Weekly Market Update - August 25, 2016

Global Steel Production in July: Production in the month of July at 134,120,000 metric tons was down by 1.5% from June and the 3MMA that we prefer as a measure was down by 0.2%. Capacity is 2.3 billion tonnes per year and the 3MMA of capacity utilization in July was 69.9%. Figure 1 shows monthly production and capacity utilization since January 2000. On a tons / day basis, production in July was 4.326 million tonnes, down by 2.0% from June. Since the recession, capacity utilization has been on a steadily downward trajectory with an upward blip in 2016. Capacity utilization in the three months through July at 69.9% was down from 71.3% in three months through July last year.

It is necessary to look at the year over year change in the 3MMA to eliminate seasonality and on this basis July was disappointing. Meaning that we are hoping for a decline in production to take pressure off the global market. Figure 2 shows the change in growth rate since January 2005. Production began to contract in March last year and the contraction accelerated through January this year when it reached 5.8%. In the next four months contraction slowed and in June was zero. In July production once again increased on a 3MMA y/y basis. The much desired slowdown in global steel production has reversed course on a year over year basis driven by China. This is not a blip, the trend in the first seven months of this year is quite clear.

Table 1 shows global production broken down into regions and also the production of the top ten nations in the single month of July and their share of the global total. It also shows the latest three months and twelve months production through July with year over year growth rates for each period. Regions are shown in white font and individual nations in beige. The world as a whole had positive growth of 0.7% in 3 months and negative 2.5% in 12 months through July. If the three month growth rate exceeds the twelve month we interpret this to be a sign of positive momentum which has been the case for the last six months.

Figure 3 shows China’s production since 2005 and Figure 4 shows the y/y growth. China’s production after slowing for 13 straight months on a 3MMA basis year over year returned to positive growth in May, June and July and accounted for 49.8% of global production in July. The slowdown in Chinese steel production that the rest of the world has demanded is NOT happening. To put this into perspective with the rest of the world, on a 3MMA basis year over year through July, China had 2.0% growth as the rest of the world contracted by 0.6%.

On a regional basis in 3 months through July year over year, South America and the EU declined by 11.2% and 5.3% respectively. Asia as a whole was up by 2.1%. Other Europe, (mainly Turkey), was up by 5.4%, the CIS was up by 1.8% and North America was unchanged. Within North America the US was down by 0.2%, Canada was down by 1.5% and Mexico up by 5.7%.

Figure 1

Figure 2

Table 1

Homebuilder Confidence and Housing Starts: Homebuilder sentiment improved in August as indicated by the National Home Builder Association’s (NAHB) composite housing market index which rose from 58 in July to 60 in August. The 3MMA rose from 58.7 to 59.3, (Figure 5). Any number > 50 indicates expansion. On a regional basis, sentiment in the West, South and North East improved as that in the Mid-West declined.

Total housing starts in July were at an annual rate of 1,211,000 units which was up from 1,186,000 in June and 1,128,000 in May. Starts in July last year were 1,147,000. The 3MMA in July was 1,175,000 which was up from 1,156,000 in June. Through 2015 we had been predicting a return to 1.4 million units annualized by mid-2017 but that assumption is now questionable. The 3MMA has been range bound since last June between 1,131,000 and 1,175,000, (Figure 6). The question is; are total starts going nowhere which is the case if we only consider the 12 months. The improvement in the last two months may be real but it’s too soon to make that call.

Single family starts in July were at an annual rate of 770,000 with a 3MMA of 758,000. The 3MMA was up by 6.2% year over year but is still 57.8% below the peak of late 2005. Multifamily, (apartments / condominiums) starts in July were at an annual rate of 441,000 units with a 3MMA of 417,000, down by 2.4% y/y. (Figure 7). It now looks as though we may be seeing a shift away from multifamily housing based on the results for 2016. In the last year the ratio of single family to multi family has been at a level not seen since the 1980s, (Figure 8). This has implications for nonresidential construction since most multi-family units are in cities and most single family are in the suburbs. The traditional mix of housing and schools, and retail construction must have been affected and may be part of the reason why nonresidential construction has had a slow recovery.

Figure 9 shows the regional situation for the 3MMA of total residential starts since January 2000. There is a significant difference between regions. The North East has been in decline for over a year, the West has been flat for 18 months. Most of the gains have been in the South with some improvement in the Mid-West.

Figure 5

Figure 6

U.S. Industrial Construction Starts in July were $14.5 Bn, down 21.5% compared to July 2015. On a 3 month year on year basis starts fell 22.1%, subsequently momentum was weak, a negative 1.6%. Power projects declined 39.9%, 3 months y/y, but were up 5.4% on a 12 month y/y metric. Production oil & gas starts plummeted by 78.6%, 3 months y/y and by 88.4%, 12 month y/y due to the sharp decline in oil prices. On a positive note, industrial manufacturing (+44.7%), alternative fuel (+913%) and petroleum refining (+144.5%), sectors leapt on terms 3 months y/y. The 12 project categories are shown in Table 2, five posted short term growth, with eight recording positive momentum.

The map in Figure 10 illustrates US industrial starts by consensus region showing the y/y change in percent change as well as the 12 month expenditure. Regions recording double digit declines include; The Southwest (-61.2%), New England (-44.8%), and the Mid-Atlantic (-20.3%). Regions posting growth include; The Northeast (+86.5%), West North Central (+32.1%), Southeast (+25.7%), East North Central (+12.8%), and the West Coast (+3.1%). The Mountain region industrial construction starts were down 7.6% for the 12 months y/y through July.

Table 2

Canadian Industrial Construction Starts rose 7.5%, 3 months y/y but was off 2.7% compared to the 12 months through July 2015. Energy related projects such as transmission of oil and gas, and alternative fuel projects, witnessed huge percentage point gains, (up from a small basis). Food & beverage, pulp, paper & wood, pharmaceuticals & biotech and metals and minerals also reported solid growth 3 months y/y, (Table 3).

Quebec and the Atlantic region of Canada recorded positive growth on a 3 month y/y comparison. While Ontario and the Western region realized negative growth 3 months y/y. Quebec was the only region to post positive growth for both 3 and 12 month y/y comparisons. Note that over the past 12 months, the western provinces accounted for 63% of the total expenditures. This value dropped to 51% on a 3 month y/y assessment, a function of lower investment in the energy sector.

Table 3

Chicago Fed National Activity Index: The CFNAI surged by 0.23 in July, it strongest growth since July of 2015 and well up from June’s posting of 0.05. On a 3MMA the index improved to -0.10, up from -0.19 in June, indicating that despite July’s stellar performance, the US economy is performing below trend, (Figure 11). There are 85 individual indicators in this broad index. In July 53 indicators made a positive impact leaving 32 that made a negative impact. Production related indicators made the largest contribution at 0.23 for the month and 0.02 for the 3MMA. Three of the four sub-indexes made a positive contribution in July. Personal consumption and housing was the only sub-index to record a negative contribution, (-0.06). This component of the index has been below zero (trend) since mid-2007, but as Figure 12 illustrates is making steady progress. Sales, orders, and inventories contributed 0.01and employment, unemployment and hours added 0.09, its largest contribution since January.

The US economy continues to steadily improve and according to Moody’s, GDP is now tracking towards a 2.7% annual rate, much improved from the dismal start of the first quarter. The July employment report showed broad gains across all industries. In addition average hourly wages showed an uptick rising 2.6% y/y. This should result in stronger consumer spending and help kick-start the anemic housing recovery. The strong showing from production related indicators is encouraging from manufacturing which is expected to perform better in the second half of the year.

Figure 11

Non-residential Construction Square-Foot Starts (Dodge Analytics): Nationally overall starts plummeted by 20.9%, 3 months y/y, after declining in eight of the past twelve months on a 3 months y/y metric. Every project category except offices & banks declined by double digits in July, 3 months y/y. On a 12 month y/y basis starts fell by 9.6% resulting in negative momentum of 11.3%. Year on year starts have been down six months in a row with the value becoming increasingly negative in each of the past three months, (Table 4).

Apartments (> 4 stories) which has been the largest square-foot category since the recession ended declined 30.8%, 3 months y/y, its third consecutive monthly decline and a larger percent y/y than in each of the last two months. Warehousing, the second largest square-foot category since the recession, also fell in July, off 18.3%, 3 months y/y. Warehouse construction was the only project categories to record positive growth on a twelve month y/y basis (+0.5%).

Figure 13 presents a chart showing Dodge starts data on a rolling 3 month basis from 1990 to present for all non-residential, (excluding apartments > 4 stories). Examining the data, we see that in each of the previous times there was a weakening of the magnitude we are now seeing, the fall-out in square-foot starts continued until the start of the next non-residential up-turn. Starts data gives us a window into the future of 9 to 12 months of what we can expect to see in future US Census Bureau Construction put-in-place (CPIP) data/ CPIP details construction dollars that has been spent. The CPIP report is still showing y/y growth but has fallen in percentage y/y terms for 3 months in a row. We expect the July report (to be discussed next week’s Gerdau market update to find out), will show a further decline yet remain positive on a y/y basis. The two reports (Dodge starts and Commerce Dept. CPIP, have a correlation coefficient of 0.782.

Figure 14 presents Dodge non-residential starts both including and excluding apartments/condominiums >4 stories from 2005 to present. This chart illustrates the significant impact that multi-story residential construction has on the overall non-residential construction numbers.

Table 4

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 8/24/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not August data but data that was released in August for previous months, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 5 are positive by historical standards, 8 are negative and 14 are neutral. This was a decrease of three negatives and an increase of three neutral since our last update on August 11th. The changes we made were to our view of the Federal Reserve Bank lending standards and manufacturing capacity utilization. Bank lending standards refers to both the ease of and demand for commercial and industrial loans.

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 facts available as of August 24th 2016. The number of indicators trending positive in this latest analysis was 14 with 12 trending negative and one unchanged. This was a net decrease of one positive since our last update. The changes that occurred were as follows. The ease of bank loans classified as commercial and industrial improved in the 3rd Q data. Shipments of long products which had trended positive since April 21st reversed course and contracted in the July data from the Steel Manufacturers Association. Service center inventory rose in July in the face of falling shipments, clearly a negative trend. There were no other changes in the direction of trends.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 6. Of the twelve leading indicators nine are trending positive, and three negative. This was an increase of one since our August 11th update. The change was in the ease of commercial and industrial loans as mentioned above. In summary the present situation is historically weak but trends are good which leads us to have confidence in the long products business environment into the 4th quarter.
(Explanation of Indicators).

Table 5

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