Weekly Market Update - January 26, 2017

Non-Residential Starts (Dodge Analytics): Square foot starts present a non-residential construction (NRC), market that was down in December on both 3 month y/y (-3.7%) and 12 month y/y (-6.7%) metrics, (Table 1). Looked at in expenditure terms, starts posts positive growth on both time comparisons, +22.5%, 3 months y/y and +4.4%, 12 months y/y, (Table 2). Figure 1 charts starts data in both dollar and square feet from 2002 to present. Note the arrows which show strong growth in expenditure terms as opposed to declining growth in square foot terms.

Figure 2 plots dollars per square foot, which ranges from a low of $115 / square feet in January 2002, (average $139 in 2002) to a high of $269 / square feet in December 2010 (average $259 in 2011). We apply a construction cost inflation adjustment to the expenditure data (constant 2010 dollars), but this does not correct for variance in project type. Since there is a large variance in the cost per square foot, expenditure starts do not give a sound outlook of future steel demand for NRC. For this reason, we prefer to use square feet starts because it gives an inflation proof, project resilient view into future demand for long product steel.

Where expenditure starts are valuable is for projects that are not under roof such as bridges, power transmission and sewer and water treatment facilities which cannot be measured square feet terms. Table 3 presents NCR expenditures for infrastructure projects. For the 12 months ending December the total expenditure was $812.7 Bn down 9.8% y/y. On a 3 month y/y basis, infrastructure projects jumped by 13.7% led by an 81.6% surge on streets and road spending and a 63.6% swell in other infrastructure project outlays. Momentum was strong at +23.5%.

Table 1

U.S. Industrial Construction Starts: January starts posted $189.9 Bn, down 9.7%, 12 months y/y. On a 3 month year on year basis starts rose 7.7%, pushing momentum to a positive 17.5%. In total of the 12 project categories, 9 recorded growth on a 3 month year on year (y/y) basis, while only six saw growth on 12 month y/y basis.

Triple digit surges were recorded for both Petroleum refining and Alternative fuel, (Table 4). Over 12 months Petroleum refining was up 91.3%, while Alternative fuel fell 1.3%. Three other project group approached double growth 3 months y/y including Transmission oil & gas (+98.9%), Chemical processing (+99.4%) and Production oil & gas (+85.1%). Industrial manufacturing also recorded solid growth, up 50.2%, 3 months y/y. On the downside, Power projects plummeted 84.5% on a 3 month y/y and were off 35.4% over on a 12 month y/y comparison. Pulp, paper & wood, Terminals and Metals & minerals also recorded declines for both 3 and 12 month y/y comparisons.

Figure 3 illustrates US industrial starts by consensus region showing the 3 month y/y change in percent as well as the 12 month expenditure. The nation as a whole saw industrial starts increase by 7.7% y/y. However, when looked at on a regional comparison, there was tremendous volatility. Regions recording increased industrial construction starts include; The Southwest (+95.6%), the Northeast (+54.6%) and the Mid-Atlantic (+145.2%). All other regions recorded declining activity 3 months y/y. The increase in the Southwest which had posted 14 consecutive months of percentage point decline on a 12 months y/y measure is due to a resurgence in energy related projects as the price of West Texas Intermediate has doubled in price from its low of $26.21 per barrel on February 2, 2016 to today’s price of $53.45 per barrel, (January 26, 2017).

Canadian Industrial Construction Starts fell 24.7%, 12 months y/y. Projects have trended downward since the end of the oil sands boom between 2012 and 2014, (Figure 4). The December 2016 rolling 12 month total was $13.9 Bn. In 2015 the total was $29.5 Bn and it was $56.0 Bn in 2014. The 12 month running total peaked in 2013 at $77.5 Bn. A continued revival in energy prices and industrial manufacturing projects will help reverse the downward slide.

Table 4

Figure 3

U.S. Housing Starts and Permits: Total housing starts were reported at a seasonally adjusted annual rate of 1,135,000 for the month of December, on a 3MMA basis, down 6.7% from the November rate. Single family housing starts declined 9.1 % 3MMA y/y, while multi-family fell 1.6% 3MMA y/y, (Table 5).

Figure 5 presents the long term view of housing starts for both single and multi-family back to the year 2000. At an approximately annual 800,000 single family rate, we are still 50% below the 1.2 million rate of 2000 and just 44% of the peak 1.8 million rate of 2006. Multi-family on the other hand at an approximately annual 380,000 unit rate has far exceeded its 200 through 2008 average of 297,000 units.

A forward looking gage of future housing construction can be gained by examining housing permits data. Permit activity is down 0.5% on a 3MMA y/y look, with single family off 7.3% but multifamily regaining traction, up 11.7%, 3MMA y/y.

Regional data for both permits and starts in included in Table 5. Aggregate starts were down in three of the four regions. The North East was the only region to record growth up 23.4% 3MMA y/y, pulled up by a 53.7% surge in multi-family starts. Figure 6 compares the four regional growth curves from 2011 to present. The greater slope of the South illustrates the strong migration to this region of the US which according to the Census Bureau is expected to continue.

Inventories of homes was 4.2 months of supply (combined new & existing), in November. New home inventory was not available at publishing time but existing inventory fell sharply to 3.6 months, so total inventory is very likely less than 4 months’ supply. This is low by historic standards and is down 7.4% y/y, (Figure 7).

Foreclosures are approaching pre-recession lows, (Figure 8) reaching 85,919 in December, a 13.2% y/y decline and the lowest total since June 2006. Low inventory and low foreclosure totals coupled with low interest rate are combining to drive prices up.

Nationally the median price of houses sold including land was $305,400 in November, up 0.4% month on month and up 4.9% year on year.

Table 5

Figure 5

Figure 6

China Domestic Steel Prices: China’s domestic steel prices were volatile through 2016. Peaking in April, falling every week until the end of May, then rising through the end of the year and hitting the highest point the week ending December 14th, 2016, as shown in Figure 9.

Chinese steel long product prices rose over the past 2 weeks. Domestic steel demand waned as destocking, prior to the Chinese New Year Holiday, pushed inventories higher. Although seasonal influences and high inventories drove January domestic prices down compared to one month ago, prices have skyrocketed year over year, (Table 6).

Historically exported steel prices have exceeded domestically sold steel prices. As an example; during the summer of 2008 exported Chinese steel exceeded domestic prices by more than $150 per ton. Five years later, in 2013 China shifted their pricing strategy and exported steel products fell below domestic prices. Data collected by the CRU reported January exported beam priced $26 per ton below domestically sold beams. Likewise, exported wire rod was priced $26 per ton below domestic and exported rebar was priced $56 per ton below domestically sold material. Of course China does not ship all of its steel exports to the US, but the massive volume of exported steel impacts other countries which in-turn export to other markets to include the US.

Figure 9

Oil and Gas Prices and Rig Counts: The good news is that in the first three weeks of 2017, oil and gas rigs counts in both the US and Canada have positive year over year growth. It’s been two years since the US oil rig count had positive y/y growth and six years since that was the case for gas.

Figure 10 shows historical oil and gas prices since January 2000. The daily spot price of West Texas Intermediate, (WTI) rose through $50 on December 8th and has stayed above that level ever since. The price had a recent high of $54.01 on December 28th and settled back to $52.45 on January 17th, Brent closed at $54.68 on the same day. Data source is the Energy Information Administration, (EIA). The price of natural gas, delivered the Henry Hub had a recent low of $2.22 on November 11th but by December 7th had shot up to $3.69 / MM BTU. By January 13th the price had slid back to $3.27.

The total number of operating rigs in the US and Canada on January 20th was 1,035 which was up from a low of 445 on May 27th. Figure 11 shows the Baker Hughes US Rotary Rig Counts for oil and gas equipment in the US through January 20th (Explanation below). The uptick in the US oil rig count is now well established having increased from 316 on May 27th to 551 on January 20th. The gas rig count is gaining traction and on January 20th was 142, up from a low point of 81 on August 5th.

Figure 10

Contributors this week include; Laura Remington, Peter Wright and Steve Murphy