Key Market Indicators - November 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 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 30th, 2016.

Present Situation

There was an increase of three negative, a decrease of two neutral and a decrease of one positive since the end of October data. 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. The Chicago Fed National Activity Index fell below negative 0.2 on a three month moving average (3MMA) basis which changed our assessment from neutral to negative. Loans for commercial and industrial use experienced a decline in demand in the fourth quarter and our assessment changed from neutral to negative. In the Steel Market Update indices section, our assessment of service center excess changed from positive to neutral. There were no changes to our perception of the raw materials, long and flat rolled steel sections, or construction indicators. In the manufacturing section our perception of capacity utilization changed from neutral to negative as the value fell below 75 percent.

We currently regard 8 of the 36 indicators to be positive, 15 to be neutral and 13 to be negative on a historical basis. The color codes show that in every section the present situation is mixed to a greater degree than we can ever remember suggesting a market that is looking for direction.

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 up until the November data there was been a gradual increase in the proportion of indicators that were regarded as positive and a decline of negatives. Based on the proportion of indicators that we consider neutral we 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 November 30th was 50.0 percent with 50.0 percent trending negative and zero indicators unchanged. 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. Between December 2015 and May this year there was a surge in positives from 44.4 percent to 70.6 percent. There was a negative turnaround between May and October when the proportion of indicators trending positive fell to 47.2 percent. There was an improvement back to 50 percent in November. Figure 2 shows the trend of the trends and 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 the end of October are described below. Please note in most cases this is not November data but data that was released in November for previous months.

The general economy is mixed at present. At the end of September all seven indicators were trending positive, this declined to five in October and to four in November. In both months the Chicago Fed index declined and the dollar strengthened. The Federal Reserve Senior Loan officer survey for the 4th Q indicated a deterioration in loan demand for the commercial and industrial sector. There were no trend changes in the SMU index section. The sentiment of sheet steel buyers has declined steadily from its all-time high on June 30th 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. Through October (latest data from the MSCI), the surplus fell to 10,000 tons. We regard an inventory surplus to be a sign of weak pricing power and at present the virtual lack of surplus is encouraging. (Figure 4).

In the raw materials section all indicators are trending positive and the prices of coking coal and zinc continue to skyrocket. In the long products section the only trend reversal was the improving price of rebar imports into Houston. In the flat rolled section the price of HR coil into Houston also reversed course and improved, there were no other trend changes for flat rolled products. There were no changes in trends for the construction or manufacturing sections. Both are mixed at present with manufacturing trending to the downside.

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.