Weekly Market Update - June 25, 2015

Long Products Supply and Mill Shipments (SMA): The overall long products, apparent domestic consumption (ADC), was up 4.0% on a 12 month y/y basis ending May, but fell sharply to negative 2.6% growth on a 3 month y/y metric. This difference indicates a slowdown between the two periods as indicated by negative 6.7% momentum, (Table 1). Rebar was the only product to post stronger growth of 12.0%, 3 months y/y compared to its 8.3% y/y growth over the previous 12 months. Beams recorded the most severe decline between the 3 and 12 month y/y comparisons, posting 3.4% growth over 12 months, declining to negative 10.9% on a 3 month y/y basis. Fig. 1 presents a graph of all long product domestic shipments plus imports. Import market-share totaled 18.1% in May, down from 24.6% in April and down from an average of 23.6% YTD.

Examining mill shipments (domestic shipments + exports, bottom part of Table 1) shows a 1.6% y/y decline on a 12 month measure which plummeted to a -6.9% decline on a 3 month y/y comparison. This means that imports took both domestic share and hurt US export shipments as well. Beams saw an 8.8% deterioration in its market, falling from a negative growth rate of 12.0%, on 12 months y/y basis to negative 20.7%, 3 months y/y. SBQ also recorded a steep decline from +3.9% 12 month y/y to a negative 11.4%, 3 months y/y. Wire rod was the only product group to post positive numbers in both 3 and 12 month y/y comparisons, albeit the 3 month metric (0.8%) was 4.5 pts lower than the 12 month value of 5.3%, (Table 1).

Table 1

Non-residential Constructions Starts (McGraw Hill/Dodge): Non-residential square footage starts in the 3 months through May totaled 290 million square feet, down 2.2% y/y compared to total square footage March through May 2014. Total square footage in the 12 months ending May, rose 7.9% y/y resulting in negative 10.1% momentum, (Table 2). Manufacturing plant starts fell 25.8% 3m y/y, however for the 12m through May, were up 29.7% y/y. Starts for manufacturing facilities have historically been volatile as depicted in Fig. 2. Retail construction starts continue to slide having never regained traction since the recession ended, no doubt impaired by the rise in on-line shopping, (Fig. 3). Note: warehouse construction was up 5.4% 3 months y/y and 11.5% 12 months y/y.

Apartments >4 stories maintained strong signs of growth as the 3 month total rose 23.9% y/y and 12 month total recorded 17.5% y/y growth. Apartment >4 stories account for 22.2% of the total square feet started over the past 12 months. The trajectory of non-residential starts is much shallower when apartments are removed, (Fig. 4).

Table 2

Housing Foreclosures, Inventory and Price: Housing inventory was 5.1 and 4.0 months’ supply for existing and new housing respectively for the month ending May 2015. On a y/y basis, existing inventory was down 7.3%, while new home inventory declined by 9.1%. Home sales for existing homes increased 1.8% y/y as new home sales rose 5.8% y/y indicating that new builds should accelerate going forward, (Fig. 5).  Foreclosures increases by 15.5% y/y in May and have increased on a y/y basis for three consecutive months. This rise is after 49 months of declines, (Fig. 6). The Case-Shiller Price index has risen steadily, the 20 city seasonally adjusted index is up 4.9% y/y through March and has increased for 34 consecutive months. If the foreclosure rate continue to rise price appreciation will fade. The 20 city Case-Shiller price index table is presented in (Table 3). Every city on the list recorded price increases ranging from a low of 2.3% y/y in Cleveland to a high of 9.7% in San Francisco.

Fig 5

Durable Goods orders, seasonally adjusted, declined for the second month in a row. May’s advanced reading fell 1.8% from April along with April’s m/m change was revised downward 1.5%. May’s reading is down almost 4% on a y/y basis, four consecutive months of y/y declines. The total dollar value was $228,913 million, the second time this year durable goods order came in below $230,000 million. Nondefense aircraft and parts plummeted from April with a 35.3% drop. This category shows volatile monthly readings. Transportation equipment also fell sharply in May, falling 6.4%. This came after April’s decline of 4%. On the encouraging side, Communication equipment grew 6.3% after two straight months of decline. Nondefense capital goods, excluding aircraft, a component that’s a widely used indicator of business investment in GDP calculations, rose 0.4 % in May after falling 0.3% in April. This category was down 2.6% on a y/y basis. Perceptions were mixed as the economy is showing strength after a revised 0.2% drop in Q1 GDP even with a strong dollar and weak demand from outside the United States, (Fig. 7).

Fig 7

CFNAI: The Chicago Fed National Activity Index is a weighted measure of 85 economic indicators that gauge economic activity and inflationary pressures (Federal Reserve Bank of Chicago). The indicators are derived from production and income, employment, unemployment and hours, personal consumption and housing, and sales, orders, and inventories. The Index has a value of 0 and standard deviation of 1, with a positive reading signaling above average growth and negative reading signaling below average growth. 

The Index reading in May fell for the fifth consecutive month from -0.19 in April to -0.17. This indicates that the economy is growing below historical trend. The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading.  The reading for May was -0.16, four months in a row of below trend growth. The CFNAI MA-3 hasn’t recorded four straight months of below trend growth since Q2-Q3 2013, (Fig. 8).   Production and Income has been below trend for six straight months while Employment, Unemployment, and Hours showed promise and has risen 0.10 two months in a row after March’s first below trend reading since April 2013. Sales, Orders, and inventories came in at 0, at trend growth, up from April’s slight decline of -0.01. As expected, Personal Consumption and Housing has yet again recorded a negative reading, 101 consecutive months of below trend growth, with the last above average reading coming in December 2006, (Fig. 9). Since GDP equals consumer spending plus investments plus net exports plus government spending, this reading depresses potential GDP growth.

The CFNAI is a leading indicator for steel consumption and historically there has been a firm relationship between the CFNAI index and steel supply up to the start of the recession. The CFNAI experienced a healthier recovery than “Long Product” steel supply as the relationship between the two started to fade. The construction sector has yet to experience the growth typically seen in the recovery after a recession; however, the gap appeared to be closing up until 2015 where steel supply seems to be hovering around the 7 million ton mark (Fig. 10).

Fig 8
Fig 9
Fig 10

ABI: In an encouraging sign for future non-residential construction, May’s Architectural Billings Index recorded a score of 51.9 (any score above 50 indicates an increase in billings) up 3.1 points m/m. Regional averages were mixed with the South posting the strongest demand at 54.6, followed by the Midwest at 52.3, while both the West (49.9) and Northeast (45.2) billings index values indicating declining demand for architectural services, (Fig. 11) The commercial / industrial sub-index posted 55.2 and the institutional score was 52.5. In addition the design contract index was 53.4.

Fig 11

GDP. 3rd Estimate of Q1 2015: The annualized growth rate in the third estimate was -0.17% down from Q4 2014 which was 2.2%. GDP is measured and reported in chained 2009 dollars and in Q1 was estimated to be $16.288 trillion. The BEA have been criticized for the way they do seasonal analysis which has tended to penalize the first quarter. At the end of July a revised calculation will be introduced retrospectively. Fig. 12 shows the headline quarterly results since 1990 and the latest IMF forecast through 2020. There are six major subcomponents of the GDP calculation and the magnitude of these is shown in Fig. 13. Personal consumption is dominant and in Q1 accounted for 68.63% of the total. Fig. 14 shows the change in the major subcomponents of GDP in Q1 2015. As can be seen net exports more than wiped out the contribution of personal consumption with respective values of negative 1.89% and positive 1.43%. The contribution of fixed nonresidential investment has fallen steadily from positive 1.23% in Q4 2013 to negative 0.26% in the latest data. Fig. 15 shows the quarterly change in the six major subcomponents of GDP since Q1 2007. The effect of the change in net exports, driven by the appreciating US dollar is clear. Comparing Q1 with Q4 2014 there were major changes in the subcomponents. Personal consumption that had contributed 2.98% in Q4 2014 fell to 1.43 in the latest data. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Net exports declined from negative 1.03% in Q4 2014 to negative 1.89%. Government expenditures improved from negative 0.35% to negative 0.11%. The contribution of fixed residential investment improved from 0.12% to 0.21% but the contribution of nonresidential construction declined from 0.6% in Q4 to negative 0.26 in Q1. Inventories which had contributed negative 0.1% in Q4 contributed positive 0.45 in Q1. Increasing inventories make a positive contribution to GDP and over the long run inventory changes are a wash and simply move growth from one period to another. Fig. 16 shows the breakdown of the $16 trillion economy.

Fig 12

Fig 13

Oil and Gas Prices and Rotary Rig Counts. June 2015: Fig. 17 shows historical gas and oil prices since January 2000. The daily spot price of West Texas Intermediate fell below $100 / barrel in August and by January 23rd was down to $44.80. By June 15th, based on data from the Energy Information Administration, (EIA) the price of WTI had recovered to $59.53. Brent closed at $60.99 on the same day. Natural gas delivered to the Henry Hub in Louisiana fell to $3.85 / MM BTUs in August, there was an uptick in November followed by a five month decline, a 38 cent uptick in May followed by a decline of 21 cents so far in June to reach $2.78 on the 12th.

Gas and oil prices are reflected in the drill rig count. Fig. 18 shows the Baker Hughes US 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. The oil rig count which had been trending flat for almost two years, accelerated in 2014 until October 10th when it reached 1,609 and has since responded to the collapsing oil price by declining to 631 on June 19th. Year over year the oil rig count is down by 58.8%. Through June 19th there was a barely perceptible slowdown in the rate of decline of oil rigs. The gas rig count now stands at 223, down by 28.7% year over year and is lower than any other time since our earliest data of January 1990. There was some good news about fracking in the last few days; There is no evidence that fracking has had a "widespread, systemic impact on drinking water," according to the EPA's five-year analysis of U.S. water pollution risks. While there have been some cases involving spills and leaking wells, the spread of fracking did not cause extensive damage to groundwater resources, the agency added. The report follows the recent fracking bans in New York and Maryland.

Fig 17

Fig 18

Steel Demand Indicators: Table 4 is a snapshot of the market situation on 6/25/2015. 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 7 are positive by historical standards, 8 are negative and 12 are neutral. This was no change from when we last published on June 11th.

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 latest facts available. Overall there was a decrease of one positive and an increase in one negative since June 11th. Changes in the detail were as follows; the supply of long products trended negative in the May data reported by the SMA, this was the first time for supply to trend negative since January. Nonresidential starts trended negative in May for the first time since March 2014. The producer price index of commodities reversed direction and trended positive in May. There were no changes in manufacturing trends.

This analysis was started in January 2010 and as a way of evaluating its validity we decided to see what the analysis would have looked like in August 2008 immediately before we went over the cliff. We then plotted the numerical totals for the present situation and trends since January 2010 and compared with August 2008. The results are interesting and we believe validate the technique we have developed to monitor the long products steel market. Fig. 19 shows the history of the present situation, the number of positive indicators has declined steadily this year. The change has been from positive to neutral, not positive to negative. However the situation in August 2008 was not that much different from what it is today. That is not the case with trends shown in Fig. 20. Trends have deteriorated since mid-2014 but are still better than 60% positive. Not so in August 2008 when almost 70% of our indicators were trending negative. Considering that all indicators are not created equal, for example we regard the Chicago Fed National Activity Index as a very powerful indicator, itself being composed of 84 sub indicators, this result is supportive of the analytical technique. (Explanation of Indicators).

Table 4
Fig 19
Fig 20

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