Weekly Market Update - August 20th, 2015

Architectural Billings Index: In an encouraging news release, the American Institute of Architects, stated that “the Architectural Billings Index is reflecting healthy and sustained demand for design services in nearly all non-residential project types.” The July national ABI recorded a score of 54.7 was off one point from June’s reading, yet still well over the 50 threshold that denotes increased design activity. On a regional basis, the Midwest posted the highest value at 58.2, followed by the South at 55.7, the West at 53.8 followed by the Northeast at 53.5. The sub-indexes institutional and commercial recorded solid numbers at 57.3 and 53.4 respectively, (Fig. 1). The design contracts index also logged strong performance with a reading of 54.5, (Fig. 2). Design drawings precede site construction by approximately one year. Referencing the AIA website, it forecasts an 8.9% rise in non-residential construction for 2015, followed by an 8.2% increase in 2016.

Fig 1

The Value of the US $ and Net Long Product Imports: The broad index value of the US $ is published by the Federal Reserve on both a daily and monthly basis. It is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. In the last 20 years there has been a 73.4% correlation between the Broad Index and net long product imports into the US, (Fig. 3). Net imports equals imports minus exports. We regard this as an important look at the overall trade picture and its effect on demand at the mill level. As the $ appreciates our exports become less attractive to foreign buyers, imports become more attractive to domestic buyers and net imports increase.

Fig. 4 shows that net long product imports on a three month moving average, (3MMA) basis in June continue to be more than double that which existed before the recession. The deterioration in net has been mainly an import effect but a decline in exports since late 2011 has also been a factor. Table 1 shows net imports by product. Year to date through June, total net long product imports were 2,728,357 tons, up by 576,072 tons year over year. All products except wire rod plus drawn wire had an increase in net imports YTD. Rebar accounted for over half the increase in long product net imports YTD. The situation of heavy structurals is particularly dire with a swing from an 89,000 tons per month trade surplus at the end of 2011 to a trade deficit beginning in June 2014 and continuing every month since then.

Fig. 5 shows the trend of monthly net long product imports since January 2011 on a 3MMA basis. Net rebar imports have declined from a recent peak of 179,038 tons in April to 107,778 tons in June. There has been no trend in either direction for net imports of hot rolled bars for 18 months.

Fig 3

Fig 4

Long product shipments and supply: This report compares domestic mill shipments and total supply to the market. It quantifies market direction by product and enables a side by side comparison showing the degree to which imports have absorbed demand. Sources are the American Iron and Steel Institute and the Department of Commerce with analysis by Gerdau. Table 2 shows both supply and mill shipments of long products, (shipments includes exports) side by side as a three month average for the periods April through June for both 2014 and 2015. Comparing these two periods total supply to the market was down by 4.5% but shipments were down by 9.8%. In other words, imports took share from the domestic mills. Table 1 breaks down the total into the individual long products. Supply of bar sized shapes and drawn wire increased y / y as all other product groups decreased. Shipments of bar sized shapes increased y / y, wire rod had a very slight increase as all other product shipments declined. A review of supply and shipments separately for individual long products is given below.

Table 3 shows the change in supply by product on a two year, one year and three month basis through June. As can be seen there is a big difference between products. Fig. 6 shows the long term supply picture since January 2006 as three month moving averages.

Fig. 7 shows import market share of long products and includes sheet products for comparison. Based on a 3MMA the import market share of long products in June was 25.8%, down from the peak of 29.4% in April. For sheet products was 22.4% in June, down from 24.3% in March and the lowest share since September last year.

Mill Shipments are shown in Table 4. YTD total long product shipments were down by 10% y / y, all individual products had negative growth on this basis. The 3M / 3M comparison is much better with only hot rolled and cold finished bars having negative growth. Fig. 8 shows the history of mill shipments since January 2006.

Table 2

Fig 6

The Non-residential Construction Building Cycle: Fig. 9 presents the non-residential starts in square-feet (NRC) building cycle going all the way back to 1970. During that time there have been five peak to peak cycles. Three of the last four cycles lasted six or seven years. The exception to the rule ran 15 years, from 1985 to 2000. The current cycle duration is at seven years and counting, yet remains just shy of the one billion square foot level (projected for 2015), well off of the 1.25 billion annual average square feet realized over this 45 year time-frame. At the current growth trajectory, it will take another two years (2017) to reach the 1.25 billion square foot long term average and until 2020 to reach 1.5 billion square feet. How long the current cycle will last is anybody’s guess, but it appears that it still has legs at this point.

If we include and compare apartment construction >4 stories with NRC without apartments (Fig. 10), we observe that in each of the last two expansion phases, the inclusion of apartment construction resulted in a more aggressive slope than NRC without apartment construction. It seems that there is a strong demand for apartments at the start of the expansion phase that falls off rapidly as the cycle reverses course. Major lifestyle and economic ramifications are influencing this dynamic. First time buyers (mostly young people) are increasingly saddled with significant student loan debt as well as the desire for mobility and an urban living lifestyle. In addition many maintain the perception that home ownership may not be the wise investment it once was, thus the preference to rent. In addition to this, the baby boom generation began its retirement phase in 2010 and many will downsize to condos, townhouses and apartments, selling their single family homes to help fund their retirement. This phenomenon will continue for some 35 years to come.

Examining a more recent metric, the Dodge momentum index rebounded in June. Historically, there has been a strong correlation between the momentum index and the Commerce Department’s Construction Spending Put-in-Place report with a full years lead time. The overall index was up 5.4% m/m with institutional buildings leading the charge, up 6.0%, commercial buildings recorded a 4.9% m/m increase.

Fig 9

Fig 10

Currency Report: The U.S. Dollar index came in at 119.45, it is now been more than two years at a value above 100. With a strong Q2 expansion of 2.3%, the Index has steadily climbed to levels seen during the beginning economic expansion of the 2000s. It has strengthened 15.7% on a y/y basis and nearly 5% over the last three months against the Daily Broad Index, (Table 5).

A strong economy, relative to the rest of the world, has helped the Dollar strengthen to its strongest level in twelve years. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S. Other major economies that rely on strong oil prices have also helped create an appreciative environment for the Dollar.

The Chinese economy has been on a precipitous decline since June. The Shanghai Composite has lost nearly 30% of its value in this time span. Because of this, the central bank of China, otherwise known as the PBOC, has decided to devalue the Yen to spur growth. This caused the Chinese stock market to experience losses not seen in almost 20 years. Since the Chinese currency is fixed to the U.S. Dollar, the RMB was trading within a narrow band of roughly 6.15 RMB per dollar. After the devaluation, it was trading near 6.38 RMB per U.S. Dollar. Many economists before the recent devaluation calculated the Yuan to be at least 10% under value. Now, that value has gotten even higher. Since China is the largest economy in the world and the biggest exporter, this move has many economic and geopolitical implications.

Economically, as the largest exporter of manufactured goods, the devaluation has the likelihood to make their goods even cheaper. For example, Chinese steel prices have plummeted even further from their historic lows. As a result of countervailing duties on imported steel from China into the United States, China may as well export steel to other countries who may then re-export it to the U.S.

On a geopolitical scale, this move could set back the Chinese government’s goal of becoming a reserve currency. The IMF has a five year plan that adjusts the basket of currencies it includes in its basket of reserve currencies. That plan will be delayed until next September. Also, American manufacturing industries, as well as politicians, were furious with the move as it has the potential to hurt output here as they will have to compete with even cheaper Chinese goods. Economists and trade experts have demanded that China must ultimately become a consumer of goods rather than sole and exporter. The country’s savings rate is 50% (World Bank) compared to 18% for the U.S.

Table 5

Steel Service Center Report: Table 6 presents percentage change data by product for U.S. steel service centers, (tonnage and inventory MOH values will no longer be published). All percentage change values are quoted as 3MMA y/y. Shipments of all carbon steel fell 7.8%, led down by Bar & Shapes, off 12.2% and Structurals, down 11.8%. Daily intake plunged 11.2% as Structurals, Bar & Shapes and Carbon plate were all down >20%. Inventory levels for all carbon steels rose 5.2%, influenced by sheet which was up 10.2%, offset by Bar & Shapes, down 13.4%.

Table 7 presents percentage change data by product for Canadian steel service centers. Shipments of all carbon steel fell 9.8%, led down by plate, off 22.5% and Structurals, down 13.6%. Daily intake plummeted 21.0% as Plate fell 44.8%, Structurals fell 20.4% and Pipe & Tube dipped 19.5%. Inventory levels for all carbon steels jumped 10.7%, influenced by Sheet, up 27.6% and Bar & Shapes, up 17.2%. Plate and Pipe & Tube both declined, down 19.1% and 9.4% respectively.

Table 6

Steel Demand Indicators: Table 8 is a snapshot of the market situation on 8/17/2015. Indicators updated since we last published two weeks ago are shaded beige. The latest month or quarter for which data is available is identified in the 2nd column. Of the 26 indicators under consideration, the present situation of 6 are positive by historical standards, 8 are negative and 12 are neutral. This was no change from the last update on August 6th. Looking at the 12 leading indicators separately, 3 were negative 7 were neutral and 2 were positive which is proportionately about the same as the total 26.

In our trends analysis, most of the values reported are three month moving averages to avoid the knee jerk reactions that are characteristic of most economic reports in the press. Please note that there is nothing subjective about this trends analysis. The numbers presented here are the facts available as of August 17th. The number of indicators trending positive in this latest analysis was 18 which like the present situation was unchanged from August 6th. There were also no directional changes in the individual indicators. However points of note were: Chicago shredded which had declined by $10 in July dropped another $35 in August which was in line with our projection made on July 23rd in this “Steel Market Update.” The decline in service center shipments of long products that began in March continued unabated through July. The producer price index of commodities which we regard as a leading indicator of industrial construction improved in June and continued to improve in July. The trends in the leading indicators are not as good as the overall 26 indicators with 5 of 12 headed in the wrong direction.
(Explanation of Indicators).

Table 8

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