Weekly Market Update - November 13, 2014

Commercial Property Price Index: The CPPI increased by 15.3%, 3 months y/y and is up 13.1% on an annual basis, (Fig. 1). The index has risen 55 consecutive months on a 3 month y/y comparison. Third quarter transaction volume was up 11% to $102 Bn, (Fig. 2). Hotels and apartments were the hottest sectors with office properties staging a come-back. Hotel volume was up 30% y/y ending Q3, while apartments rose 28%. The office segment recorded 22% y/y growth with sales of $30.6 Bn in Q3, with the central business district surging 40% y/y. The retail sector posted a decline of 8% in transaction volume y/y with sales of $18.3 Bn in Q3. However the sale of individual properties remained strong, up 34% y/y. The volume decline was due to a sharp decline in portfolio transactions. Cap rates (net operating income / current market value) continued to drift downward with apartments and (CBD) office sectors posting the sharpest declines. Some people think that this is generating speculation of a bubble in the market. According to the experts at Moody’s/Real Capital Analytic, cap rates seen today are different from those witnessed in 2007 as buyers are pricing in risk today to degrees not seen in 2007. The equity spreads above both mortgage and risk-free rates remain wide on a historical basis. These risks are especially wide considering relatively optimistic forecasts of improving net operating income. The wide spreads investors and lenders are currently realizing indicate that they are not ignoring risk and are being well compensated when compared to historic metrics.

Fig 1

U.S. Steel Production Statistics 2013: Last week the World Steel Association released its annual statistical year book that finalizes data for 2013 and itemizes production by product for all member nations. Total production in the US was 86,567,000 metric tons, (tonnes) down by 0.55% from 2012. Long products totaled 23,188,000 tonnes down by 0.51% and flat products totaled 62,407,000 tonnes, down by 0.61%. Fig. 3 shows the breakdown of long products into the major categories captured by the WSA. There were major differences in the growth / contraction rate of the product groups. Those experiencing expansion were; heavy sections up by 10.85% and rebar up by 15.97%. Those experiencing contraction were; light sections down by 16.94%, hot rolled bars down by 15.56% and wire rod down by 8.95%. Note the origin of these statistics is the AISI whose numbers do not necessarily agree with the SMA data that we report in some of our other Gerdau reports. Fig. 4 shows the breakdown of flat products including welded tubes. There was much less variation between the 2012 and 2013 reported numbers for flat rolled probably because the AISI has a higher proportion of flat roll participating companies than it does for long products. Growth contraction for the flat rolled group ranged from plate up by 2.69% to tin mill products down by 7.16%. The WSA report details apparent steel use which is (domestic shipments plus imports minus exports). ASU for 2013 was 106,300,000 tonnes down by 1.85%. Also the report estimates indirect steel imports which is the steel content of downstream manufactured products such as automobiles etc., etc. This tonnage for 2013 was 38,176,000 tonnes, up by 8.09% from 2012.

Fig 3

Scrap Exports Through September 2014: In the first nine months of 2014, scrap exports totaled 11,586,000 tonnes, down by 19.4% from the same period in 2013. In the single month of September exports were 1,163,489 tonnes, this was the second lowest month of the year following August which was the highest month. Fig. 5 shows that the 3MMA has been fairly consistent during the five months through September and continued to be lower than the average in any year from 2008 through 2013. The most obvious trends so far this year are the decline of Turkey and Taiwan since May and the increase of Korea in August and September. Year to date Turkey is down by 1.4 million tonnes or 32.7%. Last week AMM reported that Turkish mills bought only half their normal average weekly tonnage and of that only one cargo was sourced in the U.S. as buyers focused on European sources.

China’s tonnage has been quite consistently low this year on a 3MMA basis ranging from 53,000 to 90,000 tons per month. This is compared to over 500,000 tonnes per month in 2009 when they were the highest volume importer.

In YTD 2014 compared to the same period in 2013, the Far East as a whole is down by 22.4% and China is down by 58.6%. The decline of the Japanese Yen probably is a big factor in the Far East though we have no facts to substantiate that assumption. Other nations not considered in this analysis because they have been historically minor purchasers were down in total by 304,000 tonnes YTD. Some nations have taken more tonnage this year than last, Indonesian purchases have almost doubled at 274,000 tons and Thailand which took almost nothing last year is up by a factor of ten at 367,000 tons, Mexico is up by 64,000 tonnes and Vietnam by 81,000 tons. Tonnage moving North over the Canadian border, YTD was down by 28,000 tonnes from last year.

Fig 5

Imports Through October Licenses and Net Long Product Trade Through September: Total rolled product imports in October, based on license data were 3,245,460 short tons which was the highest volume since July 2006. Compared to the January volume, (3MMA) flat rolled products were up by 63.3%, semi-finished up by 36.0% and long products up by 21.8%, (Fig. 6). Comparing August through October 2014 with the same period last year provides similar numbers, (Table 1). Within the long products group the y/y comparison shows the range of variation with heavy structurals up by 98.3% and hot rolled bars down by 14.3%. We believe that net imports which is imports minus exports is a valuable way to look at the trade numbers because that is a more complete measure of the effect of international trade on demand at the mill level. Since January net imports of long products through September were up by 31%, (Fig. 7), and by 92% for flat rolled. Table 2 breaks out the volumes of net trade by product for longs. YTD through September compared to the same period in 2013 the net imports of long products was up by 1,028,042 tons with wire rod and heavy structurals bearing the brunt of that increase. We include drawn wire in the wire rod number, the sum of these had a net import increase of 614,472 tons y/y. Heavy structurals had a net import increase of 400,205 tons but in this case the swing was from a net trade surplus of 309,890 in 2013 to a net trade deficit of 90,315 in 2014. The only good news in this report is that hot rolled bars reduced its trade deficit by 118,011 tons y/y.

Fig 6

Rail Indicators Report (AAR): As defined by the Association of American Railroads, (AAR); 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.

October 2014 U.S. seasonally adjusted freight rail traffic total carloads increased by 4.4% y/y. If carloads of coal are excluded, the percentage change increases to 5.7%. Intermodal traffic increased by 4.9% y/y and 12% over two years. October was the best month in U.S. in history (64,071 units) for intermodal volume, (Fig. 8). Studying the U.S. total rail plus intermodal 52 week moving average chart shows that unit volume has now matched the level realized at the end of 2008 and that the trajectory of the slope has increased in 2014 after a brief stall at the beginning of the year. This suggests continued growth for the U.S. economy. Primary metal products carloads rose 6.5% y/y and 12% over two years. Carloads of scrap steel were up 6.8% y/y and surged 25.2% over two years. Motor vehicles and parts were down 1.2% y/y but were up 7.9% over two years.

Canadian Freight Rail Traffic was up 6.0% y/y and 11.7% over two years. Intermodal increased by 3.7% y/y and by 9% over two years, (Fig. 9). Studying the Canadian total rail plus intermodal 52 week moving average chart shows that the total volume surpassed the precession high in early 2012 and rail traffic continued to expand at a modest pace. There was a brief decline early in the year (harsh winter, no doubt), but since then performance has accelerated. Unit volume has carloads of iron ore were up 22% y/y, scrap carloads were up 3.7%, while carloads of primary metal product increased by 5.6% y/y. Motor vehicle and parts declined by 4.7% y/y.

Fig 8 

Fig 9

Institute of Supply Management: The ISM Manufacturing Index rose 2.4 points in October back to 59.0, where it was in August. The ISM Index is above the expansion benchmark, greater than 50, for the 17th consecutive month. The 3 MMA is the highest since Q2 2011. Production edged up once again, to 64.8 from 64.6. New orders increased dramatically to 65.8 from 60.0 after September’s 6.7 point decline. Inventories inched up to 52.5 from 51.5. Employment rose to 55.5 after September’s 3.5 point decline, even as net job creation yielded 256,000 in September and 214,000 in October. According to the Manufacturing ISM Report on Business, the manufacturing sector grew for the 17th straight month and 16 on 18 industries have generated growth in October (institute for supply management).

The ISM Nonmanufacturing Index slipped in October to 57.1 from 58.6 in September. This is the third straight month of declines in this Index, however, is still above the YTD average of 56.0. The 3 MMA 58.4 is still among the highest the index has experienced in eight years. Business activity and new orders have fallen again, 2.9 and 1.9 points respectively. Inventories fell below the expansionary benchmark to 49.5, the first time in seven months. Despite the negative readings of the Index, the overall Nonmanufacturing Index is experiencing strong results, in part due to robust net job creation, (Fig. 10).

Fig 10

Global Business Confidence inched up this week to 34.5 after three straight weeks of declining confidence. The results are below the YTD average of 35.0. North American business confidence has seemingly stagnated around the 42% range, with this week’s figure coming in at 42.7, however, still above the YTD figure of 41.3. All but one business condition, six month expectations, yielded increases this week from last week, with the largest coming from present situation, hiring intentions, and equipment investment intentions, with increases of 4.9, 2.5, and 2.7, respectively. Financing availability also inched up to 33.8, however, it is still down nearly 6 points from August’s YTD high of 39.3. Business confidence are near all-time highs, however, strength of sales come as a concern to most respondents, (Fig. 11). There are no indications of inflation so businesses are not pressured to raise prices. The velocity of money stock, which determines how fast money moves from one holder to the next, is currently at historic lows (Federal Reserve Bank of St. Louis). This can be seen via banks holding record levels of excess reserves and corporations sitting on piles of cash. Until consumer demand increases, as noted with an uptick in inflation, these reserves will most likely stay at current levels which dampens future business investment and economic growth.

Fig 11

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