Weekly Market Update - November 20, 2014

Chinese Steel Production and Exports: Through September 2014, China has produced 607,234 million tonnes of crude steel per the Worldsteel Association, (China Metals Weekly pegs the number at 617,997). This represents 51.2% of global crude steel production, (Fig. 1). Fig. 2 illustrates the global production of Chinese long product exports YTD through September. Year to date, the Chinese have produced 387,914 million tonnes of long products, a 4.9% YTD y/y increase. The largest production category is rebar with 161.4 million tons (41.6%), followed by wire rod at 115.3 Mt (29.7%), bar at 60.1 (15.5%), medium and small sections at 41.0 Mt (10.6%) and large sections at 10.2 Mt (2.6%). The largest YTD y/y increase was in large sections, up 8.0%, followed by a 7.1% jump in rebar, YTD y/y.

Fig. 3 charts total Chinese imports to the U.S. After bottoming-out at 30,000 tonnes per month at the depths of the recession, U.S. exports reached 335,600 tonnes in October, (based on license data) an 11 fold increase since 2009. On a YTD basis through October, Chinese exports to the U.S. have reached 2.466 million tonnes, an alarming 63.8% YTD y/y increase from the 1.506 million ton mark imported in 2013.

Chinese long products exports totaled 23.5 MMT through September, 2014, 6.0% of production. In 2013 the export ratio was 4.0% of a smaller production total, (Table 1). Note in Table 1 that the production percentage change y/y value is in single digits (except for February), while the percentage change y/y for exports is double digits every month and > 100% in October as LP exports rose from 1.90 MMT in October 2013 to 3.23 MMT in October 2014.

Fig 1

Fig 2

Long Product Shipments, (SMA): Total long products (rebar, beams, structurals, merchant products), apparent domestic consumption (ADC = Domestic mill shipments + imports), grew 10.4% y/y and 10.5%, 3 months y/y ending October 2014. All products posted growth 3 months y/y. Beams the strongest y/y growth, beams up 12.5% y/y and 9.6%, 3 months y/y. Rebar shipments increased 8.6% y/y and 11.7%, 3 months y/y. Beam momentum slowed to a negative 2.8%, while rebar momentum grew by 3.1%. Overall momentum held positive by 1.8%. Imports for all long products measured 21.4% of the total in October. Year to date, LP imports recorded 4.05 million tons, 20.0% of the total for market for long products.

U.S. mill shipments (domestic shipments + exports), were up 4.0% y/y and 3.2%, 3 month y/y ending October. Momentum fell into negative territory, down 0.7%. Wire rod posted the best performance on a 3 month y/y basis, up 11.7%. On a yearly basis wire rod was up just 2.1%. Rebar mill shipments were up 6.6% y/y and 7.6%, 3 months y/y. Merchant bars posted a small gain, up 0.9%, y/y and 2.0%, 3 months y/y. Structural shapes recorded negative growth, off 1.4% on a 3 month y/y basis, influenced by beams which fell 6.9%. Both Structurals and beams showed positive growth a y/y comparison, (Table 2).

Table 2

Architectural Billings Index: The ABI national score for October was 52.7, down from the previous months 55.2 mark but still in expansionary territory. On a regional basis the scores were: South (58.4), West (56.1), Midwest (54.4), and Northeast (47.0), (Fig. 4). What is really exciting is the sharp rise in the design contracts index which posted 56.4 in October, (Fig. 5). This portents a strong future for architectural billings which means increased non-residential construction activity 12 to 18 months in the future.

“Though it has been slow in emerging, we’re finally seeing some momentum develop in design activity for nonprofits and municipal governments, and as such we’re seeing a new round of activity in the institutional sector,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “It will be interesting to see if and how the results of the mid-term Congressional and gubernatorial elections impact this developing momentum.”

Fig 4

Employment Situation: Net job creation for October totaled 214,000, the ninth consecutive month of job growth above 200,000. Net job creation for September and August were revised upward from 248,000 to 256,000 and 180,000 to 203,000, respectively. This was 31,000 more jobs than reported in the original release. The U-3 unemployment rate dropped for the fourth straight month to 5.8%. This is the lowest the rate has been since Q2 2008. Labor force ticked up to 62.8, a seemingly insignificant increase from last month’s rate of 62.7; however, this rate has been below 63.0 since February of this year and is still among the lowest on record. The employment to population ratio inched up to 59.2, the first time it’s been above 59.0 since Q3 2009.

The U-6 unemployment figure, which includes those persons who are marginally attached to the labor force, fell to 11.5% in October, from 11.8%. This number has been steadily declining since the end of 2010. The U-6 rate peaked at 17.4% in October 2009. The average duration of unemployment for October was 32.7 weeks. It has fallen from historical highs since 2011, however, is still well above the 18 year average, pre Great Recession from 1990 - 2007, of 16 weeks, (Fig. 6). Net job creation has averaged 229,000 jobs in 2014, however, inflation has been mainly subdued, currently at 1.7% in September, staying below the 2.0% mandate by the Fed Reserve. JOLTS data, which entails job openings, separations, and quits, revealed some enlightening news. The number of job quits increased to 2.8 million, the highest since April 2008. This is an indication of a healthier job market as more employees are braving the job market and voluntarily leaving positions they normally would’ve kept during a recession. The long term unemployed (six months or longer) and involuntary part time workers have decreased only slightly and wage growth has stagnated, under 2% y/y, since the end of the recession leading to a considerable amount of slack in the labor market. Still, Janet Yellen, the Fed Chairwoman, has mentioned that, in the short term, interest rates will not be raised from its current six year position of near zero.

Fig 6

Producer Price Index Report: Fig. 7 compares the materials and components of construction (MCC) PPI with the PPI for non-residential construction (NRC). The rate of change for (MCC) was 4.3% over the last 24 months, while the increase for NRC was just 0.3%. The fact that all construction material cost inflation is greater than NRC materials of construction must mean a greater rate of increase in residential home construction materials vs. NRC materials. Table 3 compares construction steel and its primary competition. Softwood lumber and wood trusses (primarily used in residential construction) have recorded 24.7% and 17.2% increases over two years while structural steel has increased just 2.0% over the same timeframe. However, the rate of increase for structural steel has accelerated faster in the last year than has softwood lumber. The relationship between structural steel, ready mix concrete and softwood lumber is presented in (Fig. 8). Cost inflation for concrete and softwood lumber is greater that for structural steel. Lower cost inflation should assist structural steel in being a more competitive choice.

Fabricated structural steel for bridges has increased by 3.9% over two years and by 2.7% y/y, while prestressed concrete bridge beams (Table 3), have increased by 17.5% over two years and by 4.6% y/y. Once again cost inflation is lower for structural steel possibly helping it gain market share vs. competing materials.

Fig 7

U.S. MSCI Report: The three month moving average (3MMA) daily shipment rate for all carbon long products was up 3.6% y/y in October. The percentage 3MMA y/y change has been positive for 15 consecutive months. Plate showed the strongest gains, up 9.4%. Bar and shapes <3” reported the weakest shipments, up 3.2% y/y. Daily intake 3MMA surged by 7.1% y/y for all carbon steel products, strongly influenced by a 24.9% jump in plate. All product groups recorded increased percentage y/y intake. Overall monthly inventory levels grew by 15.6% y/y to achieve a 2.44 months on hand (MOH), identical to September’s MOH. Carbon plate posted the largest increase, up 25.5%, while sheet inventory increased by 18.0%. Structurals also posted a sharp increase, up 13.7% y/y. Pipe & tube inventory levels fell by 4.2% y/y, (Table 4).

Table 4

Canadian MSCI Report: Overall daily 3MMA shipments from Canadian service centers fell by 1.3% y/y and were down 2.9% vs. two years ago. Pipe & tube recorded the largest gain, up 2.5%, while sheet fell the most, off 3.9% y/y. Daily 3MMA intake surged 22.1% y/y, led by a 42.6% rise in sheet. Monthly overall inventory levels surged by 24.3% y/y to 3.11 MoH, influenced by a 31.7% increase in sheet, a 18.8% surge in plate and a 15.7% jump in structurals, (Table 5).

Table 5

Demand, (apparent consumption) of Steel Products in the U.S. through Q3 2014:  AISI generates a monthly report of shipments by product categorized as AIS 10, the latest of which data was for October. At Gerdau we subtract exports and add imports to get apparent supply to the domestic market which is as close as we can get to demand. Table 6 shows supply by product for Q3 2014 and YTD 2014 through Q3 not including semi-finished. Growth of total rolled product supply in Q3 year over year was 10.9%. Product groups long and flat were up by 4.5% and 13.1% respectively. On a YTD basis compared to last year longs were up by 7.1% and flats by 9.9%. The only long products to have negative growth in Q3 and YTD were hot rolled and cold finished bars. On a YTD basis structurals were up by 10.8%, light shapes by 7.2%, rebar by 9.9% and wire rod by 21.0%. Looking at the total market, imports have taken the lion’s share of the demand increases. Fig. 9 shows domestic shipments, imports and import market share. In this case the data does include semi-finished which are a big piece of total steel imports. It can be seen that domestic shipments, (the green bars) have been relatively flat since late 2011 as imports have surged to over 33%. Using September’s final import data we calculate that in three months through October year over year, total rolled product imports were up by 37.1%, flat rolled imports were up by 62.2% and longs by 27.1%. On the same basis semi-finished was up by 30.9%

Table 6

Steel Demand Indicators; Table 7 is a snapshot of the market situation on 11/20/14. Of the twenty seven indicators under consideration, the present situation of twelve are now positive by historical standards, eight are neutral and seven are negative. This represents a net change of plus one negative and minus one neutral. The change was in the price of Chicago shredded which we have re-classified from neutral to negative. The rational here is that high scrap prices are good as an indication of the state of the market and that when the price falls below $350 this is a negative. There were no other directional changes in the present situation of the 27 indicators. 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 latest facts available as of today’s date. There was a net increase of one negative and a net decrease on one positive trend since last we published on November 6th and returns to count to the same as it was on October 16th. The overall trends are very good with 20 of 27 indicators moving in the right direction. The only trend change in the last two weeks was that net imports which had been trending positive since our July 10th report reversed direction in the September data and increased. There were no directional changes in the trends of the general economy, construction or manufacturing. Employment data was updated since we last published and continued to be good with a y / y increase of 2.643 million of which 231,000 were construction jobs and 170,000 in manufacturing. Capacity utilization and the supply of long products continued their strong positive trend as did service center shipments of long products. The latest month or quarter for which data is included is identified since our July 10th report reversed direction in the September data and increased. There were no directional changes in the trends of the general economy, construction or manufacturing. Employment data was updated since we last published and continued to be good with a y / y increase of 2.643 million of which 231,000 were construction jobs and 170,000 in manufacturing. Capacity utilization and the supply of long products continued their strong positive trend as did service center shipments of long products. The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 7

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