Thursday
Jun262014

Weekly Market Update - June 26, 2014

The International Monetary Fund cut its forecast for growth in the US economy this year to 2%, down from its estimation of 2.8% in April. Meanwhile, the World Bank announced it had cut its expectation for global growth in 2014 to 2.8%, down from the 3.2% it forecast in January. The global economy grew by 2.4% in 2013. Developing countries were projected to grow 4.8% this year, substantially below the 5.3% estimate in January.

Auto Sales, Production and Inventories: U.S. light vehicle sales increased in May to nearly 16.8 million units at a seasonally adjusted annual rate, (SAAR) up from an average of 15.8 million units in the first five months of 2014 and the strongest rate since February 2007. Auto sales increased from 7.5 million to 8.1 million units SAAR, while light-truck sales rose from 8.5 million to 8.7 million units SAAR. Total light vehicle production in NAFTA in May was at an annual rate of 18,063,324 units, up from 16,966,644 units in April. Medium and heavy truck production was at an annual rate of 446,520 units up from 445,236 units in April. On a rolling 12 months basis y/y light vehicle production in NAFTA increased by 4.8% and is now well above the pre-recession peak, (Fig. 1). On this basis the U.S. is up by 6.6%, Canada is down by 0.9% and Mexico is up by 3.2%, (Table 1). The growth of light truck production continues to outpace cars in the US and Mexico but in Canada the opposite is happening. Medium and heavy truck production in NAFTA as a whole was down by 2.7% y/y with a decline in all three nations. In the last three months there was a turnaround in M&HT production in the US and Canada but not in Mexico.

Wards Automotive reported last week that light vehicle inventories declined by 9 days of supply in May to 60 days. Inventories of the Detroit 3 also declined by 9 from 81 days at the end of April to 72 days at the end of May.

Fig 1

Housing Starts moved up in May by 9.6%, 3 month moving average (3MMA) y/y to 1,006,000. Single-family made up 63.7% of the total, a decline from last year’s 65.3%. Permits also increased, up 2.5% y/y. Single family declined by 1.9% while multi-family increased by 9.7%, (Table 2). Single family home construction has significant economic multipliers, greater than those in multi-family construction. Per Moody’s, each single-family home constructed adds 3.7 jobs in the following year, compared with 1.8 jobs for multifamily construction. Thus a decline in the ratio of single family to multi-family is of concern to net job creation.

The South has been the fasted growing region and represents 49.7% of the total starts. Starts in the South grew by 4.2% 3MMA y/y, however permits have declined by 3.8% over the same timeframe indicating a slowing trend in this region. All regions posted stronger y/y starts ranging from 5.3%, 3MMA in the West to 27.7% in the Northeast. In addition permits recorded strong growth in the Northeast, up 19.2%, 3MMA.  Fig. 2 presents housing completions from 2000 through 2013 and what at this point appears to be an extremely optimistic prediction from the Portland Cement Associations Spring 2014 forecast. Referencing a table presented at the Chicago Fed’s Automotive Outlook Symposium (Chicago May 30, 2014), it cited a much more believable housing start forecast of 1.03 million in 2014, and 1.19 million starts in 2015. 

Homebuilder sentiment improved in June. The NAHB composite index advanced from 45 to 49. Homebuilders’ optimism is at its highest since January’s reading of 56. In addition, the single-family future sales and prospective buyers’ traffic indexes each improved by 3 points. This should bode well for improved sales for the balance of 2014 and carry-over into 2015.

Table 2 

Fig 2

 

Steel Service Centers Report, U.S. and Canada: U.S. shipments of all carbon steel products jumped 8.0% y/y in May compared to the same period last year. All product groups posted y/y increases ranging from 3.9% for structurals to 9.0% for sheet. Overall inventory levels grew by 4.3% y/y. Structural inventory increased by 10.1%, sheet by 5.8%, and plate by 3.0%, bar & shapes and pipe and tube recorded declines of 2.7% and 1.2% respectively. Inventory levels are down across the board since 2012. Daily intake levels are up in every product group y/y ranging from 4.2% for pipe & tube to 12.5% for sheet, (Table 3). Fig. 3 references 2007 at 100% and then presents shipments since as a percentage of this “peak” shipment level. All products moved except structural moved higher in 2014 compared to the same period in 2013. Flat rolled products have shown a stronger recovery than longs with sheet posting the strongest recovery since the recession. Sheet now stands at 89.5%, followed by plate at 83.8%. Long products May readings include: Pipe & Tube 80.4%, bar at 64.7% and structurals at 66.7% of the 2007 “peak” level.

Canadian service center shipments of all carbon steel products moved-up by 2.4% y/y with all product groups recording increases except pipe & tube which were down 2.6% y/y, (Table 4). Overall inventory levels declined by 9.7% y/y showing wide variations between product groups. Carbon sheet inventory plummeted 20.2% and plate was off 0.9%, while structural inventory grew by 14.8% and pipe & tube by 12.4% and bar & shape by 2.9%. Led by a 31.9% jump in sheet and a 23.7% swell in structurals. Daily intake increased for all products, up by 21.7% y/y as a group. Fig. 4 references 2007 at 100% and then presents shipments since as a percentage of this “peak” level. Canadian service center shipments had a much stronger recovery than in the U.S. that expanded rapidly from 2009 through mid-2012, at which point the recovery stalled and declined, then plateaued. Plate largely bucked this trend having broken-through the 100% “barrier” several times since 2011. May plate shipments were at 91.1% of the 2007 “peak”. Sheet shows the weakest performance having only recovered to 75% of the peak market in 2007.

Table 3

 Fig 3


Table 4

 

Preliminary U.S. Long Products Import Data: totaled 545,000 tons in May, a m/m decline of 12%. Imports have exceeded 500,000 tons every month except February, adding to YTD total imports of 2.6 million tons, a y/y increase of 28%. Rebar imports fell for a second consecutive month, down 34% m/m, while wire rod imports fell 24% in May, contributing greatly to the overall monthly drop. On a YTD basis vs, the same period last year, both wire rod & rebar imports have increased +98% and +25% respectively. Heavy structurals, including beams, have increased for four consecutive months, up 44% in May from April, and +20% y/y. Imports of MBQ fell 9% in May, but are up 16% over YTD 2013 imports, while SBQ product imports fell 7% m/m and are down slightly (2%) y/y, (Table 5).

Table 5

U.S. Scrap Exports were 1.34 million metric tons, flat from March to April. April exports were up 37%. YTD total exports stand at 4.76 mmt, down 25% from YTD 2013. Asia receives 40% of the total exports, 14% is shipped to NAFTA, 25% is sold to Turkey, with the remaining 20% divided between the rest of world, (Fig. 5). The big reduction in scrap exports 2014 YTD is primarily due to a 40% drop in exports to Turkey, (Fig 6).

Fig 5

Durable Goods Orders fell 1.0% in May with a total dollar value of $238,008 million, the first decline since February of this year. May’s number slid from April’s record high. Durable goods ended Q1 on a positive note despite GDP contracting a revised 2.9%. Higher durable goods and increased industrial production share evidence that the economy is growing faster after a miserable winter. Nondefense core capital goods orders, which are a widely used indicator of business investment in the national GDP calculation, fell 0.5% in May after a 0.6% decline in April, (Fig. 7).

Fig 7

Currencies: The U.S. Dollar has strengthened 1.7% on a y/y basis and remained flat over the last month against the Daily Broad Index. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S. The Brazilian Real has strengthened 4.2% over the last three months and 1.7% over the past week. The Brazilian Central Bank mentioned that inflation will subside from 6.4 to 6.1 with a target rate of 4.5%. The Bank also mentioned that GDP growth has been cut for Q1 2015 to 1.8%. The Euro has stabilized over the past month after a decline of more than 1% from the past quarter. German Bund 10 year yields fell to all-time lows in response to geopolitical tensions with Russia/Ukraine and Iraq, and the prospect of a slowing global economy. A particular flight to safety to German Bunds occurred when the U.S. GDP revisions were announced, (Table 6).

Table 6

Steel Demand Indicators: Table 7 is a snapshot of the market situation on 06/23/14. Nine of the “present situation indicators are still depressed by historical standards which is a reduction of two since we last published on June 6th. Based on the Commerce Department construction data we have re-classified total construction and infrastructure as neutral by historical standards. These sectors grew by 7.6% and 4.4% in 12 months through April which we think pushed them to a level that is no longer depressed by historical standards. We also re-classified the price of Chicago shredded from strong by historical standards to neutral based on the $18 price decline in June. We now have a situation where of 27 total indicators considered, the mix of depressed, neutral and strong is 9, 9 and 9. Overall trends are very good with 23 of 27 indicators moving in the right direction. This is the same as when we last published and we believe the strongest result since we first produced this analysis four years ago. Please note that trends are not related to the present situation which is static. It is quite common to have an unsatisfactory present situation that is trending positive and vice versa. In most cases the values in the trend columns are three month moving averages year over year. 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; Laura Remington, Brian Drozdowski, Peter Wright and Steve Murphy