Weekly Market Update - July 18, 2014

Industrial Construction starts grew by 20.6% y/y ending June 2014 and soared 41.4%, 3 months y/y. Power, industrial manufacturing and production oil & gas recorded the largest expenditure ratio on an annual basis, (Table 1). Cumulative industrial spending continues to be volatile when looked at over a short duration timeframe, (i.e. monthly, 3 months y/y) as illustrated in Fig. 1. It is not uncommon to witness >$10 Bn change on a 3 month y/y basis month over month. Examining the same data on a y/y basis, (Fig. 2) yields a smoother view of historic spending. Since 2010, industrial expenditures have been at historic highs led by strong energy and industrial activity. According to Moody’s Analytics, the hydraulic fracking boom has lifted energy investment to its highest share of GDP since the early 1980s. The fracking boom makes the U.S. economy much less sensitive to energy price shocks, which have been a catalyst for every modern recession. Moreover, if current trends continue, the U.S. could soon be energy independent, producing as much energy as it consumes, which could have significant geopolitical and fiscal benefits. Industrial spending strongly favors the Southwest region of the country which had 40% of the $129.3 Bn “pie” over the last 12 months. The next highest spending region was the Midwest at $13.5 Bn or 10%, (Table 2).

Table 1

NAFTA Beam Trade: For the five months ending May 2014, the U.S. exported 237,000 tons of beams to Canada and 88,000 tons to Mexico, while Canada and Mexico sent 8,000 and 28,000 tons respectively to the U.S. Net beam imports to Canada were 316,000 tons, including 87,000 tons of offshore material. Net imports to Mexico were 121,000 tons, 71,000 tons of which was offshore. Over the same timeframe, the U.S. exported 147,000 tons more than it brought in. Offshore imports to the U.S were 152,000. (In the single month of May, the trade surplus of structurals changed to a trade deficit of 9,000 tons). Total offshore beam imports to NAFTA were 310,000 tons over the first 5 months of 2014. If NAFTA beam imports continue to track at the current rate, the total for 2014 will be 743,000 tons, a 17% y/y increase compared to the 635,000 ton imported for all of 2013, (Fig. 3). Fig. 4 illustrates the huge run-up in NAFTA offshore beam imports. The top exporting countries include; Luxembourg, South Korea, Spain, Germany, Russia and Japan. Two countries in particular have dramatically increased NAFTA exports including: Russia, (27,000 tons YTD 2014 vs. 12,000 tons YTD 2013) and Japan (9,000 tons YTD 2014 vs. 4,000 tons YTD 2013).

Fig 3

Construction and Manufacturing Employment: Total construction employment increased 6,000 in June, to 6.02 million, its highest level since Q2 2009. The industry is +139,000 jobs through 2014 thus far compared to +109,000 during the same time period in 2013. Construction industry employment is up 25 of the last 27 months and is +402,000 in this period. Manufacturing employment increased 16,000 jobs in June and has had positive employment growth eleven months in a row. The industry is + 68,000 through June, versus a +26,000 in the same period in 2013. Manufacturing employment in Motor Vehicle and Parts increased 5,900 in June and is up eleven of the last twelve months. Employment in Construction and Manufacturing increased 88,000 and 35,000, respectively, in the first quarter while GDP contracted 2.9%, (Fig. 5).

Fig 5

Global Steel Capacity utilization fell slightly in May to 78.5%. The three month moving average for utilization is at 78.7%, the highest percentage of the year and since Q2 2013. Total monthly crude steel production was 142.2 million tons with an annualized production of 1.694 billion tons. May’s total steel production rose 3% from April and is among the highest monthly totals since monitoring the data in 2008. Capacity utilization is down 1.1% on a y/y basis; however, steel production is up 3.6% during the same time period. May’s monthly steel production has increased y/y since 2009 and has the second highest annualized production, (Fig. 6). United States crude steel production is up 6% from April and 3% on a y/y basis. China’s monthly steel production rose in May to 70.4 million tons, its highest on record and up 9% on a y/y basis. China contributes half of all steel worldwide production.

Fig 6

Scrap exports through May: In the month of May scrap exports were 1,549,000 tonnes which was the highest month of the year and up from 1,338,000 in April. Exported tonnage has increased every month in 2014 through May. Year to date in the first five months of 2014 were 6.3 million tonnes, down 24.8% from the same period in 2013. The annualized rate for 2014 is now 15,145,000 tons down from the final 2013 total of 18,470,000 tonnes. The top six destination nations are shown in Fig. 7 together with the 3MMA of total shipments out of the country. All of the six major destinations are down in YTD 2014 except Mexico which is up by 42.5% to 356,000 tonnes. This increase re-established Mexico as one of the six major buyers up from 8th place last year. In 2014 YTD shipments to the Far East are down by 14.4%, China is down 62.9% to 333,000 tonnes, less than a third of the shipments to Taiwan. Turkey is down by 38.3% to 1,476,000 tonnes. Other big players are Malaysia, Egypt and India, all down by around 50% compared to last year. In three months through May, shipments to Canada, Mexico and China were almost identical. AMM reported on July 14th that strong demand from Turkish mills resulted in the purchase of five cargoes from the US last week, four from the east Coast and one from the Gulf as buyers looked to build inventory. Also on the 14th Platts reported that interest in U.S. West Coast scrap had softened as East Asian EAF mills prepared for their summer maintenance shutdowns.

Fig 7

Producer price index, (PPI) of construction materials and structures: The BLS released its PPI data for June on Wednesday. Overall producer prices rose 0.4% in, rebounding from the 0.2% decline in May. The increase was mostly due to gains energy prices. The PPI of “Materials and components of construction” increased by 0.4% in the last three months through June compared to three months through May. In the last 24 months this series has escalated by 3.7% but there has been a wide discrepancy between individual products ranging from wood trusses up by 19.2% to fabricated structural steel for bridges down by 11.3%, (Table 3). Steel made great progress compared to wood in the last two years but in the last year has been giving back, particularly in the last three months during which time the price of wood products declined. In the last 24 months concrete has lost ground to asphalt which will have had a detrimental impact on re-bar demand. In the last 3 months asphalt prices escalated faster than concrete but this change is still too small to have an impact on choice of paving material.

Table 3

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