Weekly Market Update - October 2, 2014

US Preliminary Long Product Imports for August totaled 476,000 tons, a 9% increase m/m. Final imports + preliminary imports through August totaled 3.98 million tons YTD, a 24% y/y. August Rebar imports rose dramatically due to high volumes from Turkey. Rebar imports plus August preliminary YTD totaled 910,000 tons, a 15% y/y increase. Wire rod rose 22% m/m, and include 12,000 tons from Egypt. YTD Wire Rod imports + preliminary totaled 1.1 million tons, up 80% y/y. Light shapes, as defined by the S.I.M.A., rose 11% in August, importing YTD 130,000 tons for a y/y increase of 20%. Preliminary import count of heavy structural shapes (including beams) fell 30% m/m, as South Korea cut shipments by more than half, while imports from Spain & the U.K. also fell markedly, (Table 1).

Table 1

Commercial Property Price Index: The National all property type CPPI increased 14.2% m/m and by 12.9% y/y. Commercial sales activity moved up $29.0 Bn (6% y/y), in August, (Fig. 1). The hottest property sector by volume was hotels, up 71% y/y, while the office sales in the commercial business districts rose by 46%. Investors are now shifting their focus to the retail and industrial properties in search of higher yields since the cap rates for apartments are not as attractive as they once were, (Fig. 2). Likewise commercial business district office investors have shifted their focus to the secondary markets looking for better ROI, (Fig. 3). Cross-border investor interest has increased to near record levels as well capitalized foreign investment was the only sector to increase market-share in August. Foreign investment is spread across all property types and most geographic regions of the country, exhibiting greater demand for the coastal districts.

Fig 1

Nonresidential Construction Starts: McGraw Hill / Dodge publish statistics on the square footage of non-residential starts by project type monthly. Gerdau’s marketing department performs a detailed analysis of this data in order to evaluate the present situation by historical standards and to estimate the future demand for our steel products. In addition to nonresidential projects we include the square footage of multi-unit residential > four stories high, since this sector is an opportunity for steel framing. However, the inclusion of apartments makes the numbers look a whole lot better. Excluding apartments the square footage of nonresidential construction, even after four years of recovery, is still lower than at any time since our statistics begin in 1970.  At the present rate it will be the early 2020s before the previous peak of 1.7 billion square feet is reached, (Fig. 4). With apartments included recovery at the present rate will occur around late 2018, (Fig. 5) but having said that the growth rate of high rise apartments is slowing, and probably that market will be saturated before 2018. In three months through August nonresidential square footage including apartments grew by 5.7%, (Table 2). Not shown in this table is that growth in the same time frame without apartments was 4.6%. Before the recession educational buildings were the highest sector of nonresidential buildings, peaking at 290 million square feet in 2002. Finally after five years of contraction, educational buildings are beginning to turn around with four straight months of expansion through August on a rolling 12 month y / y basis, (Fig. 6). Warehouses have been doing consistently well since early 2011. Accommodation, (hotels / motels) have been growing strongly for almost four years. Manufacturing plants have been on again off again for four years and had a growth rate surge to 29.7% in three months through August y/y. The downward trend of civic construction than began in mid-2009 shows no sign of improvement.

Fig 4 

Fig 5

Currencies: The U.S. Dollar has strengthened 4.7% on a y/y basis and 3.7% over the past three months against the Daily Broad Index, thanks to a healthier economic recovery. Second quarter GDP results yielded a 4.6% incline. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S..  The latest FOMC meeting minutes were released and Fed Chairwoman Janet Yellen said that the labor market still had significant slack and were not going to raise interest rates, yet the greenback is still posting solid gains against most major currencies (Table 3).

The Russian Ruble has fallen nearly 18% on a y/y basis and more than 6% in the last month. According to Bloomberg, the Ruble has dropped the most out of 24 tracked emerging market currencies. It is clear that sanctions imposed by Western Nations, including the United States, have hurt the currency and the Russian economy. Russia may implement capital controls to fight the decline of Ruble. This is not a good sign for a country planning on adopting the free floating currency in 2015. The Japanese Yen has declined to 110 yen per dollar on September 30th, a rate not seen in six years. The Yen has declined more than 57% over the past three months. 2nd Quarter GDP fell an annualized 7.1%, more than economists and analysts have predicted. The decline primarily came from consumer spending, which fell dramatically, in part to a planned April sales tax increase, from 5% to 8%. The next quarter will be critical for the Prime Minister as the sales tax is planned to increase in October 2015 to 10%. The Bank of Japan may decide whether to intervene as the Yen depreciates much more than anticipated, however, they believe it’s mostly due to the Dollar strengthening.

The Canadian dollar has also fallen sharply against the US$, falling 7.8 % y/y and by 2.6% over the past month as economies that rely heavily on raw material commodities exports are feeling the pinch of shrinking global prices, (Fig. 7).

Table 3

Fig 7

Construction Put-in-Place: August data released yesterday from the US Commerce Department reports that total construction increased 6.7% y / y and by 3.8%, 3 months y / y. The private sector rose by 9.4% y / y and 6.0%, 3 months y / y, while State and Local decreased by 0.2% y / y but increased 0.8%, 3 months y / y. State and Local spending has posted four months in a row of positive values on a 3 month y / y basis, after recording 20 months of consecutive declines on the same basis, (Table 4). Single family residential construction grew by 14.3% y /y, but shrunk to 8% vs. the same three months in 2013 indicating a slowdown in momentum.

Non-residential construction, (Table 5), increased by 6.5% y/y and by a stronger 8.8%, 3 months y/y signifying positive momentum. The private sector surged ahead by 11.2% y/y and by 13.3%, 3 months y/y. State and Local declined by 2.7% y/y but posted a positive 0.5%, 3 months y/y. Apartments continue to record strong gains, up 36.5% y/y, lodging is also performing admirably, up 22.4% y/y. Office and commercial construction also recorded double digit gains y/y , up 16.2% and 10/2% respectfully.

Table 4 

Table 5

Steel Demand Indicators: Table 6 is a snapshot of the market situation on 10/02/14. 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. There has been no net change in the present situation since this analysis was last published on September 18th, but there have been two changes in the detail. On the basis of two upward revisions to the growth of GDP in the 2nd quarter we have re-classified this indicator from neutral to positive. The Chicago Fed National Economic Index, (CFNAI) moved in the opposite direction and was changed from positive to neutral. The CFNAI is a composite of 84 sub-indices, a value of zero indicates that the economy is performing at the historical norm. In August this index declined to just above zero. There were no other directional changes in the present situation of the 27 steel market indicators. In our trends analysis, most of the values reported are three month moving averages, to avoid the knee jerk reactions that are characteristic of most economic reports in the press. There was a net increase of two in the negative trend category since last published, but overall trends continue to be good with 20 of 27 indicators moving in the right direction. One, the price of Chicago shredded had no change and six have negative trends. The CFNAI reversed direction as mentioned above and consumer confidence, as reported by the Conference Board, declined slightly. In the single month of August there was over a seven point drop in CC, but in our 3MMA analysis the index fell by only a tenth of a point. There were no other directional changes in the trends of long products, construction or manufacturing. Capacity utilization and the supply of long products continued their strong positive trend. The growth of total construction as reported by the Commerce department on Wednesday slowed from 5.7% in July to 3.8% in August on a three month year over year basis. The ISM manufacturing index also reported on Wednesday declined by 2.4 points but the 3MMA actually increased. We learned this week that the Chicago fed Mid-West Manufacturing index that we put great store in and which was suspended for a re-vamp earlier this year will be reinstated in November. 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).


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