Weekly Market Update - September 25, 2014

Long Product Shipments, (SMA): Total long products (rebar, beams, structurals, merchant products), apparent domestic consumption (ADC = Domestic mill shipments + imports), grew 9.7% y/y and 10.5%, 3 months y/y ending August 2014. All products posted growth 3 months y/y except other structural shapes which declined by 0.9%. Beams the strongest y/y growth, beams up 14.9%, 3 months y/y and 14.5% y/y. Rebar shipments forged ahead 10.5%, 3 months y/y and 11.8% y/y. Overall momentum held positive by 0.8% but wire rod and other structural shapes momentum slipped by 4.2% and 6.8% respectively, (Table 1).

U.S. mill shipments (domestic shipments + exports), were up 6.1% 3 months y/y and 5.0% y/y ending August and momentum was positive. Rebar posted the best performance up 13.0%, 3 months y/y and 7.4% y/y. Merchant bars treaded water, up 0.4%, 3 months y/y and flat y/y. Other structural shapes recorded sharply lower values, down 13.7%, 3 months y/y and -7.8% y/y. Year to date long product import market share was 19.2% for the month, 0.8% below the YTD average of 20.0%. In 2013 the average import market share was 17.6%. It was 14.5% in 2012 and 12.2% in 2011, (Fig. 1).

  Table 1

U.S. Service Center Shipment Report (MSCI): Service center shipments of all carbon steel products rose 5.4%, 3MMA y/y to an average of 164,800 tons/shipping day for the three month period ending August. All product groups recorded increases, led by a 10.1% increase in plate and a 5.5% rise in sheet, (Table 2). Inventory levels surged 13.6% across the board to an average of 2.36 MOH, 3MMA months on hand (MoH). Plate posted the largest increase, up 14.4%, 3MMA y/y, followed closely by sheet, up 17.1%. Pipe and tube was the only product group to see a decline in inventory level, off 5.4%, 3MMA y/y. Daily intake jumped 12.5%, 3MMA, y/y overall, with plate surging 24.1%, sheet up 13.5%, bar & shapes up 8.4% and structural up 3.8%. Pipe and tube posted a decline, down 6.0% 3MMA, y/y. If we compare shipments of flat-rolled and long products (bar + structurals), side by side (Fig. 2), we see that long products have barely budged since the recession ended compared to flat rolled that have recovered to its 2002/03 shipment levels, with a trajectory to match peak level sometime over the next couple of years. Non-residential and industrial construction predictions are looking stronger for the balance of 2014 and into 2015. This should translate into stronger long product shipments from service centers.

Table 2

Fig 2

Canadian Service Center Shipment Report (MSCI): Service center shipments of all carbon steel products rose 2.0%, 3MMA y/y to an average of 21,900 tons/shipping day for the three month period ending August. All product groups recorded increases, led by a 6.5% increase for structurals and a 2.7% bump in pipe & tube. Inventory levels surged across the board by 8.1%. Structural inventory surged 17.0%, 3 MMA y/y, plate by 16.2% and pipe & tube by 13.1%, (Table 3).  Inventory MoH stood at 3.07 ending August, up from June’s 2.88. Daily intake increased by 22.9% for all product groups led by a 34.8% jump in sheet and an 18.0% rise in plate. Comparing flat and long product shipment levels shows a similar picture as in the U.S., the difference being stronger growth on longs since the recession and flat to declining growth for flats since 2011, (Fig. 3).

Table 3

Global Steel Production through August 2014: Production in August on a tons / day basis was 4.342 million tonnes, down from 4.424 in July. This was the second month since February when production was < 4.5 million tonnes / day. This is a seasonal effect, since January 2008 on average, August production has declined by 1.76% from July. This year August declined 1.86% from July. The 3MMA of production in August on an annualized basis was 1.639 billion tonnes with a capacity utilization of 76.0%, (Fig. 4). Capacity is now 2.148 billion tonnes / year. Table 4 shows regional production in the single month of August with regional share of the global total, also three months production through August and YTD production. Regions are shown in white font and individual nations in beige. In three months through August y/y global growth was 2.8%, year to date growth was 2.4%. Both measures were up slightly from July. All regions except the CIS and South America had positive y/y growth in three months through August. The effect of the war in Ukraine is clear in the contraction of that country’s steel production. This must be affecting the supply of semi-finished to Turkey and consequently affecting the scrap market. The European Union which had the fastest growth rate in early 2014 continued to slow and achieved only 0.9% in three months through August. Year over year growth of output in the NAFTA was 3.4% in three months through August with the US at 3.3%. Canada achieved 8.9% and Mexico 1.4%. South America had negative 0.5% growth through August with its largest producer, Brazil down by 1.5%. Growth in Asian production was 3.1% once again led by South Korea at 7.8%. In the single month of August, China’s production grew by 4.0% year over year and achieved an astonishing, (and maybe unbelievable) 51.2% share of the global total. The three month moving average, (3MMA) growth of China’s production through August was of 3.3% which exceeded the global total by 0.5%. North America produced 7.8% of the global total in August. Fig. 5 shows that the y/y growth of global production has steadily increased from 2.0% in April to 2.8% in August.

Fig 4 

Table 4

Global Scrap Trade through Q2 2014. Total global shipments excluding inter-country trade within the Eurozone increased in Q2 but the overall trend for three years has been down, (Fig. 6). Total tonnage in Q2 was 17.947 million tonnes. US shipments have also declined for three years but more steeply than the global total. The US share peaked in Q2 2011 at 33.4% but in Q1 this year had fallen to 21.9%, recovering to 23.2% in the second quarter. The Eurozone’s market share has been erratic and range bound between 10% and 15% since Q1 2009, (Fig. 7). It is obviously impossible to understand all the factors that influence the global trade pattern of a commodity but in the case of scrap we have identified several that have influenced US exports since the decline in share began in Q2 2011. First as shown in Fig. 7 Japan’s share has more than doubled in this time frame supported by a depreciated Yen. Secondly China’s scrap purchases have declined by over 50% since Q2 2011, (Fig. 8). Turkey is the world’s most prolific scrap importer and its share of global scrap trade was as high as 29% in Q3 last year. The 3rd identifiable change since Q2 2011 is that Turkey has been buying more semi-finished which appears to have directly subtracted from their scrap purchases, (Fig. 9). In fact this seems to have subtracted primarily from US shipments since the EZ and Russian shipments have been range bound since Q2 2011. Finally the value of the US $ as measured by the Federal Reserve broad index jumped sharply in the 2nd half of 2011 and has since trended up slightly which makes US exports less competitive, (Fig.10).

Fig 6Fig 7

Corporate Profits increased 8.0% q/q, increasing $154.9 billion to $2,097 Bn (per economagic). This after a disastrous first quarter decline of 9.4% Q1 over Q4 2013 that was blamed on an especially harsh winter, (Fig. 11). Corporate profits YTD vs. the same period last year are down 2.5%. Financial company profits contributed $449.3 Bn in Q2, up 7.3% q/q, while nonfinancial entities added $1245.2 Bn, up 10.6% q/q. The “rest of world” component totaled $402.4, up 1.2% q/q. Non-financial company’s balance sheets are in superb shape with low debt leverage.  In Q2, nonfinancial businesses had $332 Bn in cash, up $9 Bn q/q, (Fig. 12). Businesses refinanced and locked-in debt taking advantage of ultra-low rates over the past few years. As a result quick ratios are posting record highs. This availability of cash and low debt burden should bode well for future investment in non-residential assets.

Fig 11

Manufacturing capacity utilization fell for the first time in 2014 to 78.0028 from 78.4665 in July. Despite the decline, this is the second consecutive month at 78 or above, the first time since Q4 2007. Q2 GDP economic growth was 4.2%. August’s rate us up 1.73% on a y/y basis. The ideal capacity utilization range is 75%-85%. Manufacturing capacity utilization has continued in this range since the beginning of 2012, albeit on the lower side. However, this figure hasn’t been north of 80% since early 2000, (Fig. 13).

Fig 13

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