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What Factors Will Drive Cliffs Natural Resources' 2017?

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Part 10
What Factors Will Drive Cliffs Natural Resources' 2017? PART 10 OF 10

How the US Steel Demand Outlook Could Affect Cliffs

US steel demand

Since US steel demand is the major driver behind steel companies’ volumes and prices, it’s vital for Cliffs Natural Resources’ (CLF) investors to track these data.

The construction sector is the leading steel consumer in the United States (SPY). It accounts for ~40% of total steel demand, including both residential and non-residential construction.

How the US Steel Demand Outlook Could Affect Cliffs

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Residential demand indicators

Building permits and housing starts act as leading indicators of residential construction activity. They both fell more than expected in November 2016. While housing starts fell 18.7% to 1.1 million units compared to October, building permits fell 4.7% to 1.2 million units. These falls exceeded analysts’ forecasts.

Non-residential construction

The ABI (Architectural Billing Index) is a leading indicator of non-residential construction spending and is based on a survey of architects. An index value of above 50 indicates a rise in billing. Higher architectural billing generally translates into increased future construction spending. The ABI leads actual construction spending by about nine to 12 months.

The ABI stood at 50.6 in November 2016 compared to 50.8 in October. Before October, the index had been below 50.0 for two consecutive months. The change reflects a slight rise in design services.

Impact on steel demand

Higher construction activity leads to more demand for steel products, which is positive for steel companies as well as for Cliffs. Nucor (NUE) is the largest rebar supplier in North America. Commercial Metals Company (CMC) and Gerdau (GGB) are the other leading rebar suppliers.

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