Weekly Market Update - October 9, 2014

Oil/Gas Rig Count: The total rig count on 9/26/2014 was 1,931 with an 82.4% split in favor of oil. Just 62 of these rigs were offshore, a decrease of two y/y, but double the level since the same month in 2009. Oil rig count stood at 1,592,  230 more than the same time last year and an astonishing 1,216 more than the same date five years ago.  At the same time, the gas rig count on was 338, down from 376 a year ago and close to half the number in service five years earlier, (Fig. 1). Texas has 895, (48%) of the land based rigs, followed by Oklahoma at 213, (11%), North Dakota at 189, (10%) and New Mexico at 101, (5%). Shale oil/gas exploration has expanded rapidly as a function of horizontal drilling which has more than tripled since 2007 as illustrated in (Fig. 2). For reference, (Fig. 3) presents International rig counts by region. The total worldwide rig count was 3,642, the U.S. ratio was 53%. The next largest count was in Latin America at 410, followed by the Middle East at 406 and Canada at 299, (keep in mind that rig count does not correspond to volume output). Continued energy development is planned over the foreseeable future which is an encouraging development for steel providers. As (Fig. 4) illustrates, tight oil, (shale plays) is expected to dominate this activity with total U.S. output reaching close to its historic high of 9.6 million barrels per day somewhere between 2015 and 2020.

Fig 1

Rail Traffic Report: At Gerdau, we like to keep an eye on the volume of freight rail traffic as it is highly correlated to the underlining strength of the U.S. and Canadian economies. Coal, chemicals & petroleum and agricultural (mostly grain), account for 62% of the combined rail traffic volume in the U.S. and Canada. Metallic ores and minerals (includes: coke, iron ore, steel products and steel scrap) contribute just shy of 12%. Combined U.S. and Canadian carload volume was up 1.9% y/y and up 3.5% over the two years ending September. Combined U.S. and Canadian intermodal traffic rose 4.8% y/y and surged 9.3% over the past two year period, (Fig. 5). Carloads of primary metal products which is mostly steel increased by 7.0% y/y in the U.S., but fell 0.2% in Canada. Rail movement of iron and steel scrap increased by 4.5% in the U.S., but declined by 4.5% in Canada. Motor vehicle (including parts), rail shipments fell 1.3% in the U.S. and plummeted 9.3% in Canada indicating a softening in auto demand.

Fig 5

WorldSteel Outlook: The WorldSteel Association raised its short range outlook for apparent steel use (ASU) to 1,562 million tonnes for 2014, up 35 million tons from its April 2014 forecast. In percentage terms the y/y change is expected to be 2.0%, down from the previously forecasted 3.1% because more steel was produced in 2013 than was originally recorded (1,481 April 2014 forecast vs. 1,531 in the October 2014 forecast). The latest forecast for 2015 calls for 1,594 million tonnes of ASU a 2.0% y/y increase, yet 18 million tonnes higher than the April forecast. NAFTA is anticipated to consume 138 million tonnes in 2014 and 141 million tonnes in 2015, an increase from the April forecast of 134 and 139 million tonnes for 2014 and 2015 respectively. Developed economies combined are expected to account for just 26.0% of global ASU in 2014, falling to 25.8% in 2015. Developing and emerging therefore make-up the remaining 74.0% (2014) and 74.2% (2015). China alone is expected to generate 748 million tons in 2014, rising 0.8% to 754 million tonnes in 2015. This equates to 47.9% of global ASU in 2014, declining slightly to 47.3% in 2015, (Table 1), (Fig. 6).

Table 1

U.S. Import Licenses were flat in September. Long product imports plus September licenses totaled 4.443 million tons (Mt) YTD, a 22% increase over 2013 YTD imports of 3.639 Mt. Wire rod licenses saw the largest increase, up 36% m/m, while imports plus licenses were up 81% YTD, y/y for a total of 1.22 Mt. In September 38,500 tons of wire rod licenses were requested by Turkey, followed by Egypt applying for 16,500 tons.

Rebar imports licenses fell 29% m/m, however imports plus licenses remain 10% higher YTD, y/y at just over one million tons. Turkey applied for 55,000 tons of rebar licenses, followed by Peru requesting to import 15,000 tons. Licenses for light shapes fell 27% m/m. Imports plus licenses totaled 146,000 tons YTD through September, up 20% y/y. More than 80% of the light angle and channel licenses requested in September were from our NAFTA trading partners. Heavy structural licenses were flat m/m, totaling 655,000 tons YTD of which 400,000 tons were licenses to import beams. On a year over year basis, heavy structurals, (which includes beams), surged 48%. Mexico requested 16,000 tons of heavy structural licenses for September, most of which were angles and channels. South Korea applied for 14,600 tons, Luxembourg requested 12,000 tons and Russian license applications totaled 9,400 tons for the month, all beams, (Table 2).

Table 2




Employment, Job Creation in September: The Bureau of Labor Statistics (BLS) report on non-farm employment indicated that 248,000 jobs were added in September. August which had been disappointing was revised up by 38,000 and July was revised up by 31,000. The three month moving average, (3MMA) declined to 224,000 in September and has declined for three straight months but this job recovery is now looking stronger than was the case in the mid-2000s, (Fig. 7). In each of the last six months the 3MMA has exceeded 200,000 / month and the six month total has averaged 243,000. All numbers in this analysis are seasonally adjusted by the BLS. The total number employed in the US is now 139,435,000 people. Total employment equals the sum of private and government employees. It also equals the sum of goods producing and service employees. Most of the goods producing employees work in manufacturing and construction and these sectors are further subdivided in Table 3. In September private employment grew by 236,000 and government by 12,000. Service industries expanded by 219,000 and goods producing by 29,000 people. Private sector employment has expanded by 4.5% in the last 24 months as government has contracted by 0.1%. In the first nine months of 2014, the federal government has shed 46,000 jobs, state governments have lost 28,000 and local governments have added 164,000 positions.

Manufacturing has added 101,000 jobs this year but the net change in the last two months was zero as the 4,000 gain in September wiped out the 4,000 loss in August. Motor vehicles and parts was the strongest manufacturing sector in September. Construction has added 203,000 jobs this year with 16,000 in September. The strongest construction sector in September was residential building which added 6,200 positions. Note; Table 3 only identifies the major sectors in manufacturing and construction so the totals don’t add up.

The official unemployment rate fell to 5.9% in September from 6.1% in August and 6.2% in July. This is known as the “U3” rate. The more comprehensive U6 unemployment rate stands at 11.8%, down from 12.0% in August and 12.2% in July, (Fig. 8). U6 includes workers working part time who desire full time work and people who want to work but are so discouraged that they have stopped looking. The differential between these rates was usually less than 4% before the recession but in 2014 has averaged 6.0%.

Fig 7 



  Table 3

Scrap Exports from the U.S. through August: In the first eight months of 2014, scrap exports totaled 10,404,531 tonnes, down by 18.7% from the same period in 2013. In the single month of August exports were 1,575,716 tonnes, this was the highest volume month of the year, beating out May by 26,000 tons. Fig. 9 shows that the three month moving average has been fairly consistent for the last four months through August and continued to be lower than the average in any year from 2008 through 2013. The most obvious trends so far this year are the decline of Turkey and Taiwan since May and the increase of Korea in three months through August. Year to date Turkey is down by 1.2 million tonnes or 33.8%. China’s tonnage has been quite consistently low this year on a 3MMA basis ranging from 53,000 to 90,000 tons per month. This is compared to over 500,000 tonnes per month in 2009 when they were the highest volume importer.

In YTD 2014 compared to the same period in 2013, the Far East as a whole is down by 12.6% and China is down by 59.4%. Other nations not considered in this analysis because they have been historically minor purchasers were down in total by 325,000 tonnes YTD. Some nations have taken more tonnage this year than last; Indonesia is up by 126,000 tonnes, Mexico by 89,000 tonnes, Vietnam by 92,000 tons and Thailand by 301,000 tonnes. Tonnage moving North over the Canadian border was down by 21,000 tonnes from last year.

Scrap export prices are reported by the AMM every Tuesday for an 80:20 mix of #1 and #2 heavy melt in US $ per tonne FOB New York and Los Angeles for bulk tonnage sales. (Chicago shredded scrap price data published with the permission of American Metal Market Prices on the both coasts have been in free fall since August 25th. In the time frame since then to October 6th, East Coast export prices were down by $43.41 to $324.25 and the West Coast was down by $33.50 to $321.00.

Fig 9










The Institute of Supply Management Manufacturing Index fell 2.4 points in September to 56.6. Despite the drop, the ISM Index is still above the expansion benchmark, which is anything greater than 50. The 3 MMA is the highest since Q2 2011. Production inched up from 64.5 to 64.6 meanwhile New Orders and Inventories both slipped this month. Interestingly, Employment dropped nearly 4 points, however, next month’s report could yield a higher revision due to the stronger than expected September jobs report. According to the Manufacturing ISM Report on Business, the manufacturing sector grew for the 16th straight month and 15 on 18 industries have yielded growth in September (Institute of Supply Management). US 2nd Quarter GDP grew 4.6% which gains evidence for a strong ISM report, (Fig. 10).

Fig 10

The Institute of Supply Management Nonmanufacturing Index slipped in September to 58.6 from 59.6 in August. The 3MMA of 59.0 is the highest the Index has been since 2006, well before the Great Recession. Business activity and new orders have fallen as well, with Employment jumping to 58.5 from 57.1 in August. This index was released after the September jobs report on October 3rd indicating the strong jobs report, including July and August revisions, were crucial to the recovering economy.


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