Weekly Market Update - September 18, 2014

Industrial Construction Starts are accelerating at a torrid pace, up 65%, 3 months y/y and 22% over the past twelve months. The last three years power projects were leading the charge by a huge margin, (Fig. 1). This year power projects remain strong but production oil and gas has taken over the lead spot and chemical processing has also surged ahead. Production oil and gas has mushroomed 482%, 3 months year and 100% y/y, to $30.1 Bn, 22.1% of the total spend over the past 12 month period, (Fig. 2). Chemical processing has ballooned 608%, 3 months y/y and 176% y/y, representing 14.4% of the total spend over the past twelve months, (Fig. 3). Power projects starts continue to perform admirably with $26.7Bn invested, 3 months y/y for 19.7% of the total spend, but have fallen 8.0% on a year over year basis. The big winner on a regional basis is the Southwest (Texas & Louisiana in particular) benefiting from the strong growth in oil and gas shale plays, (Fig. 4). According to Loren C. Scott, Ph.D., president, Loren C. Scott & Associates, Inc., the Wolfcamp play in West Texas contains 50 Bn barrel of oil equivalent (boe) making it the second largest field in the world behind the Ghawar Field in Saudi Arabia, (Fig. 5). For reference the Bakken play in North Dakota contains 13 boe. The Southwest’s share of total industrial construction spending starts was a disproportionate 45% of the total spend over the last twelve months. Abundant, long term sources of low cost natural gas has grabbed the attention of the chemical industry which require vast amounts of nat-gas to produce ethylene, methanol, ammonia, etc. According to the UT Center for Energy Economics, there are 144 gas intensive projects with a combined value of $121 Bn and this does not include nat-gas fired power plants under construction or nat-gas powered vehicles.

  Fig 1

Fig 2

Consumer Credit: Total consumer loans increased by 7.0% y/y ending July. This was the largest increase since October 2011. In addition there were upward revisions to the second quarter figures. Revolving lines of credit ticked up 3.2% y/y, while installment loans surged 8.5%, (Fig. 6). Retail sales volumes increased 0.6% in August, as pent-up demand for autos continues to be released. Large non-revolving loans still comprise the majority of the increase (approximately one half from automobiles sales), as it appears that consumers are once again taking on credit card debt. Revolving credit balances are growing at their fastest pace of the recovery. This increased appetite for consumer debt should translate into increased hiring by firms on a go forward basis. House price gains are becoming more broad based nationwide which contributes to the “wealth effect”. When consumers feel wealthier, they are more apt to spend more, which leads to more hiring.

Fig 6

Non-Residential Construction Producer Price Index: The overall PPI for non-residential (NRC) increased 1.0% over the past 12 months and by 2.2% over two years, (Fig. 7). Breaking down PPI for NRC; Warehouse structures experienced the greatest price inflation, up 2.6% y/y and 6.5% over two years. Commercial structures increased by 1.6% y/y ending August, while office construction rose 1.4% y/y, (Table 1). Examining the materials that are used in NRC; Ready mix concrete was up 5.1% y/y, structural steel shapes increased 10.5% y/y, yet fabricated structural steel used in buildings were up just 3.4%. Reinforcing bars increased 1.7% y/y and pre-stressed concrete bridge beams rose by 3.4%. For reference, softwood lumber increased by 10.8% y/y, while wood trusses rose by 3.7%. For a reality check, we like to compare the BLS PPI with the actual price over time and as Fig. 8, structural shapes and Fig. 9, reinforcing bars illustrate, there is a pretty good fit.

Fig 7

Durable Goods Orders increased almost 23% in July, with a total dollar value of $300,220 million. The dramatic increase was due to Boeing airplane orders as the aircraft segment jumped more than 300% in July from June. This segment will see a more predictable growth rate beyond July. Other than that anomaly, there were increases across most of the durable goods categories. Nondefense core capital goods orders, which are a widely used indicator of business investment in the national GDP calculation, increased 60.8% in July, and 5.1% in June. Durable goods ended Q2 on a dramatic upswing coupled with the 4.2% expansion in GDP. Economists and analysts look forward to August’s advanced figures on September 25th to evaluate the data beyond July’s astonishing figures, (Fig. 10).

Fig 10

Global Business Confidence fell this week after three consecutive weeks of increasing confidence. Business confidence has seemingly plateaued in the first quarter of 2014 (Q1 average was 37.0%) and has stagnated around the 35% range. The YTD average is 35.1%. North American business confidence has also plateaued around the 42% range, with a slight increase in the second quarter, and a YTD average of 41.1%. Results were mixed across the board with slight changes except for Price Increase, which has seen a four point jump from this time in August. Hiring intentions have remained above 20% for the 50th consecutive week dating back to the first week of October 2013. This figure coincides with net job creation, which totaled 2.32 million since October 2013. There may be a strong correlation between the two, having the hiring intentions readings remaining strong during the release of previous month job creation, (Fig. 11).

Fig 11

Housing Permits and Starts: On a 3MMA basis, permits exceeded starts by 15,000 units in August but the disparity between single and multi-family continued. Single family permits were 2,000 less than starts as multifamily permits exceeded starts by 17,000 units, (Table 2). On a year over year basis single family starts were up by 4.5% as multifamily were up by 35.9%. The ratio of single to multi is now 1.82 which is a low not seen since 1986. This is a major shift in the preference of the consumer for rent over ownership which is presumably influenced by disinterest in housing as an investment, by job insecurity and the need for mobility, by student loan debt, by bank lending standards among others. This preference is evident across all regions. The growth of total residential starts was strongest in the Mid-West and weakest in the South, this represents a catch up as the South has had the strongest sustained growth since the recession. Multifamily starts have now fully recovered from the recession but the state of the single family sector is still dismal and at a level normal for recessions since 1960. At the present rate of growth it will be late 2018 before total starts reach 1.6 million units annualized, (Fig.12) and if the mix trend continues it will reach a level not seen since the early 1970s. The change in preference for apartments represents an opportunity for structural steel producers to increase the share of steel framing in a rapidly expanding market.

Table 2

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 09/18/14. Of the twenty seven indicators under consideration, the present situation of twelve are now positive by historical standards, nine are neutral and six are negative. There has been no change in the present situation since this analysis was last published on September 4th. As a point of reference when this analysis was first developed and published in February 2010, twenty indicators were negative, two were neutral and three were positive. We believe this is a quantitative measure of how the market situation has changed in 4 ½ years.

Overall trends are good with 22 of 27 indicators moving in the right direction, one had no change and four have negative trends. In most cases values are three month moving averages. This is an increase of one in the negative category since last published. The only directional change in the last two weeks was in the Broad Index value of the US $ which strengthened. We regard a strengthening $ as a negative trend because of its effect on net imports. Other points of note in the trends column are; Chicago shredded continued unchanged at $375 / gross ton for the second consecutive month and service center inventories of long products grew at an accelerated rate.

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 3

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