Thursday
Oct162014

Weekly Market Update - October 16, 2014

Federal Beige Book Summary July through mid-August: Table 1, presents a summary of the 51 page Beige book. The Fed’s reading on the US economy continued to show growth at a modest pace, little changed from the previous report. Most regions of the country cited continued moderate economic expansion to include; San Francisco, Dallas, Chicago, and New York. The remaining districts described their expansions as modest. The continued economic growth is fostering stronger consumer confidence across most geographies and industries. The banking sector is performing well, boasting increased loan demand in all regions of the country. Demand for auto loans is seen as the key for this demand surge. Job creation in recent months have shown a healthier labor market, while wages and inflation have been benign. One notable concern expressed was the overall housing market with both home building and home buying showing some level of deterioration in several districts. Multi-family residential has performed well. Low vacancy rates and increasing rents continues to drive construction of more rental units in some districts. Long awaited hope of the release of pent-up demand continue to buoy expectations for future growth from both the construction and manufacturing sectors.

Table 1

Ocean Freight Rates: The Baltic Dry Index has once again fallen below 1,000 after showing signs of life in Q4 2013, (Fig. 1). The index stood at 963 on October 10th. The immediate question according to the Mid Ship report is whether increased business following the summer holiday doldrums will start to absorb some of the tremendous over supply of ships. To make the supply situation worse, Vale has announced its intention to buy 20 more VLOCs which are the 400,000 ton capacity ore carriers intended for the Brazil to China rout. Rates on that run recently fell to as low as $17.75 US per metric ton compared to $7.50 / metric ton on the Australia West Coast to China rout. The Baltic Cape Size Index had fallen to 1,544 on October 10th, (Fig. 2), with average daily earnings of $10,542 compared to costs of $6,500 / day which after finance and insurance costs doesn’t leave much. The Panamax index strengthened from 461 in mid-June to 865 on October 10th but the Mid Ship report expects an imminent weakening in the Atlantic basin due to a decline in US shipments to Europe, including coking coal. The relatively strong Far Eastern market continues to keep most of the Panamax capacity on that side of the world.

Fig 1

Global GDP Growth. IMF Forecast October 2014: Last week the IMF released its semiannual forecast of the world economic outlook, (WEO) which included the following statement, “despite setbacks, an uneven global recovery continues. Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage points lower than in the April 2014 WEO. The global growth projection for 2015 was lowered to 3.8%. Downside risks have increased since the spring. Short term risks include a worsening of geopolitical tensions and a reversal of recent risk spread and volatility compression in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets.” Prior to the 2001 recession, the US held its own in the economic growth stakes but between 2001 and 2008, growth in the US averaged 1.84% less per year than the growth of the global economy as a whole, (Fig. 3). In the years 2011 through 2013 that gap narrowed to 1.36%. Global growth is now forecast to level off at about 4% in the years 2016 through 2019, the discrepancy with US widening again. The US has outperformed the Eurozone in every year since 2008 and is forecast to continue to do so through 2019. Within NAFTA, Mexico is forecast to maintain a growth rate of about 3.8% as the US and Canada slow to 2.6% and 2.0% respectively in 2019, (Fig. 4).

Fig 3

Construction/Manufacturing Employment: Total construction employment increased by 16,000 in September, to 6.08 million, the highest level since Q2 2009. The industry is +203,000 jobs through 2014 YTD compared to +129,000 during the same timeframe in 2013. Construction industry employment was up in 28 of the last 30 months and is +466,000 in this period. Manufacturing employment increased 4,000 in September after August’s unusual decline. Total manufacturing employment was at 12,154 million, the highest level since Q4 2008. The industry has increased employment 13 of the last 14 months and was +172,000 during this time period. Employment was +101,000 YTD while only +28,000 in the first nine months of 2013. Manufacturing employment in Motor Vehicle and Parts expanded by 3,300 in September, growing five of the last six months in this sector. Employment in Construction and Manufacturing increased 53,000 and 42,000, respectively, in the second quarter while GDP expanded 4.6%, (Fig. 5).

Fig 5

U.S. Job Openings & Turnover Survey: JOLTS reported 4.835 million openings at the end of August, a 5% rise from the previous month and 19% on a y/y basis. This was the most job openings since January 2001, leading hope that businesses will start to pick up the pace in hiring. There is still significant slack in the labor market as job openings are high, however, wage growth has been stagnant since 2010. (http://research.stlouisfed.org/fred2/series/CES0500000003). This says that businesses don’t have to pay higher wages because there are still plenty of job seekers per available job. Total hires were at 4.6 million, down 300k from July. Total separations were at 4.4 million. Net change in employment in August was 180,000, down significantly from July (243,000).

The West Region experienced the biggest increase in job openings, with a 9% jump from July. The South Region bounced back with a 7% increase m/m, after falling 1% in July, the first decrease since January of this year. The Northeast Region has fluctuated every month; August is up 3% while July was down 4%. The Midwest Region followed the same pattern as the Northeast, fluctuating month after month, with a 2% fall in August but 3% climb in July, essentially wiping out job openings since April of this year, (Fig. 6).

Manufacturing job openings ticked up in August 1% after July’s drop of 3%. This was the first decrease since January. The Construction Industry posted a precipitous decline of 21% in August after a 9% drop in July. Total job openings were at 115,000, 9,000 less than what 2014 started out with. Trade, Transportation, and Utilities experienced job opening growth for the third straight month, and six out of eight on the year. This can be explained by massive surge of imported steel over the past two years. Year to date through August this year, imports of all rolled steel products are up 20.2% y/y. At the same time semi-finished imports are up 39.6%.

Federal Reserve

Fig 6

U.S. MSCI Report: The three month moving average (3MMA) daily shipment rate for all carbon long products was up 4.8% y/y in September. The percentage 3MMA y/y change has been positive for 14 consecutive months. Plate showed the strongest gains, up 11.2%. Structurals reported the weakest shipments, up 2.4% y/y. Despite showing the weakest shipment increase compared the other product groups the 245,600 tons of shipments was the strongest monthly performance since the recession ended. Daily intake 3MMA surged by 11.8% y/y for all carbon steel products, strongly influenced by a 33.4% jump in plate and a 15.2% bump in pipe & tube. All product groups recorded increased intake. Overall monthly inventory levels grew by 16.3% y/y to 2.44 months on hand (MOH). Carbon plate posted the largest increase, up 25.4%, while sheet inventory increased by 19.0%. Pipe & tube inventory levels fell by 3.9% y/y, (Table 2). Inventory levels were also up 5.8% vs. the same timeframe two years ago. Fig. 7 presents daily shipment levels and the percentage y/y change since the year 2000. Overall shipments of carbon steel hit 166,600 TPD in September, well up from the recession low of 112,000 TPD, but still a long way from the 213,000 TPD average level enjoyed during the 2004 to 2008 “boom” period.

Table 2

Canadian MSCI Report: Overall daily 3MMA shipments from Canadian service centers were up 1.1% y/y and down 3.4% vs. two years ago. Pipe & tube was up 6.8%, while bar & shapes were down 1.4%. Daily 3MMA intake surged 27.0% y/y, led by a 49.3% leap in sheet. Monthly overall inventory levels surged by 16.6% y/y to 3.12 MoH, influenced by a 19.3% increase in plate, a 19.1% surge in structurals and a 16.9% jump in sheet, (Table 3). After rising steadily since the recession, daily shipment levels fell throughout most of 2012, (Fig. 8). Shipment levels were more or less flat throughout 2013 and thus far in 2014.

Table 3

U.S. Raw Steel Capacity Utilization has fallen in 6 of the last 7 weeks and is down 6.6% over the last 2 months, from 80.3% utilization 8/23/2014 to 75.0% utilization 10/11/2014. Year to date production stands at 75,241 million tons, up 0.5% compared to the 74,857 million tons produced YTD in 2013. Year to date capacity utilization through 10/11/2014 was 77.2%, up 0.2% over the same timeframe one year ago, (Fig. 9). Historically there has been a reasonably good correlation (-0.833) between jobless claims and raw steel production, (Fig. 10). Based on this relationship we should be producing a lot more steel (roughly 350,000 tons per week) than we are currently. This relationship started to diverge 11/24/2012 and has been widening ever since. This can be explained by massive surge of imported steel over the past two years. Year to date through August this year, imports of all rolled steel products are up 20.2% y/y. At the same time semi-finished imports are up 39.6%.

Fig 9

Steel Demand Indicators: Table 4 is a snapshot of the market situation on 10/16/14. Of the twenty seven indicators under consideration, the present situation of eleven are now positive by historical standards, ten are neutral and six are negative. This is a reduction of one positive and an increase of one neutral since this analysis was last published on October 2nd. The change we have made is to our evaluation of the US $ which as has been widely reported is experiencing a strong upward trend. The Federal Reserve’s Broad Index value of the dollar increased by 5.8% in 12 months, by 3.7% in 3 months and by 1.3% in one month through October 10th. A stronger dollar promotes net steel imports and depresses the price of global commodities such as oil and iron ore. There were no other directional changes in the present situation of the 27 indicators. In our trends analysis, most of the values reported are three month moving averages to avoid the knee jerk reactions that are characteristic of most economic reports in the press. There was a net increase of one in the negative trend category since last published but overall trends continue to be good with 20 of 27 indicators moving in the right direction. In our last report the price of Chicago shredded was unchanged but fell by $20 in early October which we regard as a negative. September service center shipments and inventory were reported today and for long products as a whole, (bar + structurals) shipments were up by 3.4% year over year on a 3MMA basis. Shipments of structurals in September at 11,700 tons per day were the highest since November 2008 when the market was collapsing. The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 4

Contributors this week include; Bryan Drozdowski, Peter Wright and Steve Murphy