Weekly Market Update - September 15, 2016

Shipments and Supply of Long Products through July: This report compares domestic mill shipments and total supply to the market and quantifies market direction by product. Sources are the American Iron and Steel Institute and the Department of Commerce.

Table 1 shows both apparent supply and mill shipments of long products, (shipments includes exports) side by side as a three month average through July, for both 2015 and 2016, (Y/Y). Apparent supply is a proxy for market demand. Comparing these two time periods total supply to the market was up by 4.3% and shipments were up by 0.7%.

Apparent Supply is defined as domestic mill shipments to domestic locations plus imports. In the three months through July the average monthly supply of long products was 2.422 million tons, up by 8.5% from the period three months through April and up by 4.3% Y/Y. The short term improvement, (3 months) compared to the long term, (12 months) means that momentum is very positive. Table 2 shows the change in supply by product on this basis through July. Momentum was positive for all products except rebar and structural shapes. Bar sized shaped had extremely strong growth, (33.1%) in May through July compared to February through April.

Figure 1 shows the long term supply picture for the individual long products since January 2006 as three month moving averages. Rebar and structural shapes have trended up this year, bar sized shapes have trended up since March, hot rolled bars have trended down since Q4 2014 and wire rod has been little changed this year.

Mill Shipments which includes exports averaged 1.981 million tons / month in the three months through July, up by 0.7% year / year and up by 9.0% compared to three months through April, (3M / 3M). The fact that growth in the short term is so much stronger than in the long term means that momentum is very strong. Table 3 shows shipments of individual long products. Shipments of all products except hot rolled bars improved 3M / 3M but only rebar and heavy structurals and bar sized shapes improved Y/Y. Figure 2 puts the results for the five main products into the long term context since January 2006. Shipments of heavy structurals and rebar have made good progress this year but hot rolled bars are down, wire rod is fairly flat and bar sized shapes have improved in the last four months.

Figure 3 shows import market share of long products and includes sheet products for comparison. Based on a 3MMA long product import market share peaked at 29.4% in July last year, declined abruptly to 24.5% in July 2015 and now stands at 26.4% in this latest data. The import market share of sheet products declined from 24.3% in March last year to 17.4% in May this year and has increased to 19.7% in July.

A problem with this data is that it’s now mid-September and the latest data we have for shipments and supply is for July. The AISI puts out weekly data for crude steel production the latest for which was w/e September 10th. This provides the most current data for steel mill activity. Figure 4 shows the Y/Y change in weekly crude output on a four week moving average basis. Growth became positive in w/e March 5th and in the next 19 weeks there was only one week with negative Y/Y growth. Growth became negative again in w/e July 23rd and continued to deteriorate since then. The key variable is imports which for all rolled products were up by 13.1% in three months through August compared to three months through May. Our key market indicators data are mostly trending positive therefore we do not anticipate a demand slowdown in the immediate future. The issue is, will the demand improvement be supplied by the domestic mills or by imports. This brings us full circle to Table 1 which shows that Y/Y supply up by 4.3% and shipments up by only 0.7%.

Table 1

Figure 1

Figure 3

Figure 4

Oil and Gas Prices and Rotary Rig Counts. August 2016: Figure 5 shows historical oil and gas prices since January 2000. The daily spot price of West Texas Intermediate, (WTI) rose through $40 on April 11th and since then has been in the $40s except for one day, August 2nd when it dipped to $39.50 and 3 days, June 7th through the 9th when it broke through the $50 level. On September 6th WTI closed at $44.85 according to the Energy Information Administration, (EIA). Brent closed at $46.21 on the same day.

The price of natural gas, delivered the Henry Hub in Louisiana closed at $2.94 / MM BTU on September 2nd, up from $1.57 on March 4th. September 2nd was the latest data published by the EIA. The price had trended down for two years prior to March 14th therefore the turnaround since then is encouraging. Natural gas is expected to fuel the largest share of electricity generation in 2016 at 33%, compared with 32% for coal and in 2017.

The total number of operating rigs in the US and Canada on September 9th was 639, up from a low of 445 on May 27th. In that time frame the oil rig count was up from 330 to 488 and the gas count was up from 115 to 151. Figure 6 shows the Baker Hughes US Rotary Rig Counts for oil and gas equipment in the US through September 9th. The uptick in the US oil rig count was the first since August of last year and now seems to be well established having increased from 316 on May 27th to 414 on September 9th. Based on the most recent available data, the EIA estimates that oil production from hydraulically fractured wells now makes up about half of total U.S. crude oil production. The off shore US rig count peaked at 66 on August 29th 2014 immediately before the oil price crash. Since then the off shore count has steadily declined to 18.

The gas rig count in the US fell rapidly in 2015, and broke through the 200 level on September 11th. After a few months of relative stability the decline re-commenced in late December 2015 and bottomed out at 82 on June 3rd. Since then there has been a small recovery to 92 on September 9th.

On a regional basis in the US, the big three states for operating rigs are Texas, Oklahoma and North Dakota. Texas at 244 on September 9th was up from a low point of 173 on June 20th but still down from 318 at the beginning of the year. Oklahoma at 62 on September 9th was up from its low point of 54 on June 24th but down from 87 at the beginning of the year. North Dakota at 28 on September 9th was up from its low point of 22 on June 3rd but down from 53 at the beginning of the year.

Figure 5

Figure 6

Consumer Credit G19: The Federal Reserve release of current US consumer credit reported an increase of 5.8% during the month of July, which was a $17.7 billion increase m/m at an annualized rate and far higher than analysts’ expectations but in line with the average over the past six months.

Revolving credit balances, the majority of which was credit card debt, rose 3.5%, while non-revolving credit such as mortgages, auto loans, and student loans, rose 6.9% in July on an annualized basis, (Figure 7).

Quarter over quarter non-revolving credit for auto and student loans, (Figure 8) rose 0.6% and 2.3% respectively, and were up 6.6% and 7.3% on a y/y comparison. The growth rate of student loans remains high but is decelerating from the >10% y/y range in the 2007 to 2012 time period. Auto loans on the other hand rapidly accelerated after the recession, plateaued between 2014 and 2015 have begun to diminish in 2016, (Figure 9). Falling demand for student loans should result in lower accumulated debt levels on graduation. This is a good thing since it will likely result in more first time homebuyers feeding the housing market. Historically building of new subdivisions has been followed by demand for commercial and institutional construction. Falling growth in demand for auto-loans indicates that the rate of auto sales may have topped-out. However, contradicting this hypothesis, the July rail transportation report shows auto parts carloads were up 1.9% m/m and 2.8% y/y.

Consumers accelerated their spending and added to non-revolving credit levels more strongly in July over June. At the same time revolving balances (largely credit card debt) fell. Increased wages and savings at the gas pump have helped consumers reduce outstanding balances. According to Moody’s there is still a lot of room for growth in revolving credit as balances remain below the 2008 peak level. Higher wages and increased home values will continue to enhance consumer sentiment leading to increased spending. Strong consumer spending is important to the steel sector since approximately 70% of GDP arises from consumers opening their wallets and GDP rates north of 2% growth result in increased steel production in the US.

Figure 7

Manufacturing Capacity Utilization (Federal Reserve): August data for manufacturing capacity utilization fell by -0.51% m/m and by -1.15% y/y. Manufacturing capacity is right on the fringe of recession (defined as < 75%), where it has been range-bound for five years. Figure 10 shows manufacturing capacity utilization from 2000 to present. Capacity averaged 78.0% over the 53 month period from 2005 to mid-2008 when the recession began to take its toll. Manufacturing capacity utilization first regained the 75% threshold in January 2012 and has averaged 75.0% from then to now. If we overlay MSCI carbon shipments, (Figure 11), we observe that not unexpectedly, there is a fairly strong relationship. The correlation coefficient (C.C.), between the two data sets is 0.716. There is a similar relationship for long products although the C.C. is not as strong. From 2004 to present the C.C. for all longs was 0.634 and for bars only, a nearly identical 0.638.

Figure 10

US Steel Long Product Import Licenses (SIMA): August long product import licenses were down 9% m/m compared to July final imports, (Table 4). Rebar licenses fell 32%, as Turkey cut rebar shipments to the US by more than half. July saw the highest record rebar imports since Gerdau began tracking this data, and although it was the highest recorded monthly rebar imports, over 10,000 tons (kt) of licenses were not used and could be utilized for August imports. Year to date the US imported 1.5 million tons (mt) up 9% y/y. Wire rod licenses rose 30% m/m as the Ukraine, Russia, South Korea, Belarus and Italy increased their applications to import. Year to date wire rod imports plus August licenses exceeded 1 mt, a y/y increase of 11%. Licenses for light structural shapes as well as heavy structural shapes fell modestly m/m. Year over year light shapes rose 2%, while heavy structurals (including beams) fell 5% y/y.

Products defined by the steel import monitor as hot-rolled and cold-finished bars, encompass merchant quality bar and special bar quality products. Licenses for these products rose in August, and based on 24 months of final import data published by the US International Trade Commission, MBQ and SBQ license rose 26% and 16% respectively. Year over year, MBQ imports plus licenses were down 11%, while SBQ fell 27% y/y.

Table 4

US Fabricated Steel Beam Imports: Fabricated beam imports as reported by the US International Trade Commission, rose 16.5% in July, over June imports. In the seven months through July, the US imported 297,500 tons, up 47% YTD y/y and exceeding 2015 end of year total imports with 5 months remaining this year. Imports of fabricated beams rose annually for the last 5 years, (Figure 12). Standard and I-Beam imports also rose over the last 18 months, and when combined with fabricated beam data we see the dramatic 130% increase in structural beam import market over this 5 year period, (Figure 13).

Ninety percent of imported fabricated beam tonnage was shipped from Canada, China, Mexico, Italy, the United Arab Emirates, and Luxembourg, with 50% originating from our NAFTA trading partners, (Figure 14). The map presented in Figure 15 shows fabricated beam imports by port of entry. Year to date, the Gulf region has received more than 125,000 tons (kt), which included imports from China, Mexico and the UAE. The northern Atlantic ports imported 69kt, and the Great Lakes took delivery of 56kt from Europe, Canada and China. Steel capacity utilization was reported at 69.5% for the week ending September 10th, (Figure 16) as the impact of imported fabricated beams was felt by US steel producers and fabricators.

Figure 12

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