Weekly Market Update - June 30, 2016

Dodge Non-residential Construction Starts fell in May, down 3.5% y/y and was off 5.9%, 3 months y/y. Starts have now declined for four months in a row on a y/y basis and momentum has been negative for two months, (Table 1). Just four project categories out of 14 recorded positive growth in May 3 month y/y including: Warehouses, Educational, Parking Garages and Hotel/Motel. On a twelve month evaluation 5 of 14 categories posted growth including; Apartments, Warehouses, Hotel/Motel, Transportation and Food & Beverage. Warehouses and Hotel/Motel each logged growth on both time intervals and continue to have positive momentum.

Apartments (> 4 stories) continues to be largest square foot producer since the recession ended, accounting for 306 million of the 1,240 million feet of starts over the past 12 months, (24.6%). The 3 month y/y growth turned negative in May down 9.5% but was up 7.9%, 12 months y/y. Despite the resultant -17.4% momentum, the trajectory and strength relative to history remain strong, (Figure 1). Figure 2 shows non-residential construction (NRC) starts in square feet including apartments > 4 stories from 2000 to present. The 3 month y/y change has been negative for 7 of the last 12 months. Figure 3 excludes apartments > 4 stories and reveals the huge impact on total square feet that apartment construction has made post-recession. In this case, the 3 month y/y change has been negative for 11 of the last 12 months. The slower NRC starts indicate that we should expect to see lower numbers in future construction put-in-place (CPIP) data as reported by the Census Bureau. Dodge starts data gives a 9 to 12 month window into the future by counting all of the square feet to be constructed in the month that the project commences.

Table 1

Q1 GDP Third Estimate: The Bureau of Economic Analysis reported the economy expanded 1.1% on an annualized basis in Q1, (Figure 4). The first estimate was 0.5%, the second estimate moved up to 0.8%. Upward revisions originated from non-residential investment and exports, while consumer spending was revised downward. It is important to point-out that despite its best efforts, the BEA continues to have measurement issues with the Q1 GDP numbers due to significant seasonality problems. GDP is highly seasonal and the weakest quarter is during the winter months.

Year on year growth has been lethargic, real GDP increased 2.1% in Q1 2015, a full point higher than Q1 2016. Growth over the last two quarters was less than 1.5%, the worst six month performance in three years. However, early indications suggest that Q2 has recovered nicely. The job market is expected to show strong gains in the coming months, corporate and household debt is low and with near full employment, wage growth is expected to accelerate. On the downside, a strong dollar and weak energy and commodity prices will continue to challenge exporters. Last week’s Brexit from the EU will likely cause additional hurt for exports and curtail investment over the remainder of the year.

Figure 4

Consumer Confidence (Conference Board): The composite consumer confidence index soared 5.6 points in June to 98.0, while the 3MMA increased 0.6 point to 95.0. The Present situation sub-index rose 5.1 points to its highest level since October 2007. The Expectations sub-index jumped 6.0 points, returning to where it stood in January, (Figure 5). The labor differential (difference between jobs are plentiful and jobs hard are to get), came in at 0.1 indicating consumers are about neutral on the job market. Purchasing intention were down across the board with auto purchasing intentions off 0.4 points, home buying plans down 1.1 points, appliance plans off 1.2 points and vacation intentions down 3.6 points. Considering all of the negative news in the media of late, consumer confidence has held up surprisingly well and the high expectations going forward is a positive sign that the economy still has legs.

Figure 5

Currency update through June 26th: The FOMC at their June 14th and 15th decided that a second rate increase was not appropriate. This was a nonevent in terms of dollar value since traders had correctly anticipated the lack of action following the release of the May employment result. Prior to the employment data release the dollar was trading above its 30 day moving average but that changed when the poor job creation numbers were reported. Pundits have suggested that rate increases appear to be off the table completely this year and that no increases in 2017 is a possibility. The Broad Index value of the US $ is reported several days in arrears, the latest value we have was dated June 24th, the day that the result of the UK’s referendum became known. There was no significant move in the value of the dollar on that day which may have been published before the results had been digested by the market, Figure 6.

Table 2 shows the value of the US $ measured in the currencies of 16 steel and iron ore trading nations on June 26th. It reports the changes in one year, three months, one month and seven days for each currency and is color coded to indicate strengthening of the dollar in red and weakening in green. We regard strengthening of the US Dollar as negative and weakening as positive because the effect on net imports. An estimated 25% of the U.S. economy had some involvement in international trade therefore currency swings can have a large effect on the economy in general and of the steel industry in particular. Compared to late May there was a noticeable change but the dollar has been on a roller coaster this year so we can’t state with any confidence that the Brexit drove the dollar higher against the steel trading currencies. In 30 days prior to May 24th the dollar weakened against 11 of the 16 and in the 30 days before the latest data it strengthened against 11 of 16. At the 7 day level the dollar strengthened against 10 of the 16 which we don’t regard as much evidence of a flight to safety.

The Euro: On June 26th it took 1.119 US dollars to buy one Euro, (Figure 7). Through that date the Euro had weakened by 1.4% in seven days and was down by a lesser amount in the other three time comparisons. The Euro had a recent low of 1.0580 on November 30th. There is a probability that voices in France and Italy will gain traction to leave the EU following the Brexit outcome. Billionaire investor George Soros has already warned that Brexit could very well be the start of the disintegration of the European Union. If Brexit is bearish for the pound, it is also bearish for the euro and bullish for the U.S. dollar.

The Japanese Yen: Figure 8 shows the value of the Yen since January 2000. The Yen has had a bull run for a year now and in that period has strengthened by 21.1% against the US dollar. This trend continued as the yen strengthened by 10.7% in 3 months, by 7.6% in one month and by 1.9% in 7 days to close at 102.10 on June 26th. Bryce Coward, CFA - Gavekal Capital commented this week that from a purchasing power parity (PPP) perspective, the yen is still 17% undervalued.

The Chinese Yuan: Figure 9 shows the history of the Yuan against the US $ since January 2002. The Yuan broke through 6.5 / US $ on May 9th and through 6.6 / US $ on June 24th. In the last 30 days the Yuan has weakened by 1.4% and by 7.9% in the last year.

The Brazilian Real: Figure 10 shows the history of the Real against the US $ since January 2000. The Real had an all-time low of 4.0963 on September 30th last year, recovered to 3.7013 on November 22nd, fell again to a new all-time low of 4.1315 on January 22nd and has since recovered to 3.3685 on June 26th. In the last 12 months the Real has declined by 7.2% but in the last 3 months, 1 month and seven days it has appreciated by 9.3%, 6.6% and 1.3% respectively.

We have selected four of the 16 currencies in Table 2 for the comments included above. We have similar graphs are available through June 26th for each of the 16 national currencies for any reader who requests them.

Figure 6

Table 2

US Steel Imports: May steel imports (Long, Flat and Semis), rose 12.2% month over month. The US Census reported monthly preliminary steel imports totaled 2.79 million tons (Mt). Table 3 reports the current 3 month sum from March to May 2016, totaled 7.87 Mt, down 25.2% y/y. In the five months through May, the US imported 12.8 Mt, down 31.3% YTD y/y. Rolled product imports fell 30.3%, 3m y/y, as semi-finished imports rose 1.9%, 3m y/y.

As a sub-group of rolled products, Long product imports fell 11%, 3m y/y, (Figure 11). Large declines in structural steel imports (-19.3%) and rebar (-21%) outweighed increased wire rod (+13.1%) and light angle and channel (+9.5%) imports.

Imports from Russia tripled month over month, as illustrated in Figure 12, grabbing 11% of the US import steel market. Most (93%), of Russia’s imports were classified as Blooms, Billets and Slabs. In spite of this unusual increase, Russian imports were down 53%, 3m y/y. Table 4 breaks down US imports by country of origin for the period three months through May 2016 compared to the same time period for 2015, as well as YTD y/y comparison. Top steel exporters to the US include Canada, EU as a whole, South Korea and Brazil. Steel imported from China waned, down 74%, 3m y/y as the US imposed preliminary import duties of as much as 500% on shipments of flat rolled products.

Table 3

China Domestic Prices: China domestic steel prices have been volatile throughout 2016, (Figure 13). By government mandate, February steel production in the Hebei Province, the largest steel producing region, was idled in advance of the April Horticultural festival. This short-lived 2-3 month production stall, encouraged domestic Chinese steel price increases. During that time currency exchange rates rose, peaking April 20th, (Figure 14). By the end of April the China Iron and Steel Association reported April average daily steel production for China had reached 2.324 million tonnes per day (Mt/day) “the highest level in history”. Steel production was brought back online buoyed by higher margins.

May steel production broke April’s record, up 0.8% m/m, accounting for 50.7% of global production. Figure 15 illustrates June as the fifth consecutive month of increased steel production, producing an estimated average 3.3475 Mt/day during the first 10 days of the month, up 20.3% from the beginning of the year. China exports 10-15% of the steel produced, which has the ability to disrupt global markets with prices below other regional markets. The continued glut of steel from April, May and June resulted in excess supply which resulted in the prices returning to near the lows realized prior to the pause for the April Horticultural festival.

Figure 13

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 6/30/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not June data but data that was released in June for previous months, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 4 are positive by historical standards, 11 are negative and 12 are neutral. This was an increase of one negative since our last update of June 16th. The change that occurred was that the Chicago Fed National Activity Index was downgraded from neutral to negative as its value fell to - 0.36.

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 facts available as of June 30th 2016. The number of indicators trending positive in this latest analysis was 17 with 10 trending negative. Overall this was no net change since June 16th though there were changes to the detail. Consumer confidence as reported by the Conference Board changed direction and trended positive for the first time since our November 12th report last year. The value of the US $ reversed course in May and strengthened which we regard as a negative because of its effect on net imports. There were no other trend changes in the last two weeks. At the end of each month we analyze the trend of the trends to see if the number trending positive is improving or deteriorating. We are now out of the slump which began in October and continued through January, followed by a small increase in February and a larger improvement in March that was sustained through data received in June.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 6. Of the twelve leading indicators seven are trending positive, and five negative. This was no change since our June 16th update. In summary the present situation is historically weak but trends are good which leads us to have confidence in the long products business environment through the 3rd quarter. (Explanation of Indicators).

Table 5

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