Weekly Market Update - March 19, 2015

Architectural Billings Index: The National ABI posted a value of 50.4 up slightly from January’s reading of 49.9 (greater than 50 = expanding billings). Regionally the South recorded 52.5, the Midwest 50.2, the Northeast 48.0 and the West 46.7, (Fig. 1). The institutional sub-index came in at 52.2, while the commercial/industrial revealed a score of 51.4. The institutional sector is showing some promise, however the commercial billings are showing somewhat tepid growth over the past year, (Fig. 2). In Table 1, we take a longer view of the ABI, examining the three and 12 months y/y change and momentum (3 months subtract 12 months). From this analysis the picture looks a little brighter as we see “green” in every momentum category with the exception of residential. Institutional momentum of 9.0% is particularly enlightening. Regionally all areas except the West are posting y/y growth. Despite negative 0.9%, 3 month y/y growth in the West, the momentum is moving in the right direction.

Fig 1

Net Long Product Imports: Net imports equals imports minus exports. We regard this as an important look at the overall trade picture and its effect on demand at the mill level. Fig. 3 shows that net long product imports on a three month moving average, (3MMA) basis in the last eleven months have been running about 50% higher than in early 2008 before the recession. The deterioration in net during the last three years was not only a result of rising imports as exports have been declining. Table 2 shows net imports by product. Year to date through January, (one month only), total net imports were 3,298,245 tons of which 390,488 tons were long products. On a 3MMA basis, November through January net long product imports increased by 113,281 tons year over year. Light shapes and hot rolled bars decreased slightly, the real shocker is structurals which have changed from a trade surplus of 47,889 tons in 2014 to a 14,326 ton trade deficit in 2015. In Table 2 negative net imports, (which means a trade surplus) are shown in green. Fig. 4 shows the trend of monthly net long product imports since January 2011 on a 3MMA basis. Wire rod plus drawn wire has by far the worst situation followed by rebar and hot rolled bars. The situation of structurals is clear with a cross over from surplus to deficit in June last year.

There are two main drivers of the increase in net steel imports. The trade weighted value of the US dollar ($) is strengthening which makes our exports less attractive to foreign buyers and makes the US domestic market more attractive to foreign sellers. Fig. 5 shows the relationship between net long product imports and the value of the $ since January 1995. The strengthening of the dollar is not expected to slow in the immediate future and in fact will probably accelerate as more nations ease monetary policy and the Fed raises interest rates later in 2015. The second reason is that steel demand in the US is strong at the same time as global demand growth has flattened. The global economy was recently described by Larry Somers as flying on one engine, that being the US. This is exactly what happened in the late 1990s after the Far Eastern currency crash followed by a decline in the Euro to below parity with the US dollar. In the period November 2014 through January 2015, the growth of global steel production was only 0.2% year over year, as Global steel capacity has increased, capacity utilization has decreased and now stands at 72.9%. We are currently faced with a situation of declining steel demand abroad, strong demand in the US and a skyrocketing US dollar.

Fig 3 

Table 2

Producer Price Index Report, (BLS): Table 3 compares construction steel with competing materials as of February 2015. It presents the percentage change of the PPI index 3, 6, 12 and 24 months prior. By examining the data in this way, we can monitor steel’s relative competitive position over time. Materials and components for construction in aggregate have posted steady price increases of 0.1% over 3 months, 0.6% over 6 months, 1.8% over 12 months and 3.5% over two years. Fig. 6 illustrates a historic look at the PPI of materials and components of construction going back to the year 2000. During this time prices declined during both of the past two recessionary periods, otherwise marched steadily higher.

Hot rolled structural shapes have decreased in price by 7.2% over the last 3 and 6 months, and are down by 3.4% y/y. Fabricated structural steel prices for non-residential construction are essentially flat, up 0.1% over the past 3 months and have increased 0.6% over 6 months and 2.7% vs. 12 month ago. Fabricated rebar prices (now aggregated with bar joists), have been flat (-0.1%), over 3 months ago, but are up 0.5% over 6 months. Prices are higher by 3.0% and 3.2% vs. one and two years ago respectively. Ready-mix concrete has posted steady price increased over each of the time references listed, ranging from 2.0% over 3 months to 8.5% over two years back. Soft wood lumber prices have fallen over the past 3 months as residential construction appears to have hit a soft spot, off 2.2% over 3 months and down 1.6% over a 12 month interval.

Table 4 presents PPI data for hot rolled bars and its competing materials. Hot rolled bars PPI has declined in each of the four time comparisons and the declines are accelerating. Over the past 3 months the PPI is off 3.1% vs. down 2.1% over a 12 month period. Steel impression die forgings prices have increased on 6, 12 and 24 month references, but declined slightly, 0.2%, over the most recent 3 months. Steel casting prices have increased in each of the time intervals as have power metal parts except for the 24 month interval which recorded a decrease of 0.2%. Aluminum impression die forgings PPI are flat for 3 and 6 month comparisons, up 0.6% on a 12 month basis and are down 0.9% over two years. Aluminum die casting pricing is off 2.2% over 3 months, off 1.3% over 6 months but higher 0.2% and 2.1% compared to 12 and 24 months earlier. Examining this data, it appears that hot rolled steel bars have fallen in value more so than competing materials which helps gives steel forgings a material cost basis vs. competing materials.

Table 3 

Fig 6

US Scrap Exports (USITC): January scrap exports, as collected by the US International Trade Commission, fell to 1.04 million metric tons (mmt) and were down 33% y/y. (Fig. 7) displays the average monthly scrap export for the US over the past 12 years. As Russia tightened scrap exports in 2003/2004, despite the dollar declining in value, demand for US scrap rose. As the US fell into recession, US scrap exports continued to grow and averaged 1.3 mmt in 2007. The average rose to 1.79 mmt in 2008 and peaked in 2011 when US scrap exports averaged 2.0 mmt per month, (peaked at 24.7 mmt for the year).

In the period from 2011 through 2014, the value of the $USD fell, making US scrap less expensive on the global market and demand for US scrap surged. During 2014, strengthening of the $USD made US scrap more expensive. Demand for US scrap from the world’s largest scrap importers, Turkey and Asia plummeted, as iron ore prices crashed (substitute) and cheaper scrap alternatives became available elsewhere. US scrap exports average fell to just 1.28 mmt per month in 2014. In January 2015 scrap exports began the year at a level we have not witnessed for 10 years ago.

Fig 7

Business Confidence has been volatile since the beginning of 2015. The index started the year off at 34.3 and currently at 45.2. This week’s jump from last week, 34.3, marks the biggest weekly change since the middle of the recession. North American business confidence has slowly declined since the start of 2015, starting at 48.5, an all-time high, and currently at 45.0, (Fig. 8). All business conditions rose this week, except for Space Investment Intentions and Government, due to last week’s across the board decline. Financing Ability has dipped below its record high on February 6th of 53.5, however, is still reporting strong figures with this week at 49.1. The average for 2014 was 33.0 in this particular category. Present situation and 6 month expectations have also declined since the beginning of the year in part due to the global oil glut that has decimated oil prices. Typical consumers may see cheaper gas, however, economies that rely on strong oil prices will have to cut their budget, weakening their currencies, which negatively affect US exports. Despite strong net job creation results and unemployment reaching 5.5%, inflation is still well below the 2% stable prices mandate that the Federal Reserve dictates as a healthy economy.

Fig 8

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 February was 105.8028, up slightly, 0.1%, from January and still on an upward climb seeing all-time highs dating back to 1993. The index rose 3.5% y/y and has been above the baseline for 18 straight months. The three month moving average was 105.87, down insignificantly from January’s reading of 106.04. February’s reading is up 26.7% since June, 2009, the lowest measure and last month during the Great Recession.

As industrial production has recovered and among all-time highs, total steel supply has started to make a comeback from the depths of the recession since the second quarter of 2014 and started to experience monthly averages that were common before the onset of the crisis. October’s total steel supply was 10.4 million, the highest value since May 2007. As the construction and manufacturing industries continue to generate robust net job creation, total steel supply will more than likely follow suit. Historically there has been a 70% correlation between the two data sets, (Fig. 9). The first quarter of 2015 will likely be a speed bump in the six year expansion due to the harsh winter conditions that’s widespread across the country.

Fig 9

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 3/19/2015. Indicators updated since we last published two weeks ago are shaded beige. The latest month or quarter for which data is available is identified in the 2nd column. Of the 26 indicators under consideration, the present situation of 9 are positive by historical standards, 8 are negative and 9 are neutral. This was a decrease of one positive and an increase of one neutral since the March 7th update. The change we made to our view of the present situation was that service center inventories of long products were re-classified from positive to neutral. Months on hand at the end of February increased to 2.75, we regard a desirable level to be 2.5. There were no other changes to our view of the present situation. 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. Please note that there is nothing subjective about this trends analysis. The numbers presented here are the latest facts available as of today’s date. Overall there was a decrease of one in the positive category and an increase of one negative trend. This change was to scrap exports which we analyze on a YTD basis. Our March 7th report included the latest export data available at that time which was for December and covered all of 2014, this latest compares only one month year over year. Even though scrap exports continued to be low in January they were higher than in January 2014 leading to a negative result in the trend. All indicators in the General Economy, Construction and Manufacturing sections continued to trend as they did in our March 7th report. Points of note in the latest data are that; net job creation continues to advance strongly, the trade weighted value of the US $ continues to skyrocket, Chicago shredded declined a further $10 and housing starts in February were dismal. (Explanation of Indicators).

Table 5

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