Weekly Market Update - March 20, 2014

Vacancy Report (REISS): In the fourth quarter of 2013, national office vacancies continued to decline at a very slow rate, down 0.2% y/y to 16.9% and down 0.5% over two years. Completions exceeded absorptions by 600,000 square-feet indicating a slightly deteriorating market, (Fig.1). The national retail market saw vacancies decline by 0.3% y/y and by 0.6% over two years to 10.4%. Absorptions exceeded completions by 2.4 million square-feet in the 4th quarter pointed to strength in this sector, (Fig. 2). National apartment vacancies stood at just 4.1% down 0.5% y/y and down 1.1% over two years. Absorptions exceeded completions by 6.9 million square-feet in the 4th quarter. Continued strong demand for apartments is anticipated as new household formations ramp-up with a strengthened economy, (Fig.3). Fig. 4 illustrates the sharp drop-off in vacancy rates for apartments in five geographic regions since peaking in 2010. The lowest vacancy rate is in the Northeast at 3.3%, the highest rate is in the Southwest at 5.4%. All regions are addressing the uptick in demand with robust construction activity. The explosion in apartment/condo construction is shown in Fig. 5 by representing the year 2009 as base 100 for all framing materials. By 2013, the total square footage had increased more than fivefold. All framing materials benefited from this surge in construction activity, however wood posted the largest percentage increase rising from 14% in 2009 to 25% in 2013. Structural steel recorded the largest decline; falling from 39% to 29%, while reinforced concrete was largely flat at between 38 to 41% over this timeframe. Table 1 summarizes the three sectors discussed above, comparing vacancy rate, completions and absorptions both regionally and nationally. If absorptions are greater than (>) completions, the situation is improving = green shading. Conversely, if absorptions are less than (<) completions, the situation is deteriorating = red shading.

  Fig 1

Fig 2

Long Product Apparent Domestic Consumption: Total long products (rebar, beams, structurals, merchant products), ADC (Domestic mill shipments + imports), grew 6.1% y/y and 5.5%, 3 months y/y, (Fig. 6). Beams and wire rod recorded the strongest y/y growth, each up 8.2% followed by rebar at 7.7%. Structural angles and channels posted 3.5% growth y/y. Merchant bars ADC fell by 1.4% y/y, the only product group to record a y/y decline. Import share looks to be 18.7% (preliminary estimate) in February from the 22.9% ratio in January. The most significant impact came from rebar, its share fell to 18.1% (preliminary estimate) in February after surging to 29.5% in January. U.S. mill shipments (domestic shipments + exports), rose 0.5% y/y and by1.8%, 3 months y/y. Structurals recorded the strongest growth, up 4.2% y/y and 7.6%, 3 months y/y. Angles and channels (component of structurals), surged to 5.0% y/y and 14.0% growth, 3 months y/y. Wire rod and merchant bars each fell, with wire rod off 7.0% y/y and 6.7%, 3 months y/y and merchants down 3.0% y/y and 1.2%, 3 months y/y.

Fig 6

MSCI Shipments U.S. and Canada: February shipments for all carbon shapes reflected a 2.0% increase compared to the previous month. The increase was driven by upticks in flat rolled 3.2%, plate 1.2%, pipe and tube 0.9% and bar and shapes 0.8% m/m. Structural was the only product group to post a decline, off 5.8% m/m. February's intake decreased overall 2.6%. The decrease was a function of by declines recorded by Structurals, (-12.3%), plate, (-5.8%) and flat rolled (-4.3%). Pipe & tube intake surged 24.9% m/m, while bar and shapes rose 8.7%. Total inventory measured in months-on-hand increased by 0.3% to 2.51 MOH, (Table 2). Canadian overall shipments fell 0.5% m/m in February. Structurals was off 5.3%, pipe and tube was down 4%, while bar & shapes jumped 6.3% and plate increased by 2.4%. Intake fell by 11.4%, with plate posting a 23.5% m/m reduction and sheet off 12.5%. Only pipe & tube recorded stronger intake, up 13.8% m/m. Inventory level fell 1% to 3.11 MOH, the largest change was plate, down 4.5%, Table 3.

Table 2

Apparent steel supply 2013: December’s final import numbers combined with the AISI data for steel mill shipments enables us to calculate the size of the steel market in 2013 and the change from 2012 and earlier years. The size of the steel market is a combination of mill shipments to domestic locations plus imports and in 2013 was 104.1 million tons, an increase of 0.5% from 2012. Since the recession, growth of steel demand has slowed almost to a standstill, (Table 4). In 2013 imports totaled 27.3 million tons with a market share of 22.8%, a decrease of 0.9% from 2012. Based on multiple benchmark indices, steel consumption today is about 20 million tons / year below where it should be for this stage of a recovery. The deficit will gradually close as all sectors of construction return to their past trend lines. This process is not expected to be complete until 2018 at the earliest. In a separate report the World Steel Association has estimated that indirect steel imports, that is the steel component of such things as automobiles is about 40 million tons a year suggesting that the total steel market in the US in 2013 was about 144 million tons.

Table 4

Oil and gas prices and rotary rig counts: The US is experiencing a revolution in the oil and gas markets. The spot price of natural gas delivered to the Henry Hub in Louisiana has risen by 50% since January 10th and was $6.24 per million British thermal units (MMBtu) on March 13th. Fig. 7 shows historical gas and oil prices since January 2000. West Texas Intermediate closed at 100.29 on March 13th. In 2013 domestic crude oil production increased by 1.0 million bbl/d—rising more than the combined increases in the rest of the world—to reach its highest level in 24 years. Transportation infrastructure improvements enabled crude oil from Cushing, Oklahoma, and the Bakken, Permian, and Eagle Ford tight oil formations, to better reach refineries, reducing the need for foreign crude oil. The Baker Hughes North American Rotary Rig Count is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. It includes only those rigs that are significant consumers of oilfield services and supplies. Fig. 8 shows that the oil rig count has been fairly stable for 18 months. The gas rig count is still trending down and is currently 79% below the peak of September 2008. The rising price of natural gas has not yet manifested as an increase in exploration but it will if the current price holds up through the spring warming trend. On a regional basis the big three states for operating rigs are now Texas at 864, Oklahoma at 186 and North Dakota at 177. Off shore drilling has recovered from the BP oil spill in 2010 but is still not back to where it was at the beginning of the last decade. The evolution of the North American energy market is good news for future steel demand.

Fig 7
Fig 8

U.S. Steel Capacity Utilization for week ending March 15th was 76%, totaling 1.828 million tons, which was down 0.7% from last week. Production is up 0.1% on a y/y basis. U.S. steel mills produced 19.38 million tons of raw steel through the first 10 weeks of 2013, (Fig. 9). Production in the Northeast has risen almost 10% since the first of the year, while steel production in the Midwest has remained flat. Western district production was down 14% while production in the South was up 2.5% over the same time frame. Great Lakes production was down almost 2% since the start of the year, (Fig. 10).

Fig 9

Unemployment by Duration tracks the length of unemployed persons in the United States into four categories: less than 5 weeks, 5-14 weeks, 15-26 weeks, and 27 and higher. The ratio will equal to 100%. From 2000-2008, the majority of unemployed were for 5 weeks or less; however, since the beginning of the Great Recession, the long term unemployed, 27 weeks or more, rose dramatically and quickly became the leading group. In early 2010, this group reached an all-time high of 45%, which meant almost half of all unemployed were for 27 weeks or more. This is an astounding figure since their historical average is under 20%. The Great Recession yielded massive job losses and only now, almost 5 years into the recovery, has the number of people employed reached its pre-recession norms, (Fig. 11).

Fig 11

Contributors this week include; Andrea Rubinstein, Laura Remington, Brian Drozdowski, Peter Wright and Steve Murphy