Key Market Indicators - September 30th 2016

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 September, 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 September 30th, 2016.

Present Situation

There was an increase of one positive and one negative since our last update on August 26th, which resulted in an increase of two neutral. Our intent in using the word neutral is to say that this indicator is considered to be in the mid-range of historical data. Changes that occurred in the last month were as follows. On September 29th the Bureau of Economic Analysis released the 3rd estimate of the growth of GDP in the 2nd quarter. On a year/year (y/y) basis, growth was 1.28 percent which was the lowest since Q2 2013 and caused us to reclassify this data point from neutral to negative. Consumer confidence was re-classified in the opposite direction from neutral to positive on the strength of the Conference Board report for September in which the three month moving average (3MMA) of the composite exceeded 100 for the first time since October last year. In the raw materials section the price of coking coal was re-classified from negative to positive based on the extremely rapid price escalation of the last three months. In the long steel product section the rebar import price CIF Houston was re-classified from neutral to negative. In the manufacturing section the ISM index was re-classified from positive to neutral as it fell below 52.0. There were no other changes in our view of the present situation.

We currently regard 9 of the 36 indicators to be positive, 16 to be neutral and 11 to be negative on a historical basis. The present situation of the general economy is considered to be neutral except for the value of the US $ which we consider to be negative from the point of view of net imports and consumer confidence which surprised on the upside in September. Both the SMU proprietary indexes are strong, and raw materials prices are mixed with iron units weak and coke and zinc strong. The present situation of the long and flat steel sectors are very similar except that service center shipments of long products continue to be very weak. Construction is neutral to weak and manufacturing in neutral to strong.

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 47.2 percent in October 2014 and steadily declined to 11.1 percent in the three months through last December. In 2016 there has been a gradual increase in the proportion of indicators that are currently positive and a decline of negatives. We currently still have a ho–hum present situation that has plenty of room for improvement. The real point that we are trying to identify is, “Which way is it going.”

Trends

Most values in the trends columns are three month moving averages to smooth out what can be very erratic monthly data. The proportion of indicators trending positive through September 30th was 50.0 percent with 50.0 percent trending negative and zero indicators unchanged. Between December and May there was a surge in positives from 44.4 percent to 70.6 percent. Since May there has been a deterioration back to 50 percent positive. Figure 2 shows the trend of the trends.

In October 2014 the proportion trending positive was 80.6 percent which coincided with the highest month of total steel supply since the recession. There was a steady deterioration through 2015. At the end of 2015 the proportion trending positive fell below 50 percent for the first time since March and April 2013. 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.

Trend changes in the individual sectors since our last update on August 26th are described below. (Please note in most cases this is not September data but data that was released in September for previous months.)

In the general economy, all indicators are trending positive. This may seem to conflict with what we wrote about GDP above but the economy is still growing albeit at a rate that is not at the historical norm. In the SMU index section both are trending negative. Buyer sentiment continued to decline slightly but is still historically very strong (Figure 3).

The service center excess inventory which is a proprietary SMU calculation reversed direction in July and August leading to a surplus of 234,000 tons. We regard an inventory surplus to be a sign of weak pricing power but at present the surplus relatively small and not considered to be an issue (Figure 4).

In the raw materials section the price of Chicago shredded declined in September as the price of iron ore increased. The price of coking coal shot up by over $80/gross ton and zinc was virtually unchanged. In the long products section the trend of total supply reversed course and contracted and the import price of rebar declined in September after having been stable in August. In the flat rolled section the only trend change was in the price of HRC imports into Houston which had been unchanged in August but declined by $32 in September. There were no changes in trends for the construction section. The only trend change in manufacturing was a reversal of the ISM index which contracted in August.

Trends in the September data are becoming of concern with only 50 percent heading in the right direction.

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.