Weekly Market Update - December 11, 2014

Rail Indicators Report (AAR): November 2014 U.S. seasonally adjusted freight rail traffic total carloads increased by 1.4% y/y. If carloads of coal and grain are excluded, the percentage change increases to 4.7%. Over the same time period, intermodal traffic increased by 2.7% y/y. Fig. 1 presents yearly data from 2009 to 2014YTD for both U.S. rail carloads and intermodal units. Until August, carload traffic in 2014 had exceeded all previous years. The October and November volumes have since fallen below the 2011 values. Conversely U.S. intermodal volume has steadily risen with each passing year. Excluding grain and coal, U.S. carloads of all commodities exceeds all previous years back to 2009 and are closing in on the numbers posted in 2006, (Fig. 2). This is tangible evidence of underlying strength in the broader U.S. economy. Further supporting this claim is a jump in railroad (Class 1), employment which has increased by 6,938 (4.3%), YTD through October.

Canadian freight rail traffic was up 0.5% y/y in November, while intermodal traffic rose 0.2%. Through November both railcar and intermodal volume have exceed all previous years since 2006 indicating underlying strength in the Canadian economy, (Fig. 3).

Iron and steel scrap carloads were down 6.9% y/y in the U.S and down 5.7% y/y in Canada while at the same time shipments of iron ore was up 19.8% and 12.0% respectively. This suggests that there may be some substitution of iron units underway possibly due to the large decline in global iron ore pricing.

Motor vehicle parts shipments were off in both countries, down 3.8% in the U.S. and off 13.0% in Canada indicating some weakening in the booming automotive sector, (Fig. 4). Still the overall rail carloads of primary metal products (mostly steel) is posting its best year since the recession ended as illustrated in (Fig. 5).

Fig 1 

Fig 3

U.S. Long Products License Report (SIMA): September final LP imports totaled 491,000 tons, led by 142,000 tons of wire rod, 126,000 tons on SBQ and 108,000 tons of rebar. The preliminary LP import total for October increased by 19.6% to 588,000 tons with 168,000 tons of rebar, 113,000 tons of SBQ and 94,000 tons of wire rod. November LP import licenses are tracking down 16% from October to 494,000 tons, but are up 26% to 5.54 million tons YTD y/y. November rebar licenses are up 23% to 168,000 tons, however every other sub-group was down m/m, (Table 1). Comparing YTD November 2013 to YTD November 2014, LP imports were up 26% overall. The largest y/y volume product and greatest percentage change was for wire rod, up a whopping 85% to 1.47 million tons. The next largest tonnage category is SBQ albeit the YTD y/y value was down 9%. Beams (sub-group of structural), which in recent memory has been a net export product group saw its import level surge 63% to 538,000 tons. Rebar YTD imports were up 21% to 1.33 million tons, merchant bar import rose 27% y/y and light shapes swelled by 20%.

Table 1

Net Job Creation for November totaled 321,000, the tenth straight month of job growth above 200,000. Net job creation for October and September were revised upward from 256,000 to 271,000 and 241,000 to 243,000, respectively. This was 17,000 more jobs than reported in the original release. YTD job creation is 2.65 million compared to 2.247 during the same period in 2013. Labor force participation remained at 62.8, below 63.0 since February and still amongst the lowest on record. The employment to population ratio stayed at 59.2, the second such month above 59.0 since Q3 2009.

The U-3 unemployment rate remained at 5.8%, among the lowest since Q2 2008. The U-6 unemployment figure, which includes those persons who are marginally attached to the labor force, fell to 11.4% in November, from 11.5%. This number has been steadily declining since the end of 2010. The U-6 rate peaked at 17.4% in October 2009, (Fig. 6).

Total construction employment increased 20,000 in November to 6.109 million, the highest level since Q2 2009. The industry is +233,000 jobs through 2014 YTD compared to +176,000 during the same time period in 2013. Construction employment is up 30 of the last 32 months and is +496,000 in this period. Manufacturing employment increased 28,000 in November and for the 16th consecutive month of net job growth. Total manufacturing employment is 12,217 million, the highest since Q1 2009. Manufacturing employment YTD is +164,000 compared to +81,000 during the same time period in 2013, (Fig. 7).

Fig 6 

Fig 7

Net Imports of Long Products through October: Net imports = imports minus exports, we regard this as an important look at the overall trade picture and its negative effect on demand at the mill level. Fig. 8 shows that net long product imports on a three month moving average, (3MMA) basis increased in October and returned to the 400,000 ton level which pertained in May and June. Net long product imports were zero in Q3 2009 and Q4 2011. The increase in net imports since Q4 2011 is mainly a function of increasing imports, though exports have declined by about 20% in that time frame which worsened the situation. In the first 10 months of 2014 net long imports were up by 1,316,723 tons of which over half was wire rod and drawn wire, (Table 2). Heavy structurals have had a 502,000 tons trade swing YTD moving from a 351,802 ton trade surplus in 2013 to a 150,309 deficit in 2014. When the dust settles on 2014 the heavy structural trade swing will be approaching 700,000 tons year over year which is huge given the size of this market. Fig. 9 shows the situation graphically by product. Based on AISI steel and Commerce Department trade data, the supply of long products in three months through October was up by 5.9% but mill shipments were only up by only 0.1%. It is clear from this analysis that the domestic mills are getting little benefit from the positive market growth that has prevailed in 2014.

Fig 8

Shipments of Long Products through October based on AISI Data: In other reports published in the Gerdau Steel Market Update we quote steel shipment data produced by the Steel Manufacturers Association, (SMA). The analysis you are reading now is based on data published by the American Iron and Steel Institute. In the first 10 months of this year total long product shipments were 20,650,000 tons an increase of 2.2% compared to the first 10 months of 2013. Comparing the three months through October with the three months through July, shipments were down by 0.9%. Comparing the three months through October with the same period last year shipments were up by 0.1%. Table 3 shows the performance by product on the same basis as just described. YTD all products except cold finished bars and wire rod have improved y/y, led by rebar which was up by 8.5%. Cold finished bars did particularly badly being down by 16.5%. Comparing three months through October with three months through July all products except rebar experienced a decline. Fig. 10 shows the progression of shipments by product since Q1 2008, all based on 3MMA. Rebar is the only product that has fully recovered from the recession. Structural shapes have been steadily improving since Q2 2009. Based on AISI data the capacity utilization of the long product mills is currently 76% compared to 86% for the flat rolled mills, (Fig. 11).

Table 3

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