Weekly Market Update - June 16, 2016

Producer Price Indexes of Steel and Competing Materials through May 2016: Each month the Bureau of Labor Statistics, (BLS) puts out its series of producer price indexes, for thousands of goods and materials. The latest release on Wednesday reported results through May. The PPI data are helpful in monitoring the price direction of steel and steel products against competing materials and products. For the purpose of this report, we at Gerdau have extracted comparative statistics for construction steels and competing materials and the same for engineering steels. Table 1 and 2 are a summary of each category on a 3, 6, 12 and 24 month comparative basis.

Hot rolled structural steel shapes have gained a competitive advantage over HSS, (Hollow structural shapes) in all time periods considered. At the fabrication level, steel customers have protected their margins in the non-residential framing sector. This is not the case for structural steel bridges, however bridge beams have made tremendous competitive gains against prestressed concrete in the last two years. Fabricated structural steel has gained a slight competitive advantage against wood trusses in the last year. Concrete has lost ground to asphalt in all time periods which is a negative for rebar demand. Hot rolled bars for engineering applications have suffered a much greater price erosion than downstream forgings, castings or powder metal parts. Carbon steel forgings have gained a competitive advantage over aluminum forgings over the last two years and to a lesser degree over powder metal parts. Forgings have gained a slight competitive advantage over castings in the last 12 months. As far as we can tell from comparison with known transaction prices, these PPI are a good representation of the real world. However our observation is that the actual values of the PPIs of different products cannot be compared with one another because they are developed by different committees within the BLS. We believe that this data is useful in comparing the direction of prices in the short and medium term but not the absolute value.

Table 1

Consumer Credit: April’s G19 report from the Federal Reserve showed that consumer credit rose at an annualized rate of 4.5%, with revolving credit rising 2.1% and non-revolving credit advancing 5.5%, (Figure 1). The report indicates that consumer demand for credit is likely to continue at a healthy pace going forward. This is good news since 70% of GDP comes from consumer spending and we know that steel consumption increases when GDP exceeds 2% GDP. Conversely steel consumption contracts when GDP falls below the 2% threshold, (Figure 2). Figure 3 breaks out motor vehicle and student loans. In 2006 student loan ratio was 39% of the total of student + auto loans. By 2015 that ratio has shifted to 56%. In dollar terms, in 2015, 5.18 T dollars of student loans were initiated, while over the same time period consumers financed 4.039 T in motor vehicle purchases. Figure 4 shows the annual growth rate in percentage terms of these two major loan types from 2007 to present. Motor vehicle loans fell sharply during the recessionary period and then accelerated briskly once the recession was over and have now plateaued. Student loans on the other hand saw peak growth through the recession years as jobs were scarce. Student loans have declined in y/y percentage terms since the recession ended. The compound annual growth rate (CAGR) for student loans over the past 10 years ending 2015 was 10.0%. Over the same timeframe motor vehicle loans were a much smaller 2.6% CAGR. High student debt levels a primary reason why the demand for apartment construction is at multi-year highs. New entrants to the work-force carrying the burden of student loan debt lack the down payment to purchase a home thus the high demand for rental units.

Figure 1

US Long Product Import Licenses (SIMA): Steel long product import licenses, as reported by S.I.M.A. on June 14th, totaled 526,000 tons for the month of May, up 17% month over month, (Table 3). Year to date, imports plus May licenses were down 11% year over year. Rebar licenses rose 50% m/m. Turkey returned to the US import market, increasing May rebar import licenses by 72% m/m. Japanese rebar licenses also rose in May, up 32%. YTD rebar imports plus May licenses were down 12% y/y, compared to imports through the first five months of 2015. Wire rod imports rose 17% m/m, as license applications from Russia and Brazil flooded the US import market. Russia increased wire rod license by 375%, as Brazilian exporters applied for and unprecedented 16,000 tons of wire rod, (Figure 5).

May Hot-rolled bar licenses rose 17% m/m, while applications for cold-finished bars fell 14% m/m. Hot-rolled bars and cold-finished bars comprise product categories that are classified as Merchant Bar Quality and Special Bar Quality products. Based on the last 6 months of final MBQ imports, it is estimated that MBQ licenses fell 22% in May, as SBQ licenses fell 20% m/m. Year over year, year to date MBQ imports plus licenses were down 9%, while SBQ fell 31% YTD y/y.

Month over month, licenses for light structural shapes rose 4%, as YTD imports plus May licenses remained flat compared to imports during the first 5 months of 2015. Ninety-four percent of licenses requests to import light angles and channels came from Mexico and Canada. Heavy structurals, including beams rose 44% in May (Figure 6), driven by increased beam licenses from Korea, Luxembourg, Spain, and Russia rose. Year to day the US has imported 383 kt tons of heavy structural steel, down 10% y/y.

Table 3

U.S. Industrial Production and Manufacturing Capacity Utilization: Figure 7 shows that US industrial production increased slightly (0.7%), month on month ending April. The 3MMA stands at 104.0 off 1.6% compared to the same three month average this time last year. The index has been down m/m for seven consecutive months, yet at 104.0 remains at a strong level relative to historic values. The concern is the trajectory. US manufacturers other than automotive are having a tough go, battling a strong US dollar, low energy prices and the uncertainty that is traditionally faced in an election year. For example, the May Texas Manufacturing Outlook Survey (Federal Reserve Bank of Dallas), was especially bearish, with new orders falling 14.1 points and general business conditions down 20.8 points. This report reflects what many manufacturers operating energy related businesses are experiencing. Despite the fall-out in the energy sector businesses, the state is expected to avoid a recession since its service industries continue to perform at an acceptable level.

Figure 8 examines manufacturing capacity utilization from 2005 to date. The index has hovered around the “recession line” of 75 since 2012, staying above the line from March 2014 until April 2016. The index dropped to 74.82 in May and has now fallen on a 3MMA basis for 11 consecutive months. The good news is that the rate of the decline is very slight, falling less than a point over this time-frame. The ISM manufacturing index increased from 50.8 to 51.3 in May (expansionary), and new orders were solid at 55.7. These results contradict the industrial production and manufacturing utilization indexes creating a mixed picture on where we stand currently in the manufacturing arena.

Figure 7

Steel Demand Indicators: Table 4 is a snapshot of the market situation on 6/16/2016. Indicators updated since we last published two weeks ago are shaded beige. In many cases this is not June data but data that was released in May / June, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 5 are positive by historical standards, 10 are negative and 12 are neutral. This was no change from our last update of May 31st.

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 June 16th 2016. The number of indicators trending positive in this latest analysis was 17 with 10 trending negative. Overall this was a net increase of one negative since May 31st. The change that occurred was that the price of Chicago shredded fell. There were no other trend changes. At the end of each month we analyze the trend of the trends to see if the number trending positive is improving or deteriorating. We are now out of the slump which began in October and continued through January, followed by a small increase in February and a larger improvement in March that was sustained through May.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 5. Of the twelve leading indicators seven are trending positive, and five negative. This was no change since our May 31st update. In summary the present situation is historically weak but trends are good which leads us to have confidence in the long products business environment through the 3rd quarter.
(Explanation of Indicators).

Table 4

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