Weekly Market Update - October 13, 2016

Global Economic Outlook. IMF October 2016: In its October, World Economic Outlook the IMF reduced its forecast for economic growth in the US in 2016 from 2.4% in the April forecast to 1.68% and in 2017 from 2.5% in the April forecast to 2.2% in October.

Figure 1 shows the growth of global GDP since 1970 with this month’s IMF forecast through 2021. We have highlighted the periods of the early seventies and the mid-2000s when the commodity bubbles prevalent at those times were driven by unusually high and sustained global growth. The collapse of the commodity bubble in the last decade coincided with the US banking and housing crisis setting up the perfect storm. Global growth has lacked volatility and gradually declined in the years 2012 through 2016 followed by a forecasted slow improvement through 2021. 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, (Figure 2). In the years 2011 through 2015 the gap narrowed to 0.60%. The difference is forecast to widen to 2.16% as global growth climbs back to 3.78% in 2021. The US has outperformed the Eurozone in every year since 2008 and is forecast to continue to do so through 2021, though the gap is expected to close, (Figure 3).  Figure 4 shows the growth comparison between emerging and developing economies and the advanced economies, the gap is projected to widen in the rest of this decade. Within NAFTA, the growth of GDP of all three nations coincided in 2014. Mexico and the US will track each other through 2017 then Mexico will pull away as the US growth declines. Canada performed relatively badly in 2015 and is expected to catch up with the US in 2019 through 2021 (Figure 5).

Figure 1

Net Job Creation by Industry through September 2016: The employment picture is mixed. September was the 71st consecutive month of job growth but it looks as though a slowdown is occurring. September data for manufacturing was disappointing and for construction was encouraging. In the big picture, layoffs are still declining and job openings are increasing therefore there seems to be no reason for pessimism.

In September net job creation was 156,000, July was revised down by 23,000 and August revised up by 16,000. Using a 3MMA, the result for September was 192,000, down from 230,000 in August. Figure 6 shows the 3MMA of the number of jobs created as the brown bars since 1990. These numbers are seasonally adjusted by the BLS. In the six years since and including 2011, September job creation has been up by 9.3%. This year September was down by 6.6% therefore this is a disappointing result.

Table 1 slices total employment into service and goods producing industries and then into private and government employees. Total employment equals the sum of private and government employees, it also equals the sum of goods producing and service employees. Most of the goods producing employees work in manufacturing and construction and the components of these two sectors that we consider to be of most relevance to steel people are broken. In September, 167,000 jobs were created in the private sector and government lost 11,000. The Federal government gained 4,000 as local governments lost 15,000. This was the first month for local governments to cut employment since November last year. State government’s employment total was unchanged. Since February 2010, the employment low point, private employers have added 15,309,000 jobs as government has shed 295,000. In September service industries expanded by 146,000 and goods producing industries by 10,000 people. Since February 2010, service industries have added 13,029,000 and goods producing 1,985,000 positions. This is part of the reason for stagnant wage growth since service industries on average pay less than goods producing such as manufacturing.

In September manufacturing lost 13,000 jobs and for the year as a whole was down by 58,000. August and September had a combined loss of 29,000 following small gains in June and July. In September total manufacturing employment was 0.4% less than a year ago but 0.4% higher than two years ago. Primary metals have had only one month of positive job growth in the last 20 months and have lost 4.1% in the last year and 7.7% in two years. In September oil and gas extraction had an employment gain of 1,000 people following the same gain in August. These two months were the first back to back months of gains since September and October 2014. Truck transportation lost 3,600 positions in September and is down by 7,100 YTD. Note the subcomponents of both manufacturing and construction shown in Table 1 don’t add up to the total because we have only included those that we think have most relevance to the steel industry.

Construction was reported to have gained 23,000 jobs in September and is up by 72,000 YTD. The construction employment data is not as positive as the construction expenditures report, (CPIP) issued by the Department of Commerce. This maybe, as the Associated General Contractors of America continue to report, because of a lack of availability of skilled workers which is being ameliorated by longer work weeks.

Figure 6

Table 1

U.S. Scrap Exports: Year to date the US exported 8.66 million tonnes, down 1.6% YTD y/y, down 17.2% YTD 2014, down 32.4% YTD 2013 and down 44.7% YTD 2012, (Figure 7).  Figure 8 presents the same data as Figure 7 as three month moving averages to smooth out volatility and more clearly illustrate trends. Turkey continues to be the top buyer of US scrap at 26.1%. The next largest consumer was Mexico which imported 508,000 tonnes (14.9%of total), in August, an 86% month on month (m/m) increase and its largest buy since Q2. Taiwan was the third largest consumer at 12.3% followed by Canada at 7.3%. China has all but disappeared off the chart, (Figure 9) but still imported 186,000 tonnes in Q2 or 5.0% of the total, a far cry from the average 1.1 million tonnes per quarter consumption it brought-in from 2009 through 2011.

US scrap trade has shifted over the last few years, with buyers replacing scrap with purchase of iron ore based billets from China and CIS and/or sourcing lower cost scrap elsewhere.  Figure 10 compares US scrap exports with the US Broad currency index. It shows that as the US dollar strengthens the volume of exports decline (and vice versa). US scrap export volume reached a low early in 2016 at the same time the trade weighted currency Broad index reached its high point (note the Broad Index is shown on a reverse scale). Since that point the dollar has weakened somewhat and scrap exports rebounded accordingly.

Figure 7

Consumer Credit G19: The Federal Reserve release of current US consumer credit reported a month on month increase of $25.9 Bn in August, almost $10 Bn higher than the consensus projection. The 6.3% year on year increase was 38.1% higher than the average m/m growth over the previous 6 months. Revolving credit balances, the majority of which was credit card debt, rose 6.2% y/y, while non-revolving credit such as mortgages, auto loans, and student loans rose 6.3% y/y in August (Figure 11).

Consumers accelerated their spending and added to non-revolving credit levels more strongly in August over July. Low interest rates, cheap gasoline and increased wages are enabling consumers to increase spending and take on debt, while paying down credit card loans. Vehicle sales are expected to moderate in the coming months, however strong growth in mortgages is expected to continue, supporting further expansion in non-revolving loan balances. In addition, credit availability for bankcard lending is showing signs of easing, opening the door for growth in revolving balances going forward. Continued strong job gains coupled with solid wage growth will continue to raise consumer confidence among US households. Strong consumer spending is important to the steel sector since approximately 70% of GDP arises from consumers opening their wallets. The spending party may slow as expected future FED interest rate hikes increase loan carrying costs. These hike may begin as soon as December and will likely continue throughout 2017.

Figure 11

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 (coal was down 25.4% y/y), fell 1.1% m/m and was off 2.0% year to date (YTD) through September y/y. Metallic ores (primarily iron ore) increased 3.0% m/m but were off 13.6% YTD y/y. Primary metal products carloads fell 9.5% m/m and 7.5% YTD y/y, this makes the nineteenth months in a row that the y/y volume has declined. Scrap carloads were off 3.1% m/m and down 4.5% YTD y/y. Carloads of motor vehicles and parts increased 1.5% m/m and by 2.7% YTD y/y. Total intermodal fell 4.2% m/m and was down 3.2% on a YTD y/y basis. Total cars plus intermodal declined by 4.8% m/m and was down 3.2% YTD y/y indicating slowing overall economic activity.  Figure 12 presents 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. Motor vehicles and parts has grown 48.3% comparing YTD 2010 to YTD 2016. Over the same time-frame comparison, carloads of primary metal products were down 6.5%, metallic ores carloads declined 9.0% and iron and steel scrap carloads fell by 25.4%.

Total Canadian carloads excluding coal (which was down 11.6% y/y), increased 6.2% m/m but was down 8.1% YTD y/y through September. Metallic ores (primarily iron ore), surged by 68.5% m/m but on a YTD y/y basis was down 9.9%. Primary metal products carloads plummeted 30.0% m/m and 18.8% YTD y/y. Scrap carloads were off 12.0% m/m and down 3.2% YTD y/y. Carloads of motor vehicles increased by 7.0% m/m and were up by 5.6% YTD y/y. Total intermodal was virtually flat (-0.2% m/m), but was down 2.7% on a YTD y/y basis.

Figure 13 presents 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. Movement of metallic ores compared to the other product groups is far higher ratio than it is in the US. Comparing the carload volume between YTD 2010 to YTD 2016, metallic ore carloads were down 32.6%. Motor vehicles and parts carloads grew by 14.8%, primary metal products and iron and steel scrap fell by 23.2% and 5.7% respectfully.

Figure 12

US Fabricated Steel Beam Imports: Imports of fabricated steel beams fell 14% in August, down 6,500 tons m/m. The top six importers to the US comprise 90% of the US fab-beam import market, (Figure 14). Year to date Canada, China, Italy and the UAE have shipped tonnage in excess of their 2015 end of year total imports. Year to date fab-beam imports totaled 338,000 tons (kt), up 45% YTD y/y. The map in Figure 15 shows US fabricated beam imports by region, with 41% of foreign shipments received through the Gulf ports, while the Atlantic North and Great Lakes regions imported approximately 20% each. When we include raw beam imports with fab-beam imports, the total surged by 158% from the 12 months ending August 2010 to 12 months ending August 2016, (Figure 16).

As a point of interest, the American Iron and Steel Institute (AISI) reported that in 2015, 42% of all US domestic steel shipments were utilized in the Construction Market. Slowing non-residential construction starts, a weak energy and Ag and heavy equipment market coupled with increased steel imports have combined to squeeze the domestic steel industry. The impact can be seen in the regional break down of steel production, (Figure 17).  US steel production data published by the AISI reported steel capacity utilization for week ending October 8th was just 66.8%, well down from the YTD average of 71.7%.

Figure 14

US Long Product Import Licenses (SIMA): US licenses to import steel long products totaled 499,000 tons (kt) for the month of September down 15% from August preliminary imports, (Table 2).  Requests to import rebar, wire rod, hot-rolled bars and cold finished bars fell, as applications to import light and heavy structural shapes rose m/m. Bars light shapes rose 28% in September, increasing year to date total imports plus September licenses by 6% y/y. Beams, a subcategory of heavy structural shapes, jumped 53% m/m as South Korea, Luxembourg and Spain increased beam license applications. Year to date beam imports plus September licenses totaled 446 kt were flat y/y. Hot-rolled and cold finished special bar quality product (SBQ) imports were down 15% m/m and fell 26% YTD y/y.

Table 2

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