Key Market Indicators - November 30, 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. The “Trend” columns of Table 1 are also color coded to give a quick visual appreciation of the direction in which the market is headed. All data included in this table was released in November, 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 November 29th.

Present Situation

There was an increase of one negative and a decrease of one positive indicator in our overall evaluation of the present situation. We currently regard 5 of the 36 indicators to be positive, 17 to be neutral and 14 to be negative on a historical basis. Changes in the last month were as follows; consumer confidence fell below 100 in November and we re-classified it from positive to neutral. The capacity utilization of flat rolled products fell below 78 percent and we re-classified it from neutral to negative. We now have 5.5 years of this analysis and have graphed the changes in the present situation and trends over time. Figure 1 shows the change in our assessment of the present situation since January 2010 on a percentage basis.

The number of indicators classified as positive peaked at 17 in October last year and has steadily declined to the present value of 5 which is 13.9 percent. There has not been much change in the number of indicators that we consider to be historically negative in the course of 2015, what has happened is that the decline in the positive indicators has occurred as a shift to neutral. We still regard the proprietary SMU steel buyer’s index as positive though the situation is deteriorating. All the raw materials prices currently have a negative present situation. The present situation of the long products market is marginally worse than for flat rolled, the decider is service center shipments which are historically low for longs but in the normal range for flat rolled. The capacity utilization of both the long product and flat rolled mills is now negative, this is based on shipments, not on crude steel production which is the basis of AISI and WSA calculations. In our analysis here, comparing capacity utilization and supply of the two steel sectors is not apples and apples because the performance of the long product mills is based on SMA data and of the flat rolled mills on AISI data. There were no changes in our perception of the present situation of the construction or manufacturing industries. A quick visual appraisal of the present situation shows that the general economy is basically neutral. Steelmaking raw materials are historically weak through November’s data. Both steel sectors are neutral to weak. Construction continues to be weak to neutral and manufacturing continues to be neutral to strong. No indicators are currently rated positive in the construction category. None of the manufacturing indicators on a present situation basis are currently negative.

Trends

The number of indicators trending positive through November 30th was 17 with 19 trending negative. His was no change from our October 31st update. Figure 2 shows the trend of the trends.

There has been a steady deterioration since the middle of last year and in the latest two months data the proportion trending positive fell below 50 percent for the first time since March and April 2013. In October last year the proportion trending positive was 80.6 percent which coincided with the highest month of total steel supply since the recession. Figure 2 shows the pre-recession situation at the far left of the chart. In August 2008 over 2/3 (69.2 percent) of our indicators were trending negative and the steel market crashed in September.

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

There were three changes to the direction of trends in the general economy. Consumer confidence reversed course as mentioned above. Demand for commercial and industrial bank loans became less positive though still expanding and the broad index value of the US $ took a breather and contracted for the first time since June. We regard a weakening dollar as positive because of its effect on net imports. The trend of the Steel Market Update buyer’s sentiment index continued to be negative with a three month moving average of 39.8 on November 29th but as shown in Figure 3 is still at a historical high level.

There was a slight improvement in the service center excess inventory of sheet products. Service center excess which increased to 767,000 tons in August increased again to 1,038,000 tons in September then declined to 1,024,000 tons in October. We regard this inventory level as a leading indicator of weak pricing power (Figure 4).

In the steel raw materials section, all the materials that we examine except pig iron weakened in November. The average price of pig iron from Brazil’s N and S ports collapsed in October to an average of $162.50 but picked up $10 in November. In October, scrap prices declined by $50/gross ton and we stated in our last report that in the immediate future we expected scrap to take a breather. In November, scrap declined a further $20 and we now regard that price as oversold. In the long product section, net imports reversed direction and declined slightly to what is still a very high level. In the flat rolled sector capacity utilization trended negative for the first time since June. There was no change in direction of trends of the construction or manufacturing sectors. Both with only one exception each are trending positive.

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. Our evaluation of the present situation is subjectively based on our opinion of the historical value of each indicator. There is nothing subjective about the trends section which provides the latest facts available on the date of publication. 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 situation and 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 cases 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.