Thursday
Sep112014

Weekly Market Update - September 11, 2014

Rail Indicators Report (AAR): As defined by the Association of American Railroads, (AAR); Freight railroading is a “derived demand” industry: demand for rail service occurs as a result of demand elsewhere in the economy for the products railroads haul. Thus, rail traffic is a useful gauge of broader economic activity, especially of the “tangible” economy.

August 2014 U.S. freight rail traffic total carloads increased by 2.9% y/y. If carloads of coal are excluded, the percentage change increases to 7.8%. Intermodal traffic increased by 4.3% y/y. This is the highest weekly average combined carloads and intermodal volume since October 2007. Canadian Freight Rail Traffic was up 3.9% y/y, while intermodal surged 10.4% y/y, (Fig. 1). The big change is carloads of petroleum products which increased 25.2% y/y and 48.4% over the past two years in the U.S. Canadian carloads of petroleum products grew 27.1% y/y and 21.9% over two years. U.S. carloads of iron ore were up a solid 28% y/y, scrap carloads were off 3.8%, while carloads of primary metal product increased by 6.5% y/y. Canadian carloads of iron ore were down 9.3% y/y, scrap carloads declined 3.8%, however carloads of primary metal products increased by 5.8% y/y.

Fig 1

U.S. Steel Production and Capacity Utilization: The four week moving average of U.S. raw steel production was 1,912,000 tons for the period ending September 6th, 2014, up 2.4% over the same time last year. Capacity utilization during this time was 79.7%, up 1.3% vs. the same four weeks one year ago, (Fig. 2). On a regional basis for the week ending 9/6, the Great Lakes region produced the most steel at 682,000 tons, followed by the South at 669,000 tons, the Midwest at 239,000, Northeast at 235,000 and the West at 88,000 tons. Production in the Northeast soared by 21.4% over the four week period ending 9/6 in 2013, up 8.0% in the South, 4.2% in the Great Lakes, and 1.7% in the West. The only region to post a decline in raw steel production (4week y/y), was the Midwest, off 8.2%, (Fig. 3).

Fig 2

European Situation: On September 6th the Euro broke through the 1.3 US $ / Euro level for the first time since July 11th last year and closed at 1.2953 on the 7th, (Fig. 4). The Euro has now declined by 6.05% against the US$ YTD, by 5.1% in the last three months and by 1.4% in the first seven days of September. The European Central Bank in their latest press conference last Thursday announced a cut of its main lending rate to 0.05% and also revealed their intent to enter into a form of quantitative easing by purchasing asset backed securities and covered bonds at totals estimated between $500 billion to $1.3 trillion as early as October. This targeted long-term refinancing operation (TLTRO) is intended to promote lending activity to small and mid-sized businesses across the euro zone. The euro sank immediately after the decision was made and is still declining. A devalued Euro means that US exports will be more expensive in Europe and European imports will be cheaper here. This is particularly true for steel trade. In addition European scrap will be more attractive to Turkish buyers than supplies from the U.S. which will put downward pressure on domestic scrap prices. The European Central Bank has been under immense pressure for the last year as the Eurozone continues to slip into a deflationary spiral. Deflation leads to stagnation, when the consumer and the business community stop spending in anticipation of lower prices in the future. The longer the prices stay low the more people will assume they will either stay low or fall even further.

Fig 4

Net Imports of Long Products through July: Total long product imports through July were just over 4.0 million short tons, exports in the same period were just under 1.6 million tons resulting in net imports of 2,460,686 tons. Table 1 shows net imports by product and the total for all steel products on a YTD comparison and on a three month moving average basis for the period May – July, both on a year over year basis. Year to date all products except hot rolled bars had an increase in net imports. Of the 815,877 tons increase YTD, wire rod and drawn wire accounted for 493,383 tons. Heavy structurals have experienced a drastic swing from trade surplus to trade deficit this year and the trend is accelerating. This product first experienced a trade deficit in April which amounted to 3,600 tons, by July this had accelerated to 60,691 tons. August export data is not yet available but based on licenses the heavy structurals deficit may decrease slightly in August. In the single month of July, rebar actually had a small trade surplus amounting to 5,122 tons. The dramatic and opposite trends for rebar and heavy structurals are shown in Fig. 5, which illustrates the three month moving average history since January 2011.

Table1

Imports of All Steel Products to the U.S.: Table 2, (U.S. Bureau) illustrates the significant growth in imports of all steel (long and flat rolled) products in to the U.S. YTD total imports through July were 24,886,403 tons, a 36.3% increase compared to the same period in 2013. On a 3 month y/y basis all steel products are up am alarming 46.7%. Imports of Wire Rod rose 82.9% to over one million tons, Heavy Structural Shapes were up 38.2% YTD, y/y to 500,995 tons and Reinforcing Bar imports climbed 14.2% YTD, y/y to 781,334 tons. Studying the data by country; Russia had the largest percentage increase at 266% YTD, rising from 739,604 tons YTD in 2013 to 2,708,920 tons YTD in 2014. Turkish total imports were up 46.1% YTD to 1,094,317 tons, while imports from China rose 36.1% YTD, y/y to 1,536,392 tons. A notable exception was imports from Ukraine which fell 78.6% from 254,892 tons YTD in 2013 to 54,502 tons YTD in 2014. The decline undoubtedly influenced by Ukraine’s ongoing conflict with Russia, (Fig. 6).

Table 2

U.S. Scrap Exports: In July scrap exports totaled 1,248,000 tonnes, a decline of 2% m/m. Year to date, 42% of U.S. scrap exports were purchased by Asia, an additional 24% was sold to Turkey. Twelve percent of U.S, scrap exports shipped to our NAFTA trading partners, while 23% went to the rest-of-the-world (ROW), (Fig. 7). YTD through July 8.829 million tonnes (mt) of scrap has been exported, a 21% y/y change from the YTD 2013 exports of 11.115 mt. Turkey’s purchases of U.S. scrap were flat in July, YTD totaling 2.08mt, reflecting a y/y decline of 33%. Turkey averaged 496,147 tonnes of scrap per month in the period between 2010 and 2013. Thus far in 2014, the average has dropped to 297,587 tonnes, a 40% reduction. Total U.S. scrap exports mirror Turkey’s purchasing trend, (Fig. 8). Notable exports in July were; 150,000 tonnes to Thailand, which historically averages 20,000 tonnes per month. In addition, South Korea, purchased 944,000 tonnes YTD 2014, a 180% y/y increase from its normal level.

Fig 7

Net Job Creation for August totaled 142,000, lower than many economist’ predictions. This is the lowest monthly total since January when net job creation totaled 144,000. The unemployment rate ticked down to 6.1%. Labor Force Participation remained flat at 62.8, hovering around the lowest percentage on record dating back to 1980. The employment to population ratio has stayed constant at 59.0 since the end of the recession in 2009, (Fig. 9).

Total construction employment increased 20,000 in August, to 6.09 million, its highest level since Q2 2009. The industry is +192,000 jobs through 2014 YTD compared to +116,000 during the same period in 2013. Construction industry employment is up 27 of the last 29 months and is +455,000 in this period. Manufacturing employment remained flat in August after twelve consecutive months of growth. The industry is +105,000 through August versus +25,000 during the same period in 2014. Manufacturing employment in Motor Vehicle and Parts fell by 4,600, the first decline since February. Employment in Construction and Manufacturing increased 53,000 and 342,000, respectively, in the second quarter while GDP expanded 4.2%.

Unemployment by duration tracks the length of unemployed persons in the U.S. into four categories: less than 5 weeks, 5-14 weeks, 15-26 weeks, and 27 and higher. The long term unemployed, 27 weeks or more, has fallen in recent months but is still far above the historical normal percentage, which is below 20% of all unemployed. They also lead the unemployed by duration as a percentage of all unemployed, (Fig. 10). Currently, short term unemployed numbers have increased while the longer term numbers have decreased. This could be an indication that more people have entered the workforce viewing the marketplace as favorable; on the contrary, it could be viewed that the long term unemployed view the marketplace as poor with no job opportunities.

Fig 9 

Fig 10

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