Highlighting the Leading Indicators
Service Centers Should Track

By Josh Spoores, founder and chief analyst at Steel Reality, a consulting firm specializing in the market for flat-rolled and plate steel. Steel Reality publishes two regular reports: This Week in Steel and Leading Steel Indicators. For more information, visit www.steelreality.com.

Knowledge is of no real value if all you can tell me is what happened yesterday.” Well spoken words from Richard Feynman, a Nobel-awarded American physicist who worked on the Manhattan Project. 

Those words are also fitting for service center executives striving to keep track of all the daily, weekly and monthly economic data that drives steel prices. Many are just too busy handling the daily needs of their businesses and end up following headlines or perusing the occasional article on construction spending or steel imports.

The problem in tracking this information is one of information overload. Every week, a slew of new information is released from public and private sources that show what happened in the prior month. This data can also foreshadow changes in steel prices, but only if the time is taken to dive into and understand the details.   

Traditionally, a lot of attention is given to indicators such as the Architecture Billings Index or the national Purchasing Managers Index, which show activity in the steel-intensive areas of construction and manufacturing. However, these indicators have a lousy track record in terms of leading the price movement of steel. In fact, the primary formula for understanding where steel prices are headed is to understand that prices are driven by the perceived balance of supply and demand. 

The supply side of that formula is best understood by recognizing that service center inventories have the ability to act as the primary source of demand during times of stock accumulation and as a source of competitive supply during times of stock depletion. One leading indicator covering this shift in inventory supply is the “Apparent Excess” model, proprietary to Steel Reality, which compares shipment trends to inventory.

Another indicator to watch is imports, which can add to overall supply. Like most information, import data is published with a lag of up to two months. Steel Reality’s “Relative Prices” model compares domestic steel prices with global markets to understand if imported steel is likely to be more or less competitive vs. domestic steel. Changes in this model can lead the market by three to six months.

On the demand side of the formula, some leading indicators focus on the construction and manufacturing areas. Construction and manufacturing typically represent more than 80 percent of domestic steel demand. During these times of overall weakness in the construction markets, small fluctuations in manufacturing can drive price changes.

Leading indicators of the construction market include the Architecture Billings Index, a guide to construction levels in nine to 12 months, as well as the Moodys/MIT price index of commercial property. Another indicator that can gauge construction activity, as well as coming demand for appliances, is housing starts.

Residential construction directly impacts steel demand by 4 to 5 percent. Appliances and furniture account for 2 to 3 percent of that demand. Homebuilding also stimulates markets for building materials, equipment and machinery. 

Good leading indicators on the manufacturing side of demand include regional manufacturing surveys or the survey on business conditions conducted by the Precision Metalforming Association. One timely survey that conveys a variety of information is the ISM Steel Buyers Forum, featuring information from buyers who purchase a minimum of 50,000 tons of steel.

Steel prices are volatile today, but the trends are predictable for those who take the time to study the data and know where to look.

July 2016: The Final Bell for Retiring Hannah
More...
 
Pause
July 2016: How Will Steel Evolve in the Future?
More...
Fall 2015: Cutting & Sawing Equipment
More...
Summer 2016
More...
 
Pause
DoALL Launches Four New Saw Lines
More...
Behringer Expands Band Saw Line
More...
HYDMECH Saw Cuts Banded Material
More...
KASTO Pairs Band Saw with Moveable Table
More...
Marvel 600A-PC3 Designed for Bundle Cutting
More...
 
Pause
Privacy Statement  |  Terms Of Use
Copyright by Metal Center News



Saturday, August 27, 2016