Weekly Market Update - August 28, 2014

GDP 2nd Q 2nd Estimate: The Bureau of Economic Analysis released the second estimate of growth in the second quarter this morning with the statement, “Real GDP increased 4.2% in the second quarter after decreasing 2.1 percent in the first. The percent change in real GDP primarily reflected upturns in exports, in private inventory investment, in personal consumption, in nonresidential fixed investment, in state and local government spending and in residential fixed investment that were partly offset by an acceleration in imports.” Fig. 1 shows the progression of GDP growth since 1990 with the IMF forecast, which now looks low, through 2018. Fig. 2 breaks the total growth of 4.2% into its major subcomponents which, with the exception of net exports are all positive. It increasingly appears that the negative growth experienced in Q1 was an outlier and that the growth trend that began in Q2 2012 is continuing. The strength of nonresidential investment which includes all infrastructure and nonresidential building construction is encouraging for the long products steel business. Fig. 3 shows the components of GDP in chained 2009 dollars. Personal consumption which accounted for 68.2% of GDP in the second quarter includes services, durable and non-durable goods. The breakdown of personal consumption is as follows, services 65.7%, non-durable goods 21.5% and durable goods 12.8%. In this latest analysis, durable goods had the highest rate of growth since Q3 2009.

Fig 1

Non-residential Construction Starts: There was gradual change in the number of non-residential construction (square-foot) starts, up just 5.1%, 3 months y/y in the July data release from McGraw Hill (Dodge). On a 12 month y/y basis, starts were up 8.5%, leading to a decline in momentum of 3.4%. Apartments (greater than 4 stories), continue to be where the action is, up 13.2% y/y and accounting for 21% of the total square feet. Educational buildings which were the largest volume category by a large margin pre-recession jumped 22.4%, 3 months y/y and were up 9.4% vs. the same time last year. Another bright spot is hotels, surging 72.2%, 3 months y/y, (Table 1). Several project categories were off double digits in percentage terms 3 months y/y including: parking garages (-11.2%), Retail (-18.5%), Medical (-19.2%), and Recreation (-10.7%).

As previously mentioned, apartment construction (> 4 stories) has contributed significantly to the growth in non-residential construction since the recession ended. Fig. 4 presents (NRC) starts in square feet on a rolling three month basis, from January 2000 to July 2014 including apartments greater than four stories. (The reason we include apartments >4 stories is that these buildings could be built using structural steel or reinforced concrete framing). The red dashed line illustrates the rate of growth since the recession ended. Comparing the total square feet (SF) for calendar year 2010 to calendar year 2013, nets a 49.6% growth rate over the three year period. Fig. 5 presents NRC in square feet without apartments. The slope of the red dashed line is considerably less than in Fig. 4. Performing the same numerical measurement, yields a growth rate of just 23% over the three year period. Fig. 6charts some of the laggard project categories to include: Education, Offices and Banks, Civic and Retail

Table 1 

Fig 4

Preliminary U.S. Imports, (SIMA): July preliminary imports of steel long products totaled 438k tons, down 7% m/m. YTD the U.S. has imported 3.5 million tons of long products, up 24% from 2.83mt imported in the seven months ending July 2013. Preliminary rebar imports fell 37% m/m, the 4th consecutive monthly decline. YTD rebar imports totaled 782k tons, rising 14% y/y. Wire rod imports were off 44% in July m/m, at 991k tons. On a YTD, y/y basis, wire rod imports have surged 85%. Light shapes and heavy structural shapes (including beams) rose 31% and 38% respectively from June to July. YTD, light shape imports posted 108k tons, while heavy structural shapes recorded 500k tons, (beams were 330K of this). Based upon S.I.M.A.'s preliminary imports for Hot-Rolled Bars, vs. final MBQ imports over the last 24 months, 22k tons of MBQ are estimated for preliminary July imports, totaling YTD 155k tons, up 24% y/y. Preliminary SBQ imports are up 22% m/m, and have receded 6% y/y, (Table 2).

Table 2

Scrap Price Benchmarks. Each month we compare the price of scrap with three benchmarks to attempt to determine whether it is out of line and therefore under pressure to make a correction in either direction. When scrap is under or overvalued against all three we consider it to be a signal of impending change. The three benchmarks are; the broad index value of the U.S. $, the Platts IODEX iron ore price CFR North China and price of West Texas Intermediate. There is a negative 88% correlation between the price of scrap and the US$, this would be much tighter if the commodity bubble and correction, both in 2008 were removed. The latest value for the Broad Index is July and on that basis, Chicago shredded at $375 is currently overvalued by about $25 / ton, (Fig. 7). There is an 81% correlation between scrap and iron ore. The Platts IODEX iron ore benchmark price fell to $90.1 / dry metric ton on August 25th. Seaborne ore was reported to be in ample supply and with cheaper offers doing little to generate sales. Chinese buyers were happy to hold lower inventories with a wait and see attitude. The price of iron ore has been declining since December, evidently the power of the big three cartel had waned in these times of slowing Chinese consumption. At the present time scrap is highly overvalued compared to ore which will inevitably influence the buying pattern of the integrateds, (Fig. 8). The third and best relationship is with the price of oil, correlation 93.1%. On August 18th, scrap based on this benchmark was undervalued by $10, (Fig. 9). Comparisons with these three indexes shows that two have scrap overvalued and one, (the best correlation,) has it undervalued. Therefore there is no suggestion of an immediate correction. Please note that in no way should this be construed as a forecast. We are only trying to use benchmarks that have worked in the past to suggest future price changes.

Fig 7

Consumer Confidence Conference Board: The Consumer Confidence Index rose to its highest level in more than seven years to 92.9. This is a 2.1 point increase over July and a 13% increase y/y, (Fig. 10). The Present Situation sub-index also rose to its highest level since Q1 to 94.6, a 6.7 point increase over July. This index is up 33% on a y/y basis. Despite strong readings in present conditions, the Expectations sub-index dropped slightly to 90.9 from 91.9 in July and is up 10.1 points YTD. Labor market conditions were mixed yet again, with an increase in those who thought jobs were plentiful, decrease in hard to get jobs, but expected income increases fell from July. Net job creation has averaged 245,000 jobs a month over the last three months.

Likely contributing to the strong Consumer Confidence report was a very strong Durable Goods Report: Orders increased nearly 23% in July thanks to Boeing orders. The Aircraft segment jumped more than 300% in July from June. Other than that anomaly, there were increases across most of the durable goods categories. Nondefense core capital goods orders, which are a widely used indicator of business investment in the national GDP calculation, increased 60.8% in July, and 5.1% in June, (Fig. 11).

Fig 10 

Currency Report: The U.S. Dollar has strengthened 1.1% on a y/y basis and remained flat over the last month against the Daily Broad Index, (Table 3). The Dollar strengthening makes scrap and steel products from the U.S. less attractive to buy on the global market. News that the U.S. economy expanded 4.2% in the second quarter was stronger than expected and shows more evidence that the 2.1% contraction in Q1 was due to the harsh winter. The latest FOMC meeting minutes were released and Fed Chairwoman Janet Yellen said that the labor market still had significant slack and thus no immediate rise in interest rates. The Ukrainian Hryvnia has fallen nearly 40% on a y/y basis and almost 13% in the past month. Fitch recently downgraded the Hryvnia to CCC, which is speculative, or “junk”, grade. The political turmoil involving Russian separatists have cause major upheaval in the Ukraine economy and their currency. In the past week alone, the Ukrainian President Petro Poroshenko dissolved the Parliament and called for elections since the ruling government had collapsed. The Chinese Yuan (Renminbi) has weakened roughly 2% on a YTD basis against the U.S. Dollar. In a fixed currency regime, even a 1% fluctuation can have major implications on the valuation of debts denominated in other currencies, such as the Dollar or the Euro. This is causing companies, such as airline, energy, and steel, whose debt is denominated in U.S. Dollars, to experience precipitous drops in profit. Oil is globally priced in U.S. Dollars thereby making it more expensive to purchase with a weak Yuan.

Table 3

Chicago Fed National Activity Index: The CFNAI rose 0.39 points in July, up from 0.21 in June, 0.14 in May and 0.12 in April. Of the four sub-indicators that make-up the CFNAI, three were positive in July. Personal consumption and housing continue to detract from the overall CFNAI score, (Fig. 12). The Sales, Orders and Inventories contribution to the CFNAI fell 0.01 points in July, while Production related activity contributed 0.31 as manufacturing capacity utilization increased by 0.6% in July over June to 77.8%. Employment indicators added 0.13 points to the index in July as the unemployment rate increased 0.1% m/m to 6.2%. Housing and consumption moved up to -0.10 in July from -0.15 in June. Housing permits increased to 1.052 million (annualized) up from 0.973 million in June. Housing starts meanwhile jumped to 1.093 million (annualized) up from 0.945 million in June. Despite the improved housing permits/starts numbers, this component of the CFNAI is still below the zero threshold. As a point of reference, housing starts averaged 1.694 million in the 10 year period prior to the recession.

Fig 12

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