Weekly Market Update - January 29, 2015

Global Steel Production and Capacity Utilization, December 2014: Global steel production in 2014 totaled 1.627 billion tonnes with an average utilization rate for the year of 74%. Capacity is 2.2 billion tonnes. China accounted for 51% of global production in 2014. Asia as a whole, including India, accounted for almost 70% of global production, (Fig. 1). Production in December on a tons / day basis declined for the third straight month to 4.313 million tonnes, down from 4.345 in November. Total December production was 133.7 million tonnes. If we look at the three month moving average and plot it over time we see that there has been a significant decline in the second half of the year since and including 2010, (Fig. 2). As production has increased each year since the recession, capacity utilization has decreased, the gap is widening. Much has been written about China’s desire to close up to 100 million tons of old environmentally unfriendly capacity but as yet we are not aware of any serious attempts to do so. It appears that provincial governments ignore the desire of central government in order to maintain both employment and their own political survival. Table 1 shows global, regional and the production of the top ten nations in the single month of December and share of the global total, also three months production through December and YTD production. Regions are shown in white font and individual nations in beige. In three months through November y/y global growth declined to exactly zero but in three months through December bounced back to 1.1%. Year to date growth through December was also 1.1% compared to all of 2013 which was up by 7.0% from 2012. In the 4th Q of 2014 there were significant differences in regional year over year growth. Europe and the CIS both contracted, North America eked out a 1.0% growth with the U.S. achieving 1.9%, South America grew by 2.0% and Asia by 2.5%. South Korea which until the latest data had the fastest growth rate in the world slowed to 2.2% in Q4. China’s growth was negative 0.2% in three months through November y/y but in the 4th Q recovered to 2.8%. Japan had a negative 2.1% growth in Q4. The effect of the war in Ukraine is clear in the contraction of that country’s steel production. Fig. 3 shows the 3MMA of the monthly growth of global steel production which prior to December had been falling for over a year. The recent decline in the price of oil, of iron ore and of the Baltic Index suggests that the global economy is weakening. Certainly there is a supply side to all three of those measures but it seems that demand is also down and suggests a further slowdown in global steel production in 2015.

Fig 1 


Fig 2


Regional Job Creation, Q4 2014: The states compile their employment numbers independently of the Feds then both are reported by the Bureau of Labor Statistics. The results are reasonably close with the Feds reporting total job creation in 2014 of 2,968,000 and the states reporting 2,664,000. All regions had solid job creation in the 4th Q led by the Pacific, (CA, OR and WA) with an additional 165,400 positions. The South Central, (TX, OK, AR and LA followed with 139,600 positions, Table 2 shows the history of quarterly job creation by region for the last four years. Of the total jobs created in the South Central, Texas contributed 110,000. The South East, (FL and GA) had a particularly strong 4th Q with job gains almost double what they enjoyed in the previous two quarters.

The regions have fared very differently since the pre-recession high of 1st Q 2008 and since the low point of 4th Q 2009. There are now 2,342,000 more people employed than there were immediately before the recession but of that number 1,341,000 jobs were created in the South Central, (TX, LA, AR and OK). The East North Central, (IL, IN, MI, OH and WI) and the East South Central, (AL, KEN, MIS, and TEN) have still not recovered all the jobs lost during the recession, (Table 3). In our Q3 analysis the South East, (FL and GA) were still in negative territory but their very strong Q4 put them over the top.

Employment is now 10,772,000 positions higher than it was at the low point of the recession. The Pacific has had the largest number of jobs created during the recovery with an increase of 1,963,000 new positions which amounts to 10.6% of total employment. On a percentage basis the South Central leads with an employment increase of 12.9% and the North East, (NY, NJ and PA) lags with 5.1%. The East North Central currently has the highest number of employed people with 21,307,400, followed by the Pacific with 20,486,600, (Table 4).

Table 2 

Table 3

Non-Residential Construction Starts, (McGraw Hill-Dodge): The December 3 month (m) total square-footage for non-residential starts rose +9.6% y/y, led by construction starts for manufacturing plants, hotels and recreational construction projects, (Table 5). Starts for manufacturing plants were up 135%, 3m y/y, as the 12m total rose 53.4% y/y, indicating positive momentum of 81.2%. A sign of positive investment for manufacturing companies and industries. Total 12m starts for recreational and transportation starts were up 8.3% y/y and 11.5% y/y, respectively and reflect positive momentum for both sectors. Hotel and motel starts posted stronger results on a 12m basis, up 36.4% y/y. December’s weakest segments were civic, religious, and medical. Civic starts were weak for the last 5 months of the year, with -22.4% momentum. Religious starts waned, -16.7%, 3m y/y, while on a y/y basis were down -11.1% y/y. Medical construction starts fell for 12 consecutive months, the 12m y/y through December was down -10.1% y/y, as momentum slowed.

In dollar terms non-residential starts rose 14.0%, 3m y/y and 10.2%, 12 m y/y. Results were mixed across the range of project categories. The largest gains were in manufacturing buildings, up 84.5% on a 12m y/y basis, falling to 40% in a 3 m y/y comparison indicating a slowing growth rate going forward. Public sector categories including sewage treatment and civic facilities posted the greatest spending declines, (Table 6).

Table 5 

Table 6

Industrial Construction Starts, (Industrial Information Resources): Overall industrial starts spending increased 2.7%, 3 months y/y, but was down 4.4% on an annual basis. Despite the plunge in oil prices, the production oil and gas sector posted large gains for both 3 and 12 month y/y comparisons of 352% and 100% respectively. It is probable that expenditures will decline on a go forward basis if oil prices remain low for an extended period of time. Transmission oil and gas is softening, investment in this sector declined 20.6% 3 months y/y and 38.5% over the past 12 months. Power projects were off 40.5% and 30.9% for 3 and 12 month y/y, after huge gains in 2013, (Table 7). Industrial manufacturing also recorded solid gains, up 24.5% and 53.6% (3 mo y/y and 12 mo y/y) as this sector continues to perform well. The Institute of Supply Management (ISM) manufacturing index has been north of 50 (expansion threshold) for 18 consecutive months and the Industrial production index is at record levels, (Fig. 4). Regionally the Southwest continues to see the lion’s share of industrial investment spending at 36.7% of the national total over a 12 month period up 44.0% y/y. The next largest spend was in the Great Lakes region at 12.3% of the total, followed closely by the West Coast at 11.7%. Both of these regions reported y/y declines of 12.3% and 23.9% on a y/y basis, (Table 8).

Table 7

Durable Goods: Durable goods orders, seasonally adjusted, fell sharply in December’s advanced numbers release, with a 3.4% decline. The total dollar value was $230,525 million. This month’s figure is down 1% for 2014. It is also the lowest total since February of this year and down 23% since July’s unusual reported value of $299,862 million. Most categories saw declines in December from November, most notably Nondefense aircrafts and parts and defense aircraft and parts, which fell 55.5% and 19.9%, respectively. Non-defense core capital goods orders, which are a widely used indicator of business investment in the GDP calculations, fell severely, with a 9.7% decline from November. Despite the decline in Q4, this figure is up 6.5% y/y, (Fig. 5).

Fig 5

Chicago Fed National Activity Index: The CFNAI is a weighted measure of 85 economic indicators that gauge economic activity and inflationary pressures (Federal Reserve Bank of Chicago). The indicators are derived from production and income, employment, unemployment and hours, personal consumption and housing, and sales, orders, and inventories. The Index has a value of 0 and standard deviation of 1, with a positive reading signaling above average growth and negative reading signaling below average growth.

The Index reading in December fell to -0.05, the first negative reading since August. 2014 saw positive readings for nine of the twelve months, with one of the months, January, being in the middle of the harsh winter. The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading. The reading for December was 0.39, slightly down from November, still indicating that the economy was growing above historical trend, for the tenth straight month. Employment, Unemployment, and Hours and Sales, Orders, and Inventories were positive in December, reading 0.16 and 0.03, respectively. The Employment subset has been positive for 27 of the past 28 months. Personal Consumption and Housing has yet again recorded a negative reading, 96 months in a row of below trend growth. Recent data releases involving increased employment and decreased unemployment claims contributed to the positive reading. The last above average reading was in December 2006 (Fig. 6). Since GDP equals consumer spending plus investments plus net exports plus government spending, this reading depresses potential GDP growth.

The CFNAI is a leading indicator for steel consumption and historically there has been a firm relationship between the CFNAI index and steel supply up to the start of the recession. The CFNAI experienced a healthier recovery than “Long Product” steel supply. The construction sector has yet to experience the growth typically seen in the recovery after a recession; however, the gap seems to be closing, more than five years after the recovery began (Fig. 7).

Fig 6 

Fig 7


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