Thursday
Jun122014

Weekly Market Update - June 12, 2014

Net imports of long products in three months through April reached the highest level since before the recession, (Fig. 1). This trend is being driven by imports, exports have been fairly flat for over a year. Net imports are imports minus exports and are the most comprehensive measure of the effect of international trade on the US steel market. Within the long products sector this problem is particularly acute for wire rod plus wire products and for heavy structurals, (Fig. 2). Net imports of long products in total were up by 588,957 tons YTD through April. Wire rod and drawn products accounted for 62% of this increase and net imports of this combination are now more than double the level they were at a year ago. The situation for heavy structurals has reversed the position that has existed since the early 2000s. Since that time heavy structurals have enjoyed negative net imports meaning that exports, (particularly to Canada and Mexico) exceeded imports from all global sources. In three month through April imports exceeded exports of heavy structurals, (Table 1). Based on May's license data, it appears the situation in May will be much worse.

Fig 1

European Update: From the Times of London June 6th. The European Central bank, (ECB) has taken the single currency block into uncharted waters by sending the interest rates on bank deposits into negative territory as part of a package of extraordinary measures to ward off deflation. From Wednesday this week banks will be charged 0.1% to park money with the ECB in an attempt to force them to lend to the “real economy.” This is the first time any central bank has introduced such a punitive measure. The ECB also downgraded its 2014 growth forecast to 1% from 1.2% and sharply lowered its inflation outlook.

From the UK newspaper The Independent; A common currency and budget simply aren’t conducive to large clubs. Yes, homogenous countries can benefit from sharing a currency — it can reduce costs for exporters, for example. However, the euro locked vastly different countries, cultures and economic structures into one monetary system, under a single interest rate, forever binding together the problems of all its members, debtor or creditor, large or small. The result: a sluggish economic block and a huge amount of political resentment on all sides. We would not repeat this mistake if we were to start from scratch.

Possibly the greatest problem faced by the European Union is the disparity of labor costs between member nations. High labor cost nations cannot de-value their currencies to correct trade imbalances. The inevitable conclusion is that the Euro area is unsustainable in its present form which has huge implications for steel trade if countries like Spain and Italy revert to a national currency or to a second tier Euro. Greece, Ireland and Portugal have made good progress in reducing unit labor costs based on austerity programs but Italy and France have made no progress at all and Germany still has best performance in the EU, (Fig. 3).

The Times

 

 

The Independent

 

 

Fig 3

Scrap price benchmarks: Chicago shredded (Pricing data has been published with the permission of American Metal Market, www.AMM.com) declined by a further $18 in June to $365 after declining by $15 in May. The price peaked at $438 in January and has since declined by $73. The purpose of this benchmark analysis is to determine whether these changes make sense in light of the value of the US $ and the price of oil and iron ore. There is an inverse relationship between the value of the dollar and global commodities including scrap with a fifteen year correlation of 88.7%. The US $ has been relatively stable on the Forex markets for the last two years and has not been a factor in the recent move of scrap prices, (Fig. 4). There is an 81.7% correlation between the prices of Chicago shredded and Platts 62% Fe IODEX index delivered North China. This correlation was disrupted by the activities of the big three iron ore cartel in 2010 and 2011. Excluding those two years the correlation would be much tighter and now seems to be back on track. Scrap and iron ore have moved together in the first half of this year, (Fig. 5). There is a 93.1% correlation between the prices of Chicago shredded and West Texas intermediate delivered Cushing Oklahoma, (Fig. 6). At the present time scrap appears to be underpriced relative to oil which history indicates is a buying opportunity.

Fig 4

Industrial Construction: Total industrial construction spending in May was down 3.2% compared to 12 months ago and was down 19.3%, 3 months y/y. Lower expenditures on power projects (the largest spend of all project categories), was off sharply y/y. Industrial manufacturing was up 12.4%, y/y and up 4.6% 3 months y/y, pharmaceuticals & biotech also posted positive numbers for both time metrics. Most project categories are showing negative momentum (3 month y/y is greater than 12 months y/y), indicating a slowing in this sector, (Table 2). Please note that the spending level in this sector is historically volatile when looked at over a short timeframe. Fig. 7 presents expenditures on a rolling 3 month basis, while Fig. 8 presents the same data on a rolling 12 month basis. The trend since mid-2010 is decidedly bullish. Table 3 compares expenditures on a regional basis and the percentage change y/y and 3 months y/y. The Southwest continues to enjoy a disproportionate ratio of the total spend, 33.8% of the total directed to numerous power and energy projects along the gulf coast. To put this into perspective, the three next largest expenditure regions; Mid-West, West Coast and Great lakes combined add up to $38.4 BN for the past year, $1 Bn less than the Southwest by itself.

Table 2

U.S. Steel Production and Capacity Utilization: U.S. steel production for week ending June 7th, totaled 1.845 million net tons. Over this timeframe, the average capacity-utilization rate was 76.7%, (Fig. 9). May 2012 was the last time weekly mill production exceeded 2 million tons and capacity utilization surpassed 80%. YTD U.S. mills have produced 41.4 million net tons. On a regional basis, the Southern and Great Lakes regions are trending higher, while the Midwest, Northeast and Western regions are generally flat, (Fig. 10).

Fig 9

Jobless Claims and Steel Production: Fig. 11 plots new claims for unemployment insurance on the Y axis and steel production on the X axis. The resultant correlation is -84.3%. This relationship clearly shows that as new claims for unemployment insurance decline, steel production increases. In Fig. 12, we present the same date as two lines, one on each of the two Y axis and time, from 2000 to present on the X axis. The result yields the same conclusion, but shows that according to this relationship that we should be producing more steel than we are. The relationship began diverging at the beginning of 2013 (inset). This can largely be explained by the slow recovery of non-residential construction that disproportionally affects long steel products, especially rebar, beams and angles and channels.

Fig 11

Commercial Property Price Index: The CPPI measures national price changes of repeat sales transactions of U.S commercial real estate (Moody’s Real Capital Analytics), based on 20 city indices. The national CPPI was up 12.8% m/m, and 13.5% y/y, (Fig. 13). National sales activity of properties greater than $2.5 million totaled $45.6 BN in April, up 23% y/y. YTD through April sales volume was $115 Bn up 20% vs. the same period last year. Prices increased by 2.4% in the first quarter and by 15% y/y. Hotel properties lead the charge in price gains of 5.9% q/q and 18.0% y/y, followed by the industrial sector up 5% and 15.6%.

Fig 13

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