SMU Analysis: Key Market Indicators Weaken in May

Please refer to Table 1 for our view of the present situation and the quantitative measure of trends. Readers should regard the color codes in the present situation column as a visual summary of the current market condition. The “Trend” columns of Table 1 are also color coded to give a quick visual appreciation of the direction the market is headed. All results are the latest available as of May 31, 2019.

Present Situation

The May data indicates that our view of the present situation is still strong, but there has been deterioration since February. Figure 1 shows the history of the present situation data since January 2010 on a percentage basis. On the far left of the chart is the August 2008 situation immediately before the recession struck the steel business in September that year. The May data suggests that of the 36 indicators, 19 are currently positive, 11 are normal and 6 are negative. This was a decrease of two in the number of indicators that we consider normal, an increase of one positive and an increase of one negative. Our intent in using the word normal is to say that this indicator is in the mid-range of historical data. In the general economy section, we revised demand for commercial and industrial loans from normal to negative and we revised the producer price index of commodities from normal to positive. There were no changes in the long products or sheet steel sections or in the manufacturing section.

Trends

Most values in the trends columns are three-month moving averages (3MMA) to smooth out what can be very erratic monthly data. Trend changes in the individual sectors are described below together with some general comments. (Please note that in most cases this is not May data but data that was released in April for previous months.)

Figure 2 shows the trend of the trends and the pre-recession situation at the far left of the chart. In May 2019, 18 indicators were trending positive and 18 negative. This was the worst result since October 2016. Nine indicators reversed direction in the May data resulting in a net decrease of one positive trend and an increase of two negatives. There has been a gradual deterioration in the number of positively trending indicators since February 2018.

Our observations about trend changes in the May data are as follows: In the general economy, the yield spread and demand for commercial and industrial loans deteriorated and bank lending standards improved. In the raw materials section, the price of coking coal improved and of pig iron deteriorated. In the two steel sections, the only change was that the import market share of long products deteriorated. In the construction section, the producer price index of commodities improved, and in the manufacturing section the ISM index and manufacturing capacity utilization both deteriorated.  

As a reality check for this report, we include here Figure 3, which is SMU’s sentiment index. Readings are developed through the Steel Market Update market surveys conducted twice per month. The SMU Steel Buyers Sentiment is a measure of the current attitude of North American buyers and sellers of flat rolled products regarding their company’s opportunity for success in today’s market. A reading above zero indicates a preponderance of buyers having a positive attitude. The index has been gradually deteriorating since mid-February last year but is still at positive 52.17. A result of zero would be considered neutral.

We believe a continued examination of both the present situation and direction is a valuable tool for corporate business planning. Figures 1 and 2 both show the pre-recession situation in August 2008. The trends analysis shows that the steel market was going over a cliff, but the actual values of the indicators at that time were still good with only 23 percent registering as historically negative.

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 the market is headed and is designed to describe the situation on a specific date. The chart is stacked vertically to separate the primary indicators of the general economy, of raw material prices, of both sheet and long product market indicators, and 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 it is pointing. 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 or vice versa depending on the overall situation and direction of the market. The present situation is subdivided 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.