Weekly Market Update - November 10, 2016

NAFTA Beam Trade: Figure 1 presents a MAP of the US, Canada and Mexico (NAFTA) showing the trade in beams between the three countries as well as the inflow of offshore imports and exports to the rest of the world (ROW). All of the tonnages mentioned in this report are YTD through August 2016, we will run this report again at year end and do a year over year comparison early in 2017.

The US shipped 224,522 tons of beams to Canada and 68,722 tons to Mexico. Canada shipped 13,764 tons of beams to the US and 573 tons to Mexico. Mexico shipped 29,447 tons to the US and 2,346 tons to Canada.

The US, Canada and Mexico were all net importers of beams in YTD 2016. Off shore beams imports to NAFTA totaled 747,456 tons. The US imported 352,128 tons of off shore imports and was a net importer of 163,252 with the vast majority (106,715), entering through the port of Houston.

US off shore imports were 2.4% lower YTD y/y. Canada was a net importer of 478,253 tons. Most, 186,515 tons of Canada’s off shore imports came in through the St. Lawrence. Off-shore imports to Canada surged by 21.6% YTD y/y. Mexico off-shore imports totaled 129,607 tons of which 106,715 entered primarily via the ports of Tamaulipas and Veracruz. Off-shore imports to Mexico fell by 57.2% YTD y/y.

Figure 1

Advanced Durable Goods Orders: New orders for durable goods fell 0.1% in September from August, totaling $227.3 billion. On a 3MMA basis the year on year (y/y), change was a positive 1.2%, while the 3MMA change over 12 months was a disappointing -3.6%. The 3MMA y/y change over 12 months has now been negative for 7 months in a row and in 20 of the past 21 months since January 2015, (Figure 2).

September data from the manufacturing sector was mixed. Orders have been largely flat for close to two years which does not encourage investment in new equipment. Primary metals gained 0.2% and the August number was revised upward indicating slow improvement in this sector. Soft energy related demand has had a large negative impact. Firming energy prices should help heading into the fourth quarter and into 2017. The strong dollar continues to constrain US exports of capital goods and with interest rate increases on the horizon, the dollar will likely continue gaining strength.

Figure 2

ISM Manufacturing and Non-Manufacturing Indexes: The Institute of Supply Management October manufacturing index rose modestly to 51.9, up 0.4 points from September. Because of the variability in most of the data that Gerdau studies we almost always consider three month moving averages (3MMA). The 3MMA fell for a third consecutive month after increasing every month from January through July. Figure 3 illustrates the movement of the 3MMA beginning in 1997 and ending in October 2016 with a 3MMA index of 50.9, indicating that the manufacturing economy is generally expanding. An index value below 50 is considered stagnant, where as an index value below 42.2 is generally considered declining or recessionary.

Business executives surveyed by the ISM had mixed feelings. Respondents in the primary metals industry are expecting a slowdown for October and November, yet fabricated metal product respondents said that business was much better. Miscellaneous manufacturing had “a good year” and “ongoing strength in 2016”, while the machinery industry executives surveyed attributed significant upward business trends to Mother Nature, “due to the hurricane and other storms.”

The October non-manufacturing index slumped 2.3 points to 54.8, and on a 3MMA the score was 54.4, (Figure 4). It is important to keep an eye on the non-manufacturing index since it accounts for 88% of GDP and has a considerable impact on demand for steel products. US consumers continue to spend as the holiday shopping season approaches and increasing wages encourage consumer spending. Oil prices will continue to be a wildcard for both the manufacturing and non-manufacturing indexes as OPEC increased October oil production, topping 34 million barrels per day, its highest daily production levels ever. The US Dollar is the reserve currency for the world and most transactions for oil are denominated in US dollars. The swings of oil supply and demand affect the price of goods and services.

Figure 3

US Steel Capacity Utilization: US steel production for the week ending November 5th was recorded at 1.602 million tons as US mills operated at 67.5% of capacity. Week over week production rose by 1.7%, a positive direction as production tends to drop off in November and December. Compared to 2014 and 2015, steel production has been weaker, but well above the dismal levels we saw in 2009, (Figure 5). The weekly increase was supported by a 4.4% increase in production in the Southern region of the US, as well as a modest increases in the Northeast (+1%), Midwest (+1.3%), and Western regions (+2.8%). Unrevised US steel production totaled 75.3 million tons year to date, down 2.4% y/y compared with total production through November 7th, 2015. The map inset on Figure 6 illustrates the YTD y/y change by region, while charting weekly production and capacity utilization. In spite of a health week over week increase, US steel production has been in decline since the mid-June peak of 76.1% capacity utilization.

Analyzing the four week moving average (4WMA) for steel production compared to the 4WMA for new jobless claims, historically these two data sets have had a high correlation. Simply, as fewer people applied for unemployment, steel production rose and conversely as more Americans applied for unemployment benefits steel production in the US fell. Since 2013, this correlation began to diverge. Figure 7, shows the separation highlighted by a green circle. This indicates that jobs are being created, but not in construction and manufacturing, two large industries that support US steel.

Figure 6

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