Thursday
Jan092014

Weekly Market Update - January 10, 2014

Construction Put in Place: For the 12 months ending November CPIP was up 7.8% y/y to $542.1 BN (adjusted for inflation, not seasonally adjusted) according to U.S. Commerce Department data just released. The private sector jumped 11.8% y/y led by a 28.7% y/y surge in housing. The state and local sector continued its decline, off 1.3% y/y. Looking at the numbers on a three month y/y basis, all project categories are “green” to include state and local, (Table 1). Single family housing continues to make progress after bouncing along the bottom for almost four years, (Fig. 1). On a three month rolling basis housing CPIP expenditures totaled $30 BN at the peak in 2013. As a point of reference, this value bottomed in early 2011 at $14.7 BN and peaked in mid-2005 at $96.7 BN. Aggregate infrastructure expenditures shows a promising trend, (Fig. 2). After a precipitous fall in 2011, expenditures bottomed and then flat-lined in 2012 and the first half of 2013 before starting to accelerate in the latter part of the year. This suggests that public treasuries are on the mend. Looking specifically at non-residential construction (NRC includes apartments > 4 stories) also reveals some encouraging news, (Table 2). Total CPIP for NRC for the past 12 months was $220 BN up 4.7% and on a three months y/y basis, $60.3 BN, up 7.8%. Once again it is the private sector leading the charge, up 10% y/y and 13.6% three months y/y. State and local expenditures declined on a 12 month y/y basis by 4.7%, but by less (-3.0%) on a three month y/y performance. Project categories showing strong growth include: Apartments, Lodging, Manufacturing, Commercial and Transport Terminals. Charting just private NRC illustrates a strikingly different recovery ‘picture’ to that of single family residential, (Fig. 3). Note that the housing decline began in 2006 (red = negative y/y growth, green = positive y/y growth) and other than the short lived federal government subsidy blip of 2010, did not begin to recover until the start of 2012. In the case of private NRC, the decline did not commence until mid-2008, while recovery commenced at the start of 2012. Note also that the recovery thus far is occurring at a considerably greater rate than that of housing. Historically recovery starts with housing and NRC follows some 15 to 24 months later. This time around the recovery seems to be occurring simultaneously. Flush corporate balance sheets, low cost financing coupled with pent-up demand are contributing factors.

Table 1

Producer Price Index Construction Materials: Each month the Bureau of Labor Statistics puts out its monthly update of producer prices. This comprises tens of thousands of items from which we pull those of relevance to our steel business. We have concluded that this data is realistic by comparing the PPI to known producer prices such as structural steel. The latest data for some relevant and competitive construction materials in November is summarized in Table 3. Overall materials and components of construction have been virtually unchanged for 6 months but there are big differences between individual items particularly over a 24 month period. This is especially true of structural steel shapes and soft wood lumber where in 24 months steel has had a 47% positive differential. We believe that appreciation of this benefit is vital for fabricators in their bids for low rise building frames. It is evident that over 24 months fabricators have been able to improve their margins since the PPI of fabricated structural shapes has not declined. There are convoluted relationships in this data which must extend far beyond the limited analysis we perform. An example that is far from obvious is that the price of oil can affect the demand for structural steel shapes as demonstrated by the following logic. Continuously reinforced concrete roads are a large consumer of concrete with huge potential for future growth. Concrete roads compete with asphalt, the price of which is driven by oil. An increase in the price of oil makes concrete more competitive and positively affects rebar demand. In addition, cement manufacturers would much rather pour their product on the ground than hoist it in the air for building frames. Therefore the price of oil is one of many factors that will trickle down to affect the demand for structural steel frames. Fig. 4 shows the long term relationship between asphalt and concrete. Since early 2005 there has been a huge beneficial shift in the competitive advantage of concrete which has given back only 1.7% in the last 24 months.

Table 3

The Chicago Fed National Activity Index is a weighted measure of 85 economic indicators that gauge economic activity and inflationary pressures (Federal Reserve Bank of Chicago). The indicators are derived from production and income, employment, unemployment and hours, personal consumption and housing, and sales, orders, and inventories. The Index has a value of 0 and standard deviation of 1, with a positive reading signaling above average growth and negative reading signaling below average growth. The Index reading in November was 0.60, the highest reading since November 2012. The index is up 0.67 from October’s reading, (Fig. 5). All sub-indexes increased in November with the largest increases coming from Production and Income, 0.07 to 0.39, and Employment, Unemployment and Hours, -0.05 to 0.28. Arguably the most significant statistical increase is Personal Consumption and Housing, inching up to -0.12, its highest reading since October 2007, however, still almost seven years in below average growth but trending upward. December’s figures will be noteworthy to watch for. Since GDP equals consumer spending plus investments plus net exports plus government spending, this reading depresses potential GDP growth. The CFNAI is a leading indicator for steel consumption and historically there has been a firm relationship between the CFNAI index and steel supply up to the start of the recession. The CFNAI experienced a healthier recovery than “Long Product” steel supply. The construction sector has yet to experience the growth typically seen in the recovery after a recession.

Fig 5

Rail Activity: The demand for rail delivery arises from of demand for delivery of goods within the broader economy. Hence rail traffic is a useful measure of macro-economic activity. Non-seasonally adjusted U.S. freight rail traffic total carloads declined 0.9% y/y through December. However if coal is excluded, volume was up 2.1% over the same timeframe. While the trajectory is encouraging, volumes are still way off (approximately 2 million carloads), from the levels realized pre-recession, (Fig. 6). Intermodal volume was up 8.0% in December 2013 y/y. Intermodal was up +4.6% in 2013, a new volume record. Carloads of coal were off 5.2% y/y. Other products showing declines in December y/y include: Metallic ores, down 15.3%, iron and steel scrap off 10.7% and steel products off 1.2%. Product with large increased volumes y/y include: Petroleum and petroleum products increased by 17.2% y/y. For the full year, petroleum and petroleum products surged by 31%. Grain carloads were up 11.1%, and nonmetallic minerals were up 7.6% December y/y. Steel mill raw materials and finished goods represent a small fraction of the total goods transported via rail. Iron and steel scrap was 1.5% of total volume and “primary” metal products (includes non-ferrous) was 3.7% in 2013. Metallic ores (mostly iron ore) was 2.3% and coke was 1.2%, (Fig. 7). Canadian railroads saw a 5.2% y/y carload volume decline in December. However intermodal was up 4.5% setting a new record. Volume on Canadian railroads has fully recovered from the recession period, (Fig. 8). Distribution of goods transported by Canadian railways is quite different than in the U.S., (Fig. 9). Iron and steel scrap was 1.2% of total volume and “primary” metal products (includes non-ferrous) was 2.8% in 2013. Metallic ores was 15.7% and coke was 0.8%.

Fig 6

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