Weekly Market Update - March 27, 2014

State Government Tax Collections: U.S. total state tax (including: Income, Property, Sales and Other), collections totaled $850 billion in 2013, up 6.4% y/y. Six states had double digit percentage point increases y/y including: CA, FL, CO, OR, UT, NB, while five saw double digit percentage point declines y/y. These include: MN, KY, NM, and AK. Fig. 1 illustrates the top eight states collections (these 8 states combine for 50.8% of the total collections) on the left hand scale and U.S. total state tax collections on the right hand scale. California alone represents 16% of total receipts, followed by New York at 8.9% and Texas at 6.2%. In the year 2013, California’s collections swelled by over $20 billion. To put this in perspective, y/y increase exceeds the lower seven states entire total collections. The nation’s most populous state now has a multibillion-dollar surplus. Table 1 presents state data in rank order (highest collection to lowest), cumulative percentage of total collections as well as y/y change 2013/2013, two year change, five year change and the momentous drop that occurred from 2010 to 2008, when the great recession hit. On a national basis, state tax collections in 2013 exceeded the previous high-point in 2008 by 9%. These additional revenues are arising from strong stock market capital gains taxes, higher corporate earnings and a larger tax-base resulting from the jobs created from a strengthening economy. This improved fiscal picture will allow many states to increase public building construction and infrastructure spending which has been restrained since 2008.

Fig 1

Global Steel Capacity Utilization rose to its highest level in five months in February, with a reading of 77.6%. This is a 2.2% increase from January. Total monthly crude steel production was 124,990,000 tons with an annualized production of 1.5 billion tons. Capacity utilization is down 3.9% on a y/y basis; however, steel production is up 1.4% during the same period. Steel production appears to increase at the beginning of the second quarter since the economic recovery took hold in 2009. February and March’s numbers have increased y/y since 2009, with annualized production hitting all-time highs in mid-2013, (Fig. 2). At this point early in 2014, we will he hit yet another new global record this year. China contributes half of all steel production, roughly 62,000,000 tons, every month and the ratio of Chinese steel production continues to increase each year.

Fig 2

Durable Goods Orders increased 2.2% in February from January with a total dollar value of $229,379 million ending a two month skid. January’s number was revised downward from a 1% decline to 1.3%. February’s number comes as a light of hope that the dead of winter is over and spring will facilitate more orders. A positive sign from the data indicates increases in a majority of categories; however it may be due to all categories experiencing a downward revision in January. The largest nondefense increases came from Transportation equipment (a large Boeing order) and nondefense aircraft and parts, with +6.9% and +13.6%, respectively. Capital goods, which is a widely used indicator of business investment (excludes aircraft and defense), fell unexpectedly in February 1.3% after an increase of 0.8% in January, (Fig. 3).

Fig 3

US Scrap Exports: Fig. 4 presents U.S. scrap monthly export averages from 2002 through 2013, and 2014 monthly actuals in metric tons (mt). U.S. scrap exports grew rapidly, peaking in 2011, only to fall 11% in 2012 y/y and an additional 16% in 2013 y/y. Major contributors to this decline include; Turkey down 20% y/y, Taiwan down 17% y/y, as South Korea off 55%. Total monthly scrap exports have fallen below one million mt only twice since the spring of 2006, (Fig. 5). The U.S. dollar is strengthening against the broad (basket of trade weighted currencies) index. Japan has deliberately devalued its currency to drive exports. The Turkish Lira has weakened, as has the Ukrainian Hryvnia and Russian Rubble. In addition Russia has relaxed its scrap export policy and the Eurozone continues to struggle with slow economic growth. The net result of this combination of changes is a dramatic shift in global scrap trade patterns creating some uncertainty in the scrap market.

Fig 4

GDP, 4th Q 2013 Third Estimate: The Bureau of Economic Analysis released their third estimate of real GDP today for Q4 2013. The first estimate of Q1 2014 will be released late next month. GDP rose in the fourth quarter by 2.6% at a seasonally adjusted annual rate, this was an upward revision from the second estimate of 2.4%, but still well below the advance estimate of 3.2%. For the year as a whole GDP rose by 2.59% to 15.942 trillion dollars, (Chained 2009 dollars.) Personal consumption, the largest individual component of GDP rose by 2.22%, its best performance since Q4 2010. All other components contributed 0.38% meaning that they were more or less a wash. On the positive side next exports contributed 0.99% and government was the exact opposite with a negative contribution of 0.99%. Fixed residential, (housing) investment made a negative contribution of 0.26%, its first negative contribution since Q3 2010. Fixed nonresidential contributed a positive 0.68% making three consecutive quarters of solid growth. Inventories which are the most volatile component of GDP broke even in the fourth quarter, (Fig. 6).

Fig 6

China Steel Prices continue to spiral downward. The latest prices converted to U.S dollars per short ton including VAT translate to: Wire Rod (6.5mm) $461, Rebar (20mm) $470, Angle 50 x 5mm) $520, Channel (16#) $502, Beam (25#) $517 and HRC (3mm) $509, Fig. 7. Prices for all of the products mentioned rose strongly from 2009 through mid-2011 when the reversal commenced. For the most part prices have headed downwards since then. Year over year price changes range from -7.8% for Angle to -11.9% for HRC. Over the past three years prices have declined from -22.3% for HRC to -28.3% for rebar. The prices reductions since 2011 are a function of both slower Chinese GDP (inset Fig. 7) growth and ever increasing capacity. According to the Macquarie Commodity Research’s China Steel Sector Survey (March 2014), loan default risk is soaring as profits dwindle to historic lows. The HSBC manufacturing purchasing managers index (Chinese equivalent to our ISM manufacturing index), has now declined for five consecutive months to its lowest level since July 2013. This month’s reading of 48.1 is in the contraction range. The smaller less efficient mills are the most at risk of default. The article goes on to say that it is likely that many of the low profit small privately owned Chinese mills will struggle and that the government will allow them to fail.  Should this occur, supply and demand will eventually come into equilibrium.

Fig 7

Steel Demand Indicators: Table 2 is a snapshot of the market situation on 03/27/14. The review of the present situation indicators is unchanged since February 6th. Ten of the “present situation” indicators are still depressed by historical standards of which five are from the construction sector. These are identified in red. However eleven are green which is the best result for the present situation since we began this analysis four years ago when only three of the present situation indicators were green. Six of the present situation indicators are neutral by historical standards. The trends analysis has taken a sharp reversal in the last two months. On Feb 6th 23 indicators were trending positive, this declined to 21 on Feb 20th, 19 on March 13th and now 15 on March 27th. In most cases values are three month moving averages. Since March 13th there has been no change in the trend of the general market indicators. The long product steel sector has added one net negative in the trends column. This is for net imports which in December shrank by 11.4% but in January increased by 29.3%. The construction sector added a net two indicators with negative trends. These were nonresidential and residential buildings which contracted by 2.8% and 0.3% respectively on a y / y basis. Both had expanded continuously since mid-2011. Hopefully this was a weather effect with a rapid recovery now underway. In the manufacturing sector capacity utilization had a very small contraction of 0.01% in February after growing by 0.31% in January. 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 2

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