Weekly Market Update - April 9, 2015

Rig Counts and Energy Prices: Fig. 1 shows historical gas and oil prices since January 2000. The daily spot price of West Texas Intermediate fell below $100 in August and by January 23rd was down to $44.80. By March 30th, the latest daily figure available from the Energy Information Administration, (EIA) the price of WTI had recovered to $48.66. Brent closed at $55.99 on the same day. Both these prices were effective before the announcement of a possible nuclear deal with Iran which could result in up to 4 million barrels a day being added to global supplies. In addition Iran will have its oil sector re-opened to foreign investment – which will help it increase production. Natural gas delivered to the Henry Hub in Louisiana fell below $4.00 in August, there was an uptick in November, the slide continued through March 27th when the spot price closed at $2.79 / MM BTUs.

Gas and oil prices are reflected in the drill rig count. Fig. 2 shows the Baker Hughes North American Rotary Rig Count which is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. Rigs are considered active from the time they break ground until the time they reach their target depth and may be establishing a new well or sidetracking an existing one. The Baker Hughes Rotary Rig count includes only those rigs that are significant consumers of oilfield services and supplies. Fig. 1 shows that the oil rig count which had been trending flat for almost two years, accelerate in 2014 until October 10th when it reached 1,609 and has since responded to the collapsing oil price by declining to 802 on April 2nd. To this date there has been no slowdown in the rate of decline of oil rigs. The gas rig count has fallen by 94 from this time last year and now stands at 222, which is the lowest level since the Baker Hughes data began in July 1987. The total number of operating rigs on April 2nd was 1,028 a decrease of over 200 in the last month.

  Fig 1

  Fig 2

ISM Manufacturing Index: After the October surprise on the upside, the ISM Manufacturing Index slid back from 55.1 in December to 53.5 in January, to 52.9 in February and to 51.5 in March. Any number > 50 indicates expansion. The three month moving average has declined for five straight months and now stands at 52.63, which is 2.57 points below the 15 month average since January last year. The good news is that this was the 30th straight month for which the 3MMA indicated growth, and there has only been one slightly negative month in over 5 ½ years, (Fig. 3).

Table 1 shows the break down for March by sub component with the monthly result, the 3MMA, the growth of the 3MMA m/m and y/y for each. The table shows that the 3MMA y/y growth was negative 0.1 which was the first negative growth y/y since March last year. On a m / m basis customer inventories and prices both improved. The price component in March was down by 23.5 points from this time last year but eked out a small gain of 0.17 points m/m. Bad news is that employment has negative growth both on a m/m and y/y basis.

The ISM index suggests that manufacturing slowed in the first quarter. The industrial production index for March won’t be released until mid-month but the February data did suggest a slowdown in growth. Durable goods orders have been below the long term trend line for the last four months. If the March Industrial Production Index continues to decline then there will be one more piece of evidence suggesting that a manufacturing slowdown is for real. Please note by no measure are we seeing a contraction, just a slower rate of growth. Some possible causes of a slowdown such as the disruption at the West Coast ports and heavy snow in the northern states are no longer in effect but the appreciating US dollar is bound to be a headwind for the immediate future.

Fig 3 

Table 1

Rail Indicators Report (AAR): As defined by the (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. March carloads fell 3.4% y/y in the US as 12 out of 20 commodities posted declines. On a year to date (YTD) basis y/y ending March, total carloads rose slightly, +0.3%. Excluding coal these values adjust to -1.2% and +2.1% respectively. Total intermodal rose 5.7%, March y/y and was flat YTD y/y, (+0.1%).

Primary metal products was off sharply, down 16.2% y/y for the month of March and down 7.5% for the three months ending March y/y. This results is not surprising given the fact that US raw steel production (per AISI), through March was down 5.7% y/y. Iron and steel scrap recorded the largest decline of all commodities, off 23.0% y/y for March and down 14.3% YTD y/y. AAR reports that there is a 75% correlation between carloads of primary metal products and carloads of iron and steel scrap which makes sense, when one does poorly so does the other, (Fig. 4). Heading sharply in the opposite direction, carloads of iron ore were up 19.1% y/y and up 18.0% YTD y/y. It is appears that some substitution of iron units is taking place as the price of iron ore has dropped into the fifty dollar range. Carload shipments of motor vehicles and parts was flat y/y (-0.3%), but up 1.2% YTD y/y.

March carloads increased 4.6% y/y in Canada, and were up 6.5% YTD y/y, (Fig. 5). Excluding coal these values rise to 6.3% and 7.6% respectively. Canadian intermodal traffic moved-up 11.6% y/y and up 11.0% YTD y/y helped by a 26.9% y/y surge in lumber & wood products, a 16.1% jump in motor vehicles & parts and a 15.5% rise in carload shipments of iron ore. As was the case in the US, carloads of iron and steel scrap plummeted 20.0% March y/y. Canadian railroads will set its sixth consecutive annual record for intermodal volume.

Fig 4 

Fig 5

Industrial Construction Starts: After hitting a soft spot over the past few months Industrial construction starts surged 19.7%, 3 months y/y ending March to $39.2 Bn. Starts were down 1.8% on a twelve month y/y basis, pulled down by a marked reduction in power projects. Over the past three months, however power projects have sparked back to life, up 21.2% to $8.0 Bn. Plummeting oil prices have taken a toll on oil & gas terminal projects, down 72.8%, 3 months y/y and 50.8% y/y. Production oil & gas projects are also softening, down 31.6%, 3 months y/y, but were up a 12 month basis by 87.1%. Transmission oil & gas bucked the trend, recording a 59.9% increase 3 months y/y, but is off 29.5% on a y/y metric. Most other project categories posted growth 3 months y/y with the exception of those mentions plus food and beverage (-36.6%), and metals & minerals (-22.0%). Overall momentum was up a solid 21.5% led by the resurgence in power project starts, but 7 of the 12 project categories recorded negative momentum, (Table 2).

Fig. 6 illustrates the disproportionate geographic spread of industrial spending starts across the US YTD. For the three months YTD ending March, the Southwest posted $18.4 Bn in starts, 46.9% of the total for the nation. The next largest region was the middle Atlantic at $4.2 Bn followed closely by the Great Lakes region at $4.0 Bn.

Table 2

Employment: Net job creation for March totaled 126,000, the lowest job growth since December 2013. January and February were revised down a total of 69,000 jobs, (Fig. 7). Despite the lower than predicted job creation, the US economy has had positive job growth for 54 straight months dating back to October 2010. The U-3 unemployment rate stayed at 5.5%, among the lowest since Q2 2008. Labor force has declined three months in a row down to 62.7%, (Fig. 8). The rate has been below 63.0 for a full year and still among the lowest on record. The employment to population ratio has appeared to stabilize around the 59.3 mark, however, is still roughly 4 percentage points lower than the pre-recession highs.

The U-6 unemployment figure, which includes those persons who are marginally attached to the labor force, dipped again for the ninth consecutive month to 10.9. This is the lowest rate since August 2008. This figure has been steadily declining since the end of 2010 and has plunged 1.8 percentage points since January 2014. The long term unemployed, those unemployed for 27+ weeks, fell again in March to 29.8 from 31.1. This is the lowest share for this group since June 2009. Long term unemployment has dropped more than 1.1 million person on a y/y basis, (Fig. 9).

Net job creation has slowed in the past three months and core inflation has been below the 2% benchmark. The long term unemployed (six months or longer) and involuntary part time workers have made measured progress and wage growth has stagnated, under 2% y/y, since the end of the recession leading to a considerable amount of slack in the labor market. Recent FOMC minutes have indicated that Janet Yellen and the Fed Presidents may hike the Fed Funds rate later this year despite the unpredictable job readings and low inflation. An early hike may hurt the economy worse in the short and medium term than overshooting the 2.0% inflation target.

Fig 7 

Fig 8

NAFTA Reinforcing Bar Trade through the end of the year 2014 totaled, 2.137 million tons (mt). A total of 1.583 mt was imported from countries outside of NAFTA, (Fig. 10) a 47% y/y increase over 2013 offshore imports. When Gerdau began tracking NAFTA rebar imports in 2008, offshore imports totaled 636,000 tons (kt), then fell by more than half in 2009, rising each year for the following 5 years. Offshore imports for 2014 were 149% higher than in 2008.

In 2014 rebar trade from within NAFTA totaled 555 kt, down 30% y/y, the second year trade within NAFTA has fallen. Canadian rebar imports totaled 683 kt in 2014, of which 232 kt originated from outside NAFTA or “offshore”, (Fig. 11). Offshore imports include 153 kt from China, 30 kt from Portugal and 37 kt from Turkey. The remaining 451 kt originated from US steel mills.

US rebar imports totaled 1.45 mt for 2014, and included 1.35 mt of offshore sources. More than 70% (990 kt), of offshore imports were from Turkey. Fig. 12 illustrates offshore imports which included 54 kt from South Korea, 94 kt from Japan, 118 kt from Spain and 13 kt Portugal.

Mexico continues to be a net exporter of rebar, shipping 717 kt in 2014, and importing less than 3,000 tons originating from offshore sources. Mexico’s exported 99 kt, (14% of its total exports) to the US, while only 14 tons were shipped to Canadian customers.

Fig 10 

Fig 11

US Steel Capacity Utilization (AISI): The rate for week ending April 4th, 2015 was 67.7% as US mills produced 1.600 (mt) of raw steel, (Fig. 13). Production was down 11.6% from a year ago when US steel mills were operating at 77.1% of capacity and produced 1.853 mt. YTD US mills have produced 23.145 mt at an average utilization rate of 72.9%, down 6.3% from this same time last year. February preliminary imports totaled 3.58 mt, down 18% m/m, the lowest total monthly steel imports in the last 12 months yet well above recent historic volumes, returning to 2006 import levels. Low priced imported steel continues to pressure domestic mills. Production in the Great Lakes region of the US rose 2.1% w/w, up 1.9% w/w in the Midwest, and was up 5.9% in the Western region, while production in the Northeast fell 2.1%. Year over year, total raw steel production in the Midwest region is down 10.1% y/y, followed by the Southern region where YTD production has fallen 9.2% y/y. YTD 3.1 mt of steel has been produced in the Midwestern region of the US, down from 3.4 mt produced in the same period of 2014. Steel production in the Southern region of the US, in the first 14 weeks of 2014, totaled 8.9 mt. YTD production in this region totaled 8.1 mt. (Fig. 14)

Fig 14

Durable Goods orders, seasonally adjusted, fell 1.4% m/m, and three of the last four months, with a total dollar value of $230,943 million. February’s full reading is up marginally, 0.47%, on a y/y basis. February’s reading was down 23% from the all-time high in July 2014 of $299,862 million. The biggest increases were defense communications equipment and ships and boats 42.2% and 26.4%, respectively. The largest declines were defense aircraft and parts, down 33.1%, and somewhat predictably, gas field machinery, down 16.6%, (Fig. 15).

Fig 15

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