SMU Key Market Indicators: Valuable Tool for Business Planning

The total number of indicators considered in this analysis is currently 36.

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 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 February 28th.

Present Situation

There was an increase of one negative since we last published this review on February 2nd, and a decrease of one in what we consider to be normal or neutral. We currently regard 4 of the 36 indicators to be positive, 15 to be neutral and 17 to be negative on a historical basis. Changes in the last month were as follows; the Chicago Fed National Activity Index, (CFNAI) which fell below negative 0.2 (our normal to poor threshold) in its December data returned to neutral in January. The first quarter report from the Federal Reserve dealing with bank lending standards produced a negative situation for demand for commercial and industrial loans, down from neutral in Q4 2015. Shipments of flat products from service centers declined in the January data and fell into our historically poor category. There were no changes to the present situation of construction and manufacturing indicators.

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 4 which is 11.1 percent. Through the course of 2015 there was not much change in the number of indicators that we considered to be historically negative, what happened was that the decline in the positive indicators occurred as a shift to neutral.

In the two months of 2016 there has been an increase in negatives which now stand at 47.2 percent. The present situation of the general economy with the exception of loan demand and the value of the US $ is OK. Not great and not unsatisfactory by historical standards. Last week’s update of the growth of GDP in Q4 improved from the first estimate of 0.69 percent to 1.0 percent, a change that was contrary to analysts’ expectations.

We still regard the proprietary SMU steel buyer’s index as positive and the service center excess as negative. All the raw materials prices currently have a negative present situation. The present situation of the long products market is slightly better than for flat rolled. In our analysis here, shipments and supply are based on SMA data for long products and AISI for flat products.

In summary a quick visual appraisal of the present situation shows that the general economy is basically neutral. Steelmaking raw materials are historically weak through January’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 and none of the manufacturing indicators on a present situation basis are currently negative. As we will see now in our trends analysis the situations of construction and manufacturing are reversing.

Trends

The number of indicators trending positive through February 28th was 18 with 16 trending negative and two unchanged. This was an increase of one unchanged and a decrease of one negative since our February 2nd update.

Most values in the trends columns are three month moving averages (3MMA) to smooth out what can be very erratic monthly data. Figure 2 shows the trend of the trends. There was a steady deterioration from the middle of 2014 through 2015. At the end of 2015 the proportion trending positive fell below 50 percent for the first time since March and April 2013. In the January and February data released the situation has improved and as of now 44.4 percent are trending negative. In October 2014 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 of that year.
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 through the 28th for previous months.)

In the general economy, the direction of the CFNAI reversed and trended positive. Both of the Steel Market Update proprietary indices reversed direction in our last update and trended positive a situation that was unchanged in this latest update. The SMU buyer’s sentiment index improved from 36.5 in mid-December to 41.7 in Mid-January and to 49.0 in mid-February as shown in Figure 3 and continues to be at a historical good level.

The calculation of service center excess inventory of sheet products which had trended positive in the October data trended negative in November then returned to positive in December and January. This excess is very high by historical standards which we regard as a leading indicator of weak pricing power (Figure 4).

There was one change in raw materials price trends in February. Chicago shredded increased in price in January and was unchanged in February which was a trend change from positive. We have lost our data source for Brazilian pig iron therefore this item has not been updated from our last report. In our next report we will begin to report the World Steel Association pig iron price. The price of iron ore reversed direction through February 12th and picked up almost $4. Coking coal moved in the opposite direction and experienced a price decline. The price of zinc continued to edge up slightly. In the long product section, there were no trend reversals in the data released in either January or February. In the data released in February for flat rolled, four out of five trended negative which was no change from the January data. There were also no trend changes in the construction or manufacturing sectors. Five of the six construction indicators are trending positive with one negative and two of the five manufacturing indicators are trending positive with three trending negative.

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.