Key Market Indicators- March 1 2015

Please refer to Table 1 for the view of the present situation and the quantitative measure of trends. Readers should regard the color codes in the present situation column as a quick look at the current market condition. This is a subjective analysis based on our opinion of the level of each indicator. The “Trend” columns of Table 1, are also by their color codes designed to give a quick visual appreciation of the direction in which the market is headed. However the quantitative analysis of the value and direction of each indicator over time are the latest “facts” available. There is nothing subjective about the trends section which is designed for those readers who want to dig deeper. All data included in this table was released in February, the month or specific date to which the data refers is shown in the second column from the far right and all data is the latest available as of March 1st.  

Present Situation: There were two change to the present situation since this analysis was last published on January 30th.  The number of indicators currently positive is 11, the number considered neutral is 12, and the number rated negative is 13. The changes we made were to service center inventories of flat rolled which had been very high at the end of December and the producer price index of commodities was re-classified from positive to neutral. A quick visual appraisal shows that the general economy is good and steelmaking raw materials are historically weak. The present situation of the flat rolled steel sector continues to be better than for long products. Capacity utilization of the long product mills is classified as negative and of the flat rolled mills as neutral. Net imports continue to be high for both sectors. Flat rolled apparent supply continued to be positive through December’s data, (latest available from AISI) but as we have reported elsewhere, imports absorbed almost all of the market growth.

Construction continues to be weak to neutral and manufacturing continues to be neutral to strong. Both nonresidential and residential construction starts are rated historically negative as is the total number of people employed in construction. No indicators are currently rated positive in the construction category. The falling price of commodities caused this indicator to be re-classified as neutral from positive this month. None of the manufacturing indicators on a present situation basis are currently negative. Four are positive and one, manufacturing employment is neutral.

Trends: Twenty three of thirty six indicators are still trending positive which was an increase of one from January’s update. The number of negatively trending indicators declined by two from 14 to 12. One indicator, the price of pig iron was unchanged in February.  

Changes in the individual sectors are described below. (Please note in most cases this is not February data but data that was released in February for previous months.)

In the general economy, the Commerce Department released the second estimate of GDP for the 4th Q of 2014 on Friday and revised the growth rate down from 2.62% to 2.20%.  In Table 1, GDP growth is reported as 2.37% which is the year / year rate and which we believe is more indicative of the real situation. On this basis the revision to Q4 brought the y / y GDP down from the first estimate of 2.49%. Consumer spending was a major driver in Q4, contributing 2.8 percentage points to growth. This was driven by the continuing improvement in the employment statistics and the plunge in gas prices.

The Federal Reserve Senior Loan Officer Survey reported an improving trend for demand for commercial and industrial loans in Q1 2015, this was a reversal of the trend reported for Q4 2014.

The trends of both of the SMU proprietary indexes reversed course in a positive direction in the latest data. The SMU buyers sentiment index which had been declining since it’s all-time on September 15th eked out a small gain in the February 12th result and is still historically strong, (Figure 1). This index is a measure of the current attitude of North American buyers and sellers of flat rolled products regarding their company’s opportunity for success in today’s market.

The service center excess declined in January, (Figure 2). This indicator was developed by SMU for sheet products and when in surplus as it is today indicates rising inventories and falling pricing power. SMU is forecasting an excess through May, which is as far out as we look in this context.

Trends in raw materials changed significantly in the latest data. After rising by an inexplicable $9.00 in January, Chicago shredded crashed by $89 in February and came almost back into line with iron ore as we predicted it would in this report last month. The IODEX price of iron ore also reversed course in February, January’s small increase became a $4.00 negative on February 23rd. The prices of coking coal and zinc both continued to decline through late February data. The price of Brazilian pig iron (an average of Brazilian N and S port exports FOB) which had been inexplicably defying the iron ore logic, declined abruptly to $335 on January 23rd from the December value of $372 then in February remained unchanged.

In the long products section, apparent supply reversed course from positive year over year growth in December to negative in January. Capacity utilization continued to trend negatively. The other indicators trended positive, net imports were down, scrap exports were down and both the MSCI shipments and inventories had encouraging results in January. 

In the flat rolled section the only trend reversal was for net imports which reversed course from growth in December to contraction in January. Capacity utilization continued to decline and apparent supply continued to increase. Service center trends on a y / y basis for flat rolled continued to trend positive as they have done every month since September 2013.   

In the construction section there were no changes in the direction of trends, only one indicator, the price of commodities is trending negative. We regard this indicator as a driver of industrial construction which is still strong driven by energy projects which have yet to be hit by the decline in the price of oil. Nonresidential and residential construction starts continue to improve but as we have reported elsewhere they both have a long way to go.

The seven month string where all manufacturing trends were positive was broken in December when the ISM index reversed direction and experienced a small, 0.1 decline. In January that decline continued when the three month moving average of the index fell a further 0.4 to 57.7 still a historically strong result. In February the decline continued to 55.4. The industrial production index and auto production continue to expand at a 4.7% and 4.8% rate respectively. Manufacturing employment grew by 228,000 year over year, less than construction which added 308,000 positions.

The key indicators analysis is still looking good. SMU has several benchmark analyses that show steel demand has recovered more slowly than the general economy and is still not where it should be at this stage of a recovery. This is because the recession in non-residential and housing construction was so extreme. Steel supply is now beginning to close the gap as construction slowly picks up the pace but imports are taking up almost all of the demand increase.

We believe a continued examination of both the present situation and direction is a valuable tool for corporate business planning.

Explanation: The point of this analysis is to give both a quick visual appreciation of the market situation and a detailed description for those who want to dig deeper. It describes where we are now and the direction in which the market is headed and is designed to give a snapshot of the market on a specific date. The chart is stacked  vertically to separate the primary indicators of the general economy, of proprietary Steel Market Update indices, of raw material prices, of both flat rolled and long product market indicators and finally of construction and manufacturing indicators. The indicators are classified as leading, coincident or lagging as shown in the third column.

Columns in the chart are designed to differentiate between where the market is today and the direction in which it is headed. It is quite possible for the present situation to be predominantly red and trends to be predominantly green and vice versa depending on the overall direction of the market. The present situation is sub-divided into, below the historical norm (-), (OK), and above the historical norm (+). The “Values” section of the chart is a quantitative definition of the market’s direction. In most cased values are three month moving averages to eliminate noise. In cases where seasonality is an issue, the evaluation of market direction is made on a year over year comparison to eliminate this effect. Where seasonality is not an issue concurrent periods are compared.  The date of the latest data is identified in the third values column. Values will always be current as of the date of publication. Finally the far right column quantifies the trend as a percentage or numerical change with color code classification to indicate positive or negative direction.