell. Year to date imports plus December licenses totaled 1.56 mt, and were flat y/y.

Bars-light shapes, as defined by S.I.M.A., includes lighter structural shapes such as angles and channels. December licenses for these products fell for a 3rd consecutive month, down 3% in December, importing 173 kt YTD which was flat YTD y/y. Heavy structural shapes, including beams were flat m/m, totaling 875 kt YTD, and down 3% YTD y/y. The beam component rose 4% in December while the heavier angles and channels fell 5% m/m, a second monthly decline.

Hot-rolled and cold-finished bars comprise products defined as merchant bar quality (MBQ) and special bar quality (SBQ). Based on the last 24 months of final import data, we have extrapolated that an average of 20% of hot-rolled bars are MBQ products. This percentage has fluctuated as high as 27% and as low as 14% over the last 2 years, but gives us a good postulation of how much tonnage can be expected to reach US shores. Based on this knowledge, MBQ December licenses were up 34% m/m while SBQ license were flat, up 2% in December. Year over year MBQ imports plus licenses total 244 kt, down 9% YTD y/y. SBQ imports plus December licenses exceeded 1.1 mt, down 22% YTD y/y compared to 2015 end of year imports. SBQ imports have declined for the 3 consecutive years, (Figure 8).

Table 2

Figure 7

Rail Time Indicators Report (AAR): At Gerdau, we follow the AAR report is because; freight railroading is a “derived demand” industry: demand for rail service occurs as a result of demand elsewhere in the economy for the products railroads haul. Thus, rail traffic is a useful gauge of broader economic activity, especially of the “tangible” economy.

Total US carloads excluding coal was up 2.0% in December 2016 over December 2015 (m/m) and off 1.5% for the year. Metallic ores (primarily iron ore), decreased 4.3% m/m and was down 12.7% y/y. Primary metal products carloads increased by 3.9% m/m but fell 6.5% for the year. This was the first monthly increase after a long string of m/m declines. Scrap carloads jumped 23.4% m/m as the market for scrap turned around starting in November. On a 12 month measure scrap was down 2.0%. Carloads of motor vehicles and parts rebounded m/m to +5.3% after a down month in November. For the year motor vehicles and parts recorded 2.1% growth.

Total intermodal jumped 11.2% m/m, (containers +11.6% & trailers +8.4%). For the year intermodal eked out a 0.5% gain. Total cars plus intermodal grew by 6.9% m/m but was off 5.0% for the year. It is encouraging that the last two months are showing growth indicating stronger economic activity heading into 2017.

Figure 9 presents a chart comparing the growth of rail carloads of motor vehicle & parts, primary metal products, metallic ores and iron and steel scrap from 2010 to present.

Total Canadian carloads excluding coal increased 9.2% m/m but was down 3.9% through December. Metallic ores (primarily iron ore), surged by 51.2% m/m but on a y/y basis was down 5.5%. Primary metal products carloads declined by 11.2% m/m and 17.1% y/y. Scrap carloads surged 23.7% m/m, it was up 1.4% y/y. Carloads of motor vehicles decreased by 1.2% m/m however climbed 3.4% for the year.

Total intermodal was climbed 9.7% m/m, (containers +9.5% & trailers +26.4%), but was down 1.2% on a y/y basis. Total cars plus intermodal grew by 8.7% m/m but was off 3.1% for the last twelve months y/y. Much like the situation in the US, economic activity ticked-up a bit over the past two months.

Figure 10 presents a chart comparing the growth of rail carloads of motor vehicle & parts, primary metal products, metallic ores and iron and steel scrap from 2010 to present.

Figure 9

Figure 10

Consumer Credit: We monitor consumer spending because history has shown that increased consumer spending (which is approximately 70% of GDP), translates into increased steel consumption (and vice versa).

Consumer spending surprised to the upside in November after posting a disappointing October. Non-revolving credit led a strong surge to $24.5 Bn, exceeding analysts’ expectations by $6.1 Bn. Revolving credit also recorded a solid increase in November, up $11 Bn, its best showing in six months, (Figure 11). Heading into 2017, economists expect continued strong job creation at levels on-par with 2016. This bodes well for increased borrowing as consumer confidence continues to improve. However, headwinds in terms of higher interest rates will limit this growth as the FED Open Market Committee is likely to continue raising rates going forward.

Figure 11

Contributors this week include; Laura Remington, Peter Wright and Steve Murphy