Weekly Market Update May 16, 2013

Total supply of steel products was down by 4.8% in Q1 2013 from Q1 2012. Excluding rail and seamless tube, long products were down by 5.6% and flat products by 4.6%. This analysis is based on the AISI report AIS10 and Department of Commerce trade statistics, (Table 1).  The supply of structural shapes and rebar both increased as construction continued to gain momentum.   Products with a manufacturing orientation, wire rods, hot rolled bar, light shapes and cold finished bar all declined.   There was a very strong increase in structural tubing but this may not be a true reflection of the market since the independent tubers are not included in the AISI statistics.   The market share of total finished steel imports, (excluding semis) increased from 23.3% in March 2012 to 24.3 in March 2013, (Fig. 1).	Table 1
Unemployment U3 vs. U6: The U-3 unemployment rate for April was 7.5%, while the U-6 rate was 13.9%. U-3 and U-6 both measure unemployment data but with different definitions, (Fig. 2).  The U-3 is the official unemployment rate that is frequently referred to in the media.  Its definition is “total unemployed, as a percent of the civilian labor force”.  The underutilized U-6 measures “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force” (source: BLS).   Marginally attached workers are defined as those who are not currently looking for work but note that they would like to be employed. Both the U-3 and U-6 have been falling since the end of 2010, however the U-6 is significantly higher since it includes marginally attached workers.  This is an important statistic since there are 2.3 million persons marginally attached to the labor force and part time workers increased to 8 million in April.  These two numbers add to 10.3 million workers out of a total labor force of 155.238 million, roughly 6.6% being unaccounted for in the official rate.	Fig 2
Bank lending standards and Federal Reserve Senior Loan officer survey: In the April survey, domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months.  In the last three quarters, demand for commercial real-estate loans has been higher than at any time since the first quarter of 1998 and banks willingness to lend is approaching the pre-recessionary peak of the first quarter of 2005, (Fig. 3).  This is one of the pillars that will support the recovery of non-residential building construction.   The data for commercial and industrial loans is broken down into large firms with > $50 million of annual revenue and those less than this size.  In both cases, more banks reported an increase in demand for C&I loans, particularly from small firms.  Banks willingness to lend also increased particularly to large firms, (Fig. 4 & Fig. 5).  Banks that eased their C&I lending policies generally cited increased competition for such loans as an important reason for having done so.	Fig 3
U.S. scrap exports: Year to date through March the U.S. exported 1.967 million tonnes of scrap, (Fig. 6) down 8.6% y/y.  Turkey continues to purchase the largest volume (0.564 MMT) but the y/y growth rate is only up 0.4%.  March volume was down 14.5% from two years ago. The next largest customer was Taiwan (0.272 MMT), down 21.4% y/y followed by South Korea (0.227 MMT), down 35.6% y/y, (Fig. 7). A surprise large volume entrant was Egypt whose purchases leapt 418% y/y to 0.200 MMT, close to the amount purchases in all of 2012.   China purchased 0.179 MMT, down 41.1% y/y. The U.S. dollar has been appreciating against the Broad index (a basket of trade weighted currencies). The result is increased scrap price making the U.S. a less attractive source for foreign buyers.  Europe steel capacity utilization remains soft resulting in abundant supply. In addition since 2010 Russia has been gradually relaxing its trade embargo on scrap exports. This has resulted in a shift in scrap trade patterns.  Turkey for example has shifted more orders to Europe and Russia and away from the U.S., (Fig. 8).	Fig 6
Scrap benchmarks: Chicago shredded, east coast export shredded and Rotterdam shredded scrap continue to track well. The differential range between the highest and the lowest metric is just $6 in May, (Fig. 9). Comparing Brent crude oil pricing to Chicago shredded indicates that shred is currently undervalued. The coincidental (nothing in common other than both being internationally traded commodities) index has a remarkably high 0.934 correlation coefficient, (Fig. 10).  Chicago shred tracks reasonably well (scrap may be substituted for iron ore and visa-versa) with iron ore (IODEX 62% delivered China).  Ore has been running higher than shred for some time but the gap is narrowing, (Fig. 11).  Scrap price is inversely related to the value of the U.S. dollar, (Fig. 12). This is because scrap is traded internationally in U.S. currency.  The dollar has been strengthening against the Broad index.	Fig 9
Steel Demand Indicators; Table 2 is a snapshot of the market situation on 05/14/13.  In most cases values are three month moving averages. Only 5 of 27 “Present” situation indicators are green, indicating strength by historical standards.  Nine are still depressed of which five are the construction indicators.  The trends analysis shows that all but two of the construction and manufacturing indicators continue to have positive momentum.  The situation for the steel long products sector is mixed, service center daily shipments declined for the 10th month in a row based on a 3MMA y/y.  Mill shipments of long products in Q1 were down year over year.  Overall trends are good with 18 of 27 indicators moving in the right direction.  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 2

This weeks contributors include; Laura Remington, Bryan Drozdowski, Peter Wright and Steve Murphy.