Weekly Market Update - November 3, 2016

Shipments and Supply of Long Products through August: This report compares domestic mill shipments and total supply to the market and quantifies market direction by product. Sources are the American Iron and Steel Institute and the US Department of Commerce. Table 1 shows both apparent supply and mill shipments of long products, (shipments includes exports) side by side as a three month average through August, for both 2015 and 2016, (year / year). Apparent supply is a proxy for market demand. Comparing these two time periods, total supply to the market was up by 3.7% yet mill shipments were down by 0.3%. This means that demand improved but imports took all the growth and then some.

Apparent Supply is defined as domestic mill shipments to domestic locations plus imports. In the three months through August the average monthly supply of long products was 2.426 million tons, up by 6.0% from the period three months through May and up by 3.7% y/y. The short term improvement, (3 months) compared to the long term, (12 months) means that momentum is positive. Table 2 shows the change in supply by product, on this basis, through August. Momentum was positive for all products except drawn wire. Rebar had very strong growth in both 3 month on 3 month and y/y. Bar sized shapes had very strong growth, (18.5%) in June through August compared to March through May. Hot rolled bars had the worst performance y/y.

Figure 1 shows the long term supply picture for the individual long products as three month moving averages, since January 2006. Rebar and structural shapes have trended up this year, bar sized shapes have trended up since March, hot rolled bars have trended down since Q4 2014 and wire rod + drawn wire has been little changed this year.

Mill Shipments which includes exports averaged 1.951 million tons / month in the three months through August, down by 0.3% y/y and up by 3.4% compared to three months through May, (3m/3m). The fact that growth in the short term is stronger than in the long term means that momentum is positive. Table 3 shows shipments of individual long products. Shipments of bar sized shapes had a strong increase 3m/3m but hot rolled bars, cold finished bars and rod and wire all declined. Rebar and heavy structurals showed a moderate improvement. Figure 2 puts the results for the five main products into the long term context, beginning January 2006. Shipments of heavy structurals and rebar made good progress this year, but hot rolled bars are down, wire rod is fairly flat and bar sized shapes have improved over the last four months.

Figure 3 shows import market share of long products and includes sheet products for comparison. Based on a 3 month moving average (3MMA) long product import market share peaked at 29.4 in April last year, declined abruptly to 24.5% in July 2015 and now stands at 27.5% in this latest data. The import market share of sheet products declined from 24.3% in March last year to 17.4% in May this year and has increased to 20.1% in August.

A problem with this data is that it’s now mid-October and the latest data we have for shipments and supply is for August. The AISI puts out weekly data for crude steel production the latest for which was w/e October 29th. This provides the most current data for steel mill activity. Figure 4 shows the y/y change in weekly crude output on a four week moving average basis (4WMA). Growth became positive in w/e March 5th and in the following 19 weeks there was only one week with negative y/y growth. Growth became negative again in w/e July 23rd and has continued to deteriorate since then. The key variable is imports which for all long products were up by 8.5% in three months through August compared to three months through May and by 10.4% y/y. Our key market indicators data are mostly trending positive therefore we do not anticipate a demand slowdown in the immediate future. The issue is, will the demand improvement be supplied by the domestic mills or by imports. This brings us full circle to Table 1 which shows that y/y supply up by 3.7% and mill shipments were down by 0.3%.

Table 1

Figure 1

Figure 2

Global Steel Production for September and Forecast through 2017: According to the OECD capacity will continue to increase through 2018. To make matters worse, global economic growth is slowing. China is picking up the pace of steel production again, as the rest of the world has contracted for 18 straight months through July, and experienced a slight positive 0.1% growth in August and 0.4% in September. The World Steel Association short range forecast that was released in early October forecasted a 3.0% demand increase in the US next year which we believe is optimistic based on the IMF forecast for US GDP growth in 2017.

Production in the month of September at 133,035,000 metric tons (mt) was up by 2.5% from August and the three month moving average, (3MMA) that we prefer as a measure, was down by 0.8%. Capacity is 2.35 billion tonnes per year and the 3MMA of capacity utilization in September was 68.0%. Figure 5 shows monthly production and capacity utilization since January 2000. On a tons / day basis production in September was 4.434 million tonnes (Mmt) with a 3MMA of 4.360 Mmt, up by 0.3% from August. Since the recession, capacity utilization has been on a steadily downward trajectory with an upward blip in the first few months of 2016. Capacity utilization in the three months through September, at 68.3%, was down from 68.9% in three months through September last year. On September 9th the OECD’s steel committee reported that global capacity is expected to increase by almost 58 Mmt / year between 2016 and 2018 bringing the total to 2.43 billion tonnes. Figure 6 shows the change in growth rate since January 2005. Production began to contract in March last year and the contraction accelerated through January this year when it reached 5.8% y/y. In the next four months contraction slowed and in May and June was zero. July, August and September have had year / year increases in the 3MMA of 0.7%, 1.3% and 1.7%. The much desired slowdown in global steel production has reversed course on a year / year basis and is accelerating, with China as the driver.

Table 4 shows global production broken down into regions, also the production of the top ten nations in the single month of September and their share of the global total. It also shows the latest three months and twelve months production through September with year / year growth rates for each period. Regions are shown in white font and individual nations in beige. The world as a whole had positive growth of 1.7% in 3 months and negative 1.6% in 12 months through September. If the 3 month growth rate exceeds the 12 month we interpret this to be a sign of positive momentum, and has been the case for the last eight months. On a regional basis in 3 months through September year / year, South America, the EU, North America and the CIS contracted. Asia as a whole was up by 3.3% with India up by 8.7%. Other Europe, (mainly Turkey), was up by 9.2% and North America was down by 4.0%. Within North America the US was down by 4.2%, Canada was down by 4.4% and Mexico up by 1.4%.

The October 2016 version of the World Steel Association Short Range Outlook, (SRO) for apparent steel consumption in 2016 and 2017 was released last week. (Note this forecast is steel consumption, not crude steel production which is the main thrust of what you are reading now). This latest WSA forecast has global demand in 2016 expanding by 0.2% and by 0.5% in 2017. Based on this forecast, NAFTA will contract by 0.1% this year and grow by 2.9% next. China’s demand will decline by 1.0% this year and 2.0% in 2017, therefore if their production doesn’t decline by at least that amount the flood of exports to the rest of the world will only increase. The forecast for the top 10 steel producing nations, has the US down by 1.2% in 2016 and up by 3.0% next year.

Figure 5

Figure 6

Table 4

Industrial Construction Starts were down 21.5%, to $180.3 Bn (12 month rolling total), compared to September 2015. On a 3 month y/y basis starts declined a smaller 21.5%, thus momentum was a positive 2.3%. Power projects declined 18.0%, 3 months y/y but were up 4.0% on a 12 month y/y metric. Production oil & gas starts plummeted by 80.3%, 3 months y/y and by 92.9% y/y as oil prices remained depressed, currently trading just below the $50 range. Two project categories surged by triple digits 3 months y/y to include: Chemical Processing (+114%) and Alternative Fuel (+112%). Of the 12 project categories, 7 posted growth 3 month y/y, the same ratio posted positive momentum. All but one of these were within the same project category, (Table 5).

Figure 7 illustrates industrial starts by census region showing the y/y change in percent as well as the 12 month total expenditure. Regions recording double digit declines include; The Southwest (-65.5%) and the Middle-Atlantic (-30.3%). Regions posting significant solid growth numbers include; The Pacific (+33.7%), West North Central (+20.6%), Northeast (+17.1%), Mountain (+16.9%), Southeast (+11.3%), and the East North Central (+7.1%).

Canadian industrial starts were up 9.1%, 3 months y/y, but down slightly (-0.6%) compared to September 2015. Power projects surged 110% y/y and accounted for $14.5 Bn of the $28.0 Bn for 51.7% share of the total for the 12 months ending September. Oil related projects were mostly off, led by a 96.0%, 3 month y/y decline for production oil and gas and a 61.4% 3 month y/y decline for petroleum refining project starts. Project groups posting large triple digit growth include: Pharmaceuticals & Biotech (+424%), Industrial Manufacturing (+406%) and Pulp, Paper & Wood (+251%), (Table 5).

Figure 8 presents a regional look at Canadian Industrial starts showing the y/y change in percent as well as the 12 month total expenditure. Quebec boasted the largest percentage gain at +50% y/y followed by the Western provinces at +25.1% and Ontario at +18.4%. The Atlantic zone, down 93.5% y/y, dragged the overall Country growth down to negative 0.6%. The four Western provinces accounted for 59.8% of total expenditures for the 12 months ending September, followed by Ontario at 29.9% of the total outlay.

Table 5

Figure 7

Construction Put-in-Place (CPIP): Data released by the US Census Bureau on November 1st reported that spending fell 0.4% month over month, as CPIP is based on construction spending work as it occurs. Table 6 displays non-seasonally adjusted expenditures by sector on a 3MMA and a 12MMA year over year basis to eliminate seasonality or volatility that occurs month to month. We consider four sectors within total construction, non-residential, residential (with and without improvements), infrastructure and other; which includes industrial, utilities and power. In the last 3 months non-seasonally adjusted construction spending totaled $324.2 billion and rose 1.9% y/y. In the 12 months through September 2016 construction spending totaled $1166.7 billion, an increase of 8.1% y/y compared to the same time frame ending September 2015. However momentum (3 month subtract 12 month) was negative, signaling that construction activity is slowing. This is also supported on Figure 9 as the 3m y/y percent change, albeit still on the positive side, continues to dwindle.

Reviewing the breakdown of expenditures, the growth rate of private construction rose 6.7% in the last three months, while public construction spending fell, with state and local construction down 8.8% 3m y/y and federal down 3.7% 3m y/y. Spending for highways, streets and transportation was depressed, down 6.5% and 12.3% 3m y/y respectively, while spending on vital infrastructure projects such as water supply, power and sewage/waste continue to plummet, (Table 6). Compared to work totaled on a 12m basis, momentum was negative for all three finance channels.

Figure 9

Chicago Fed National Activity Index: After recording a +0.23 reading in July, the CFNAI fell in both August (-0.72) and September (-0.12) to a 3MMA of -0.21. A negative value denotes an economy has been performing at below its long term average, (> 0.0 means above trend growth, < 0.0 means below trend growth).

On a 3MMA basis the CFNAI has recorded negative numbers for 20 consecutive months, the longest stretch of negative scores since the great recession, (Figure 10). There are four sub-indexes in the overall CFNAI, these include: The 3MMA Production and Income index fell to negative 0.08, down two of the last three months and 11 of the past 12 months. The 3MMA Sales Order and Inventory and Personal Consumption indexes also recorded negative readings in September of -0.02, (negative 10 of the last 12 months) and -0.09, (negative in all of the last 12 months) respectively. The 3MMA readings for Employment, Unemployment and Hours were also negative, (-0.02 and negative 5 of the last 12 months).

Figure 11 overlays long product domestic shipments and imports onto the CFNAI. Note that prior to the recession the blue line (long product market size) was generally higher than the CFNAI and after the recession ended, the blue line is consistently below the CFNAI. We think the reason for the shift can be explained by the long slow recovery of non-residential construction (NRC). Moody’s estimates that third quarter GDP will come-in at 2.5% thanks to increased federal government spending and stronger than expected industrial production numbers. Moody’s still think that despite the negative numbers in the CFNAI that a rate hike is still on the table for December.

Figure 10

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

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