Thursday
Sep042014

Weekly Market Update - September 4, 2014

Construction Put-in-Place (U.S. Commerce Dept.): Total construction rose 6.3%, 3 months y/y and 7.2%, y/y ending July. Private construction increased by 8.5%, 3 months y/y and 10.4%, y/y. State and local construction was up 1.2%, 3 months y/y, its third consecutive month in positive territory after 20 months in a row of negative growth, (based on a rolling 3 month y/y change). Single family residential construction grew 16.3% y/y, to $164 Bn (constant 2010 $). On a rolling 12 month basis this category has increased for 32 consecutive months. For perspective, this value averaged $461 Bn in the period between 2005 and 2008, (Table 1).

Non-residential construction rose 9.9%, 3 months y/y and 6.0%, y/y ending July. Private construction increased by 14.5%, 3 months y/y and 10.9%, y/y. State and local construction was up 0.9%, 3 months y/y, but down 3.7% y/y. (Table 2). Apartments greater than 4 stories continue to show the strongest growth at 37.6%, 3 months y/y and 36.2% y/y. Manufacturing is gaining strength rising 21.4%, 3 months y/y. On a 12 month y/y basis manufacturing building expenditures have rising for four years in a row with each successive year a greater percentage gain than the previous year.

Charting total building expenditures including state and local, but excluding single family, (Fig. 1) indicates that expenditures (constant 2010 $) have recovered to approximately the same as the1996 level ($191.3 Bn YTD vs. $196.6 Bn YTD). If we remove state and local and chart just total private non-residential, (Fig. 2), we have to back up an additional year to 1995 to get an approximate match ($133.9 YTD vs. $136.0 Bn YTD). Comparing the two charts, since the great recession ended, the recovery has been stronger for private buildings as demonstrated by the slope of the red arrow line vs. the shallower slope of the Fig. 1 which includes state and local. As the economy continues to improve and more jobs are created, state and local revenues will improve leading to more construction projects.

Table 1

  Table 2

Fig 1

Portland Cement Shipments (PCA): Portland cement shipments increased by 9.6%, 3 months y/y to 25,762 k-tons for the three months ending June. All regions of the country were “green” indicated growth. The largest percentage growth was in the South Atlantic, up 14.8%, 3 months y/y, followed by the West North Central, up 13.8%, 3 months y/y. The West South Central region continues to hold the top spot by volume which it has held since April 2008. Prior to that it was the South Atlantic region, (Fig. 3) and (Fig. 4). Increasing cement shipments is a bullish sign for long product steel consumption, especially reinforcing steel. Historically, U.S. rebar market shipments average between 7% and 8% of the weight of Portland cement shipments on an annual basis..

Fig 3

NAFTA Automotive Production: Total light vehicle production in NAFTA in July was at an annual rate of 14,777,652 units, down by 16.6% from June. This was the normal July re-tooling slowdown but the decline was much less than normal. Since 2004 the average July slowdown compared to June has been 30.7%. On a rolling 12 months basis y/y light vehicle production in NAFTA increased by 5.9% and is now well above the pre-recession peak, (Fig. 5). On this basis the U.S. is up by 8.4%, Canada is down by 2.1% and Mexico is up by 3.4%, (Table 3). For NAFTA as a whole on a rolling 12 month basis year over year, light truck production is up by 11.3% and autos are down by 0.8%. A time comparison such as this is very strong evidence of a long term shift in consumer preference, probably driven by the crossover sub set of light trucks. Total light vehicle production in NAFTA on a three month moving average basis is now 2.1% higher than it was in the pre-recessionary peak of Q2 2006, however there is a big difference between the recoveries of the three nations, (Table 4). The U.S. is down by 4.1%, Canada is down by 17.9% and Mexico is up by 66.2%. These numbers overstate the performance of Mexico who had a very rapid surge in late 2010 but who has since slowed to a rate less than half that of the U.S. on a rolling 12 month basis y / y. Fig. 6 shows the production share of light vehicles achieved by the three nations since 1987. The US has made serious inroads into both Mexico’s and Canada’s share in the last three years. Currently the capital expenditure plans of the auto companies in the U.S. far exceed Mexico.

Fig 5 

Table 3

Energy Prices and Rig Count: Fig. 7 shows historical gas and oil prices since January 2000. The daily spot price of West Texas Intermediate fell below $100 in August and was $95.39 on the 25th. Brent closed at $100.49 on the same day. Natural gas delivered to the Henry Hub in Louisiana fell below $4.00 in August and on the 22nd closed at $3.85 / million BTUs. The Baker Hughes North American Rotary Rig Count is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. Rigs are considered active from the time they break ground until the time they reach their target depth and may be establishing a new well or sidetracking an existing one. The Baker Hughes Rotary Rig count includes only those rigs that are significant consumers of oilfield services and supplies. The oil rig count which had been trending flat for almost two years has continued to accelerate in 2014, (Fig. 8) and is now at the highest level in over 2 ½ decades. The gas rig count has trended flat since March and is at a depressed level not seen since the mid-90s. The total number of operating rigs is now 1,913, an increase of 55 in the last two months. Land rigs increased by 52 in this time frame to 1,851 and off shore by 3 to 62. On a regional basis the big three states for operating rigs are Texas at 899, up by 13 since June 20th, Oklahoma at 209, up by 9 and North Dakota at 185, up by 15. Off shore drilling has now recovered from the Deep Water Horizon oil spill in April 2010 but is still less than half what it was in January 2000. In 2004 only 9% of rigs were drilling horizontal wells, in 2014 that proportion had grown to 69%. There will be continual expansion of unconventional oil and gas development over the next decade – most notably in the U.S., but also around the world. To exploit these resources hydraulic fracturing is employed; a process in which formations are fractured under high pressure and propannt pumped into the created fissures. In the U.S., since the natural gas price has decoupled from the crude oil price, expansion will be primarily driven by the shale oil industry which is a more attractive investment. Elsewhere in the world, shale gas development will predominate as nations seek to exploit their unconventional gas resources for export purposes or for the sake of domestic energy security.

Fig 7 

Fig 8

Commercial Property Price Index (Real Capital Analytics): The national index increased to 211.1 up 5.5 points m/m to its highest level since the index began at 100 in December 2000. The CPPI has increased every month since March 2010, (Fig. 9). Referencing Real capital Analytics Mid-Year Review 2014; “Investment trends remained solidly positive across all property types in Q2 with volume gains accelerating. For the first half of the year, volume totaled $184.1 Bn, up 23% y/y and just below the levels achieved in 2006”. Apartments were the key driver but now investors are expanding their horizon into the retail and industrial sectors. In addition over $10.0 Bn of developable land was purchased in the first half of the year, up 48% y/y, most of this in central business districts. This would suggest that new construction starts are on the forefront.

Fig 9

Manufacturing Capacity Utilization rose for the seventh straight month in July to 77.7%. Each month of 2014 has yielded incremental growth, even during the harsh winter conditions that caused Q1 GDP to fall by 2.1%. July’s capacity utilization rate was up 2.8% on a y/y basis. The ideal range is 75%-85%. Manufacturing capacity utilization has remained in this range since the beginning of 2012, albeit on the lower side; however, this figure hasn’t been north of 80% since early 2000, (Fig. 10).

The Manufacturing PMI Index rose to 59.0 in August, up 1.9 points from July, continuing the economic expansion in the sector. This is the highest reading since Q1 2011. The economic outlook is generally positive, however, some respondents have noted some concern due to “global geopolitical unrest” (institute for supply management).

Fig 10

U.S. Industrial Production: The Industrial Production Index measures the monthly output from four industries: mining, manufacturing, gas, and electric. Its baseline is 2002 = 100. The seasonally adjusted figure in July was 104.3882, the highest on record dating back to 1993. The Index rose 5% y/y and has been above 100 for the eleven straight months. The three month moving average was 103.95, also the highest figure on record. July’s reading is up 25% since June 2009, which was the lowest recorded value and the last month during the Great Recession. As industrial production has recovered and seeing all-time highs, total steel supply has yet to make a comeback from the depths of the recession and is still well below the monthly averages seen before the onset of the crisis. It is probable that as the construction and manufacturing industries will continue to expand throughout 2014, total steel supply will follow suit. Historically there has been a 70% correlation between the two data sets, (Fig. 11).

Fig 11

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 09/04/14. Of the twenty seven indicators under consideration, the present situation of twelve are now positive by historical standards, nine are neutral and six are negative. This is a net change of plus two in the positive category, and minus one in both the neutral and negative categories since this analysis was last published on August 21st. The Chicago Fed National Activity Index, (CFNAI), was moved from neutral to positive on the strength of their latest report which itself is a composite of 84 sub-indices. Consumer confidence was moved from negative to neutral. Even though multiple analysts still regard consumer confidence as depressed, the fact is that the value of the composite index published by the Conference Board is now almost at the average for the last 34 years, (1980). The Broad Index value of the US $ was moved from neutral to positive on the strength of a decline of 0.27 which will help retard imports and promote exports. There were no changes in the present situation of the long products, construction or manufacturing indicators.

Overall trends are good with 23 of 27 indicators moving in the right direction, one had no change and three have negative trends. In most cases values are three month moving averages. This is an increase of one in the positive category and a decrease of one negative. Changes in the last two weeks of data releases were: The CFNAI reversed direction from negative to positive, there were no other reversals of trend direction in the last two weeks. There were some changes in the magnitude of trends that are worthy of note. The growth of long products supply slowed from 799,000 tons in three months through June to 473,000 tons in three months through July. The growth of nonresidential starts slowed from 12.4% to 5.1%. The ISM manufacturing index surged more than expected in this week’s result and now stands at 57.1 on a 3MMA basis. Durable goods orders surged in July by 11.2% but this was largely driven by aircraft orders which routinely whipsaw this data point.

The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 5

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