Key Market Indicators - January 31 2017

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 January, 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 January 31st 2017.

Present Situation

There was a decrease of two negative and an increase of one neutral and one positive indicator since we last published on December 29th. Our intent in using the word neutral is to say that this indicator is considered to be in the mid-range of historical data. We currently regard 10 of the 36 indicators to be positive, 14 to be neutral and 12 to be negative on a historical basis. An overall view of the color codes in the present situation columns show that in every section the present situation is mixed suggesting a market that is looking for direction. Changes that occurred in the last month were as follows. The price of Chicago shredded continued to improve raising it into the neutral category. After rising dramatically in the period July through November last year, the price of coking coal took a dive in December and January falling from $310 on November 18th to $174 on January 20th. This put the price of coking coal back into the neutral zone. The price of HRC imports to the Gulf reached $540/short ton on January 27th and was re-classified as positive. Service center flat rolled months on hand increased in December and this data point was downgraded to neutral. Based on data from the Commerce Department, total construction, infrastructure and non-residential expenditures for November were upgraded from neutral to positive.

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 January. In 2016 the proportion of positives increased through the September data after which there was a leveling until once again the situation improved in January. Based on the proportion of indicators that we consider neutral we still have present situation with no particular direction with 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 January 30th was 55.6 percent with 44.4 percent trending negative and zero indicators unchanged. This was no net change from our last update on December 29th. 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 January 2015 and May of last year there was a surge in positives from 44.4 percent to 70.6. There was a negative turnaround between May and September when the proportion of indicators trending positive returned to 44.4 percent. In the fourth quarter the positive trends improved to 55.6 percent where it remained unchanged in January. 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 December are described below. (Please note in most cases this is not January data but data that was released in January for previous months.)

The general economy with the exception of commercial and industrial loan demand and the value of the US $ is trending positive. In the SMU index section, steel buyers sentiment continued to improve (Figure 3) but there was a minor reversal in service center excess which increased to 116,000 tons.

This is a proprietary SMU calculation. We regard an inventory surplus to be a sign of weak pricing power and at present the low surplus is not a problem (Figure 4).

In the raw materials section the price of iron ore declined slightly and the price of zinc made up most of the decline that occurred in December. We regard rising raw materials prices as positive and indicative of a strengthening market. In the long products section the only trend reversal was that net imports increased. In the flat rolled section, net imports did a reversal and declined. There were no other trend changes for flat rolled or long product sectors. In the construction sector the only change was that infrastructure expenditures reversed course and expanded. It may be that the $305 billion authorization approved by congress in December 2015 is starting to kick in. There were no trend changes in the manufacturing sector.

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 dir