Weekly Market Update - January 3, 2014

Dodge Non-Residential Starts: For the twelve months ending November, Dodge non-residential starts on a square foot basis increased 14.4% y/y. Warehouses posted the highest percentage gain over this timeframe, up 43.8%. Apartments (> 4 stories) were the highest volume category at 202 million square feet, up 26.1% y/y. Apartments (> 4 stories) over the last three months vs. the same three months in 2012 were up just 6.3%, so it appears that growth in this sector is slowing down (momentum off 19.7%), Table 1. Education, which recorded negative y/y growth (down 6.0%), posted solid growth on a 3 month y/y basis, up 23.9% to 29 million square feet. This is the first sign that education construction may be turning the corner after a prolonged downward trend that began in 2008, (Fig. 1). Despite the recent improved overall performance, non-residential construction has a long way to recover. The most recent 12 month total was 921 million square feet after bottoming at just over 600 million square feet in 2010, (Fig. 2). As a point of reference, the market peaked at over 1.9 billion square feet in both the 1999 to 2001 and 2006 to 2008 periods, while the recession between these two periods bottomed out at over 1.5 billion square feet. The current trajectory of growth for the Dodge non-residential if projected forward at the same slope (and assuming no recession) is tracking towards 1.6 million square feet in the year 2020, (Fig. 3). Hopefully the slope will accelerate and that number will be eclipsed on a much shorter timeframe.

Table 1

U.S. Steel Production and Capacity Utilization: Referencing data from American Iron and Steel Institute (AISI) for the week ending December 28th 2013, production totaled 1.773 million tons (MT) netting a capacity utilization ratio of 74.0%. The last four week moving average production was 1.788 MT, 2.0% lower than the same week period a year ago. Steel production for the year (52 weeks) totaled 95.858 MT of steel at a utilization rate of 76.9%, falling 1.4% y/y, (Fig.4). Regionally the Great lake region recorded 35.102 MT of production for the year, down 1.5% y/y beating-out the Southern region for “top producing region”. The Southern region totaled 34.191 MT, down 7.2% y/y, while the Midwest posted 13.107 MT, -5.3%, y/y. Two regions surpassed their 2012 output; The Northeast, was up 4.3% to 10.726 MT and the West, + 6.2% to 4.559 MT, (Fig. 5).

Fig 4

Durable Goods Orders, November 2013: The three month moving average of new orders for manufactured durable goods surged to another all-time high in November with a value of B$237 and a year over year growth rate of 8.2%, (Fig. 6). The monthly data is very spiky mainly due to erratic orders for civil aircraft. However it is one of the earliest indicators for US manufactured goods and using a 3MMA helps to smooth out the data. Even though we are not involved in aviation the overall trend line is very relevant to the steel business and the trend of durable goods orders is a useful reality check for other manufacturing data such as the ISM index, the industrial production index and employment. Inventories of manufactured durable goods in November increased $1.2 billion or 0.3% to $384.7 billion. This was at the highest level since the series was first published on a NAICS basis, and followed a 0.3% October increase. Nondefense new orders for capital goods in November increased $7.5 billion or 9.4% to $88.0 billion. Moody’s summarized as follows; “Orders and shipments of durable goods rose strongly, consistent with other signs that point to faster manufacturing gains into year’s end. The big gains in core capital goods orders and shipments are likely the beginning of a period of stronger growth, particularly now that there is evidence of acceleration in consumer spending. At least part of the capital spending drought recently is related to weak demand growth, but this appears to be shifting from a headwind to a tailwind for investment as consumers' underlying performance improves.”

Fig 6

Currencies: The U.S. Dollar has strengthened 3.1% on a year over year basis but has remained flat in the past month against the Daily Broad Index, (Table 2). The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive for foreigners to buy from the U.S. The Brazilian Real has weakened 12.7% year over year and 5.9% in the past three months over news that the trade surplus for 2013 was only $2.56 billion, the lowest since 2001. The Real has also declined because of a stronger U.S. Dollar and the Fed Reserve’s decision to choke off stimulus by cutting asset purchases. The Japanese Yen fell 17.7% year over year against the U.S. Dollar as Prime Minister Shinzo Abe attempts to resuscitate the Japanese economy through a series of fiscal and monetary policy targets, notable called “Abenomics”. The sales tax is expected to increase from 5% to 8% by April and finally 10% by 2015. The Bank of Japan is trying to achieve a 2% inflation target through long term bond purchases after nearly two decades of deflation has limited growth in the country.

Table 2

Consumer Confidence: The Consumer Confidence Index rose sharply in December to 78.1, an 8% jump from November, ending the year on a positive note after two consecutive months of decline. The index ended 2013 with a 34% increase from January. The Present Situation sub-index rose as well to 76.2 from 73.5 in November, (Fig. 7). This sub-index didn’t experience the same drops in October and November as the overall index and ended 2013, 36% higher than the beginning of the year. The Expectations sub-index rose 11.7% in December but has yet to recover from June’s three year high of 91.1. Consumers who are considering shopping for autos and homes increased in December. Labor market conditions were mixed as the percentage of consumers who expected a rise in income decreased; however, those who anticipate lower income decreased for the first time since September.

Fig 7

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 01/03/14. Ten of the “present situation indicators are still depressed by historical standards of which five are the construction indicators. These are identified in red. Nine of twenty eight “Present” situation indicators are green and nine are neutral. Overall trends are good with 21 of 28 indicators moving in the right direction. In most cases values are three month moving averages. There has been one reversal in the trends analysis since this review was last published two weeks ago. The 3MMA of the ISM Manufacturing Index trended down by just less than 1% but is still at a healthy level. The trends for the long product sector are looking good with only service center shipments moving in the wrong direction.  There were only two declining trends in construction and manufacturing. These were in the producer price index of commodities which we believe to be correlated with industrial construction and in the ISM manufacturing index as mentioned above. The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table .

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