Weekly Market Update - July 2, 2015

Construction Put-in-Place (US Commerce Dept.): Total construction put-in-place (CPIP) for the 12 months ending May was $874.6 Bn (NSA in constant 2010 $) or 6.2% y/y. On a 3 month y/y basis total construction has accelerated to 12.3% resulting in a strong momentum score of 6.1%. Private construction recorded 6.8% 12 month y/y growth and a sharply stronger 13.8%, 3 month y/y growth rate. State and Local construction also posted improved results, up 4.6% on a 12 month y/y metric and up 7.8% on a 3 month y/y basis, (Table 1). Single family housing accounted for 20.9% of total construction rising 13.3%, 12 months y/y and by 15.7%, 3 months y/y. Infrastructure spending except for Power (State & Local) recorded stronger y/y percentage growth and as Fig. 1 shows is trending upwards after falling for two years (2010 & 2011) and plateauing for two years (2012 & 2013). The year on year percentage growth rate has been positive and accelerating for 18 consecutive months.

Non-residential CPIP increased 16.9%, 12 months y/y to $382.4 Bn the largest 12 month total since April 2010. On a 3 month CPIP increased 26.2%, 3 months y/y to $102.8 Bn the largest 3 month total since October 2009. Private non-residential CPIP increased by 22.2%, 12 months y/y and surged 33.1%, 3 months y/y, both recording the largest percentage increase ever, (data stream begins in 1993), (Table 2). Every project category was up except public safety (-6.9% y/y, -8.0%, 3 months y/y) and several were up double digits. Manufacturing buildings lead the charge surging 40.1% y/y and accelerating to 77.4%, 3 month y/y. The 12 month total at $61.2 Bn was the highest since October 2009. Commercial building also recorded its strongest 12 month running total since October 2009 and office construction had its best 12 month total since early 2010.

Fig. 2 illustrates private CPIP excluding single family housing from 1994 to present. The red lines indicate typical historic growth trajectories after a recession. Note that the slope of the red lines is constant throughout time. Now observe the orange dashed line that begins in 2014. The rate of growth shows a pronounced acceleration. This is encouraging news buoyed by the fact that the y/y rate of percentage growth is also steadily accelerating.

Table 1

Fig 1

Preliminary Imports (SIMA): Preliminary long product imports (LP) for May totaled 491K tons, climbing 20% m/m. On a YTD basis, LP imports are up 8% vs. the same timeframe last year, (Table 3). The Rebar numbers for May were 153k tons, a 27% decrease over April. YTD Rebar imports as of May are at 920k tons vs 669k tons during the same period in 2014, representing a 38% increase. Wire Rod recorded 107k tons of preliminary imports, a decrease of 8% over April. YTD Wire Rod imports through May are at 610k tons vs 758k tons during the same period last year, representing a decrease of 20%. Merchant Bars posted 29k tons, up 11% m/m, while YTD saw a 19% increase. Beam preliminary imports came in at 35K tons, a 55% m/m increase. YTD beam imports stand at 294K, a 54% increase over the 192K tons brought in over the same timeframe last year. SBQ May imports recorded 154K tons, up 11% over April’s volume. On a YTD basis SBQ imports were down 4% to 650K tons.

Wire Rod and Beams both had license requests in excess of what was what shipped. For Beams, Spain has 10k tons of unused licenses requested in April, while Wire Rod has a total of 26K of unused licenses that were applied for in May. They breakdown as follows: Japan 12K, Germany 9.6K and Brazil 4.4K. Shipments can occur for up to 75 days after a license is granted.

Table 3

Consumer Confidence: The Consumer Confidence Index rose sharply in June to 101.40, up 6 points from May, (Fig. 3). This is the largest month over month increase since January (10.7 points) and highest reading since March (101.40). 2015 has already experienced three readings of 100+ or higher, the first such event since mid-2007. June’s reading is up 17% on a y/y basis. The 3MMA of this reading is up 12% and has remained above 90 for eleven straight months. The Expectations sub-index rose more than 7 points in June to 94.6 from 86.9 in May. It has remained above 80 for the 16th consecutive month. The Present Situation sub-index also rose in June coming in at 111.6 from May’s reading of 107.1. This figure is up 29% on a y/y basis while the 3MMA is up more than 30%. Both indexes have remained above 100 for six months in a row. Labor market conditions also improved in June with those expecting plentiful employment increasing three months in a row; similarly, those expecting jobs to be difficult to obtain decreased in June, also the third straight month of improvements. Recent data regarding home sales have contributed to a growth in home buying plans as well as this category is at its highest level since November 2014. Inflation expectations remained subdued as the FOMC noted there needs to be improvements in labor market slack before a liftoff of the Fed Funds rate.

Fig 3

The Situation in Greece: Question; why as steel people do we care? Answer; because this could eventually end up as a replay of 2001 when the Euro declined to 84 US cents and steel imports from Europe were the final straw leading to bankruptcy of half of the US steel industry.

The Euro, like the US $ is a single currency system. The reason the USA works and the Euro doesn't is because the USA has a system of rebalancing whereby poor states get more federal funding than wealthy states. That is, the Germanys of the USA (California, Texas and NY) pay into what is essentially a system of wealth redistribution that keeps poor states (Mississippi, Alabama, etc.) from defaulting on their municipal bonds once every two decades. Between sovereign currencies this rebalancing could occur through the manipulation of exchange rates, but in a single currency that can’t happen. So, the EMU is flawed because they don't have Euro Bonds and a Central Treasury.

Talks between Greece and its creditors collapsed over the weekend. The Greek government has called a referendum on July 5 to accept or reject its creditors' terms. The referendum, according to Credit Suisse analysts, is tantamount to a vote on whether or not Greece should remain in the Euro. Greece defaulted on a $1.8 billion loan payment to the IMF on Tuesday and then imposed emergency capital controls and closed banks starting Monday June 29 until after the July 5 referendum. The whole situation is a struggle between the highly industrialized, low unit labor cost nations, Germany in particular and the southern periphery of the EMU. The Germans who are powerful but fragile, have been the ones controlling negotiations with the Greeks. Germany exports about a quarter of their gross domestic product to the European free trade zone, and anything that threatens this trade threatens Germany's economy and social stability. Their goal has been to keep intact not only the Euro, but also the free trade zone and Brussels' power over the European economy.

The fear is that Greece may leave the Euro because they are aware that a sovereign currency would be a long term solution to their problems even though the initial stages would be extremely painful. Other Europeans such as Spain and Italy have also realized as much, which is why Eurosceptic parties are on the rise across the union. Germany, the country most threatened by growing anti-EU sentiment, wants to make clear that debtors face a high price for defiance. And if resistance is confined to Greece, the Germans will have succeeded. But if resistance spreads to other countries, the revolt of the debtor states against the union will cause major problems for Germany, threatening their relationship with the other Euro participants.

ISM: The Manufacturing Index rose in June to 53.5, up slightly from May’s reading of 52.8, (Fig. 4). It is only the second such increase since October. Since then, the Index has dropped more than 4 points, nearly 8%. The 3MMA increased somewhat to 52.6. Production fell to 54.0, the third decline in a row for this subcomponent. Inventories and New Orders also creeped up but the largest expansion came from the Employment subcomponent, which rose to 55.5 from 51.7, the highest reading since December. Despite the immense growth in Employment and overall growth in the Index there wasn’t much optimism in the report. According to the Manufacturing ISM Report on Business, the manufacturing sector grew for the 30th straight month; the overall economy expanded for the 73rd consecutive month, more than six full years. (Institute for Supply Management).

Fig 4

US Steel Capacity Utilization (AISI): US steel mills produced 1.733 million tons (MT) through the week ending June 27th, and operated at a capacity utilization rate of 73.3%. Year to date an unadjusted 44.667 mt of crude steel was produced, down 6.5% y/y, (Fig. 5). Production fell in the Midwest & Western Regions. Midwest output fell 1.9% from June, as YTD production, compared to production in the first half of 2014, fell 11.2% y/y. Production in the West was down 2.5% m/m, and down 1.3% y/y. Steel output in the Southern region of the US rose 8% m/m, but fell 10.3% y/y. The Northeast region rose 1.8% m/m, and is down 2.6% y/y, (Fig. 6).

Momentum in the US steel industry has slowed influenced by increased imports & logistic issues of getting product to customers, exacerbated by spring flooding. The result was that US mills operated at a capacity utilization rate of 72.4% for the six months through June 2015, 4.4 points lower than the same period in 2014. Steel output fell in January, February and March as 2015 began, falling below 70% utilization rate. Output rose over the three consecutive months following, bringing the YTD average up to 72.4%.

Fig 6

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