Weekly Market Update - April 10, 2014

Housing Start, Inventory, Prices and Foreclosures: Total 3MMA housing starts ending February fell 6.4% to 947,000, on a seasonally adjusted annual rate (SAAR) after exceeding the one million mark in December and January. Single family starts fell 6.6% to 611,000 (SAAR), 3MMA, while apartments (>4 units/structure), fell 6.5%, (Fig. 1). On a regional (SAAR) basis, starts in the Mid-West plummeted 31.7%, 3MMA on the heels of a 19.7% decline in January. Starts in Northeast declined by 6.4%, 2.4% in the South and by just 0.4% in the West (all SAAR, 3MMA), (Fig. 2). Fierce winter weather is cited as the principal cause for the decline. Inventory of both new and existing homes stood at 5.3 and 5.2 months’ supply in February pushing the overall inventory up 0.2 months over January’s level. On a y/y basis existing home inventory (measured as month’s supply) is up by 13.0% and new home inventory is up 26.2%, (Fig. 3). The trend for foreclosures continues to be downward as prices continue to rise. In Fig. 4, foreclosures are presented on the left axis (3MMA) and Case-Shiller SA median home prices are presented on the right axis on a reverse scale. As the supply of distressed properties waned, prices began to accelerate. This trend will likely continue, especially with an economy that is adding jobs and expanding (albeit slightly), its GDP y/y. Historically housing starts lead non-residential starts. This makes sense; build a new housing development then along comes schools, retail and institutional buildings a year or so later (Fig. 5). Housing is picking up on a more aggressive slope than non-residential thus far in the recovery. The pace of non-residential should follow.

Fig 1

Net Long Product Imports Through February 2014: We at Gerdau spend a lot of time working with import data but from the point of view of trade’s impact on markets that is not the whole story. A change in export volume can either alleviate import pressure or exaggerate it, so it’s important to also review net imports, which is import tonnage minus export tonnage. In some cases such as beams, exports far exceed imports so net imports can be negative. Total net long product imports declined in the 2nd half of 2013 but have bounced back in the first two months of 2014, (Fig. 6). Both months of 2014 presented a worst case scenario where imports increased and exports decreased. Comparing YTD 2014 with the same period last year, net imports of long products in total increased by 180,100 tons or 43.5%, (Table 1), quite a significant change but nothing like the situation for flat rolled which increased by 128.9%. Net imports of wire rod and rebar accounted for nearly all the change in long product net imports YTD. Heavy structurals and hot rolled bar improved and in the case of structurals that meant that the excess of exports over imports increased.

U.S. Import Licenses: Total long product import licenses surged by 49% m/m in March to 570,501 tons. On a YTD, y/y basis import licenses jumped 26% to 1.489 million tons, (Table 2). Rebar imports increased by 104% as Turkey increased March licenses requests by more than 100,000 tons. Wire rod licenses swelled 52% m/m aided by China’s request to import almost 40k tons more than in February. Wire rod imports have more than doubled over the Q1-2013 level. Structural shapes rose by a 1/3 m/m, but are down 5% y/y. Beams imports ballooned by 49% m/m augmented by an increase in licenses for Russian standard I-beams. Russia’s licenses requests comprise more than 40% of the licenses requested for standard sections for the month. Beam imports were down 24% comparing Q1-2013 with Q-2014.

Table 2

Net Job Creation, Through March 2014: The Bureau of Labor Statistics (BLS) report on non-farm employment came close to expectations in March with a net gain of 192,000 jobs. In addition January and February were revised up by 15,000 and 22,000 respectively. The three month moving average, (3MMA) rose to 178,000 after declining for three straight months, (Fig. 7). The growth trajectory is still on track to meet the pre-recessionary peak of total employed by the middle of this year and in March private sector employment did exceeded the pre-recessionary peak of January 2008 by 110,000. However the underlying level of participation rate and under-employed has a very long way to go to absorb entrants to the working age population since 2008. On Saturday the WSJ reported that an additional 7.2 million jobs are needed to keep pace with population growth since the recession. A total of 167,000 jobs were created in service industries in March and 25,000 in goods producing. The percentage growth of both service and production employment has been the same in one month and twenty four month periods. Of the net gain in goods producing jobs in February, 19,000 were in construction as manufacturing lost 1,000, (Table 3). All of the 192,000 jobs created in March were in the private sector as government employment was unchanged.

Currency: The U.S. Dollar has strengthened 2.6% on a y/y basis but has remained relatively flat in the past month against the Daily Broad Index, considering the turmoil going on in the global market. The strengthening Dollar makes U.S. scrap (all U.S. produced goods), more expensive to purchase in foreign markets. The Russian Ruble has weakened almost 11% on a y/y basis and more than 6% in the last three months. The currency stabilized over the past month as the markets have digested the Crimea situation. The Ruble is expected to weaken further as more information comes out that Russians have seized eastern Ukrainian government buildings, a floundering economy and heavy Western sanctions. The International Monetary Fund (IMF) cut Russia’s’ expected growth forecast by 0.6% to 1.3% in 2014 because of the crisis. The IMF also cites that capital outflows from Russia’s $2 trillion economy may have reached $70 billion in the first quarter with the expectation that more will follow. The Ukrainian Hryvnia has devalued almost 30% on a y/y basis and more than 21% in the past month. The country is torn between the western half, who are more supportive of the EU, and the eastern half, who are more aligned with Russia. The currency has tumbled further in recent weeks as the IMF has proposed a nearly $15 billion dollar loan from the IMF for 2014 and 2015 to avoid a default. The IMF is requiring greater exchange rate flexibility as part of the terms agreement for the loan, (Table 4).

Table 4

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