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Here's What Could Drive Cliffs Natural Resources Stock in 2017

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Part 5
Here's What Could Drive Cliffs Natural Resources Stock in 2017 PART 5 OF 11

Cliffs Natural Resources: How US Steel Demand Is Progressing

US steel demand

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

The construction sector is the leading steel consumer in the United States (SPY). It accounts for ~40.0% of the total steel demand, including residential and non-residential construction.

Cliffs Natural Resources: How US Steel Demand Is Progressing

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Demand indicators

Building permits and housing starts act as leading indicators of residential construction activity. The data for housing starts came in worse than expected in January. Starts fell 2.6% compared to a rise of 11.3% in December 2016.

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

The ABI was 49.5 in January 2017 compared to 55.6 in December 2016. That implies a fall in design services. However, billing inquiries were strong at 60.0 compared to 57.6 in December 2016. Market participants are seeing this as a one-off event rather than the beginning of a downtrend.

Impact on steel demand

President Donald Trump said he intends to spend $1.0 trillion on infrastructure. So during his presidency, we could see higher allocations to infrastructure spending. Trump also reaffirmed his commitment to have companies use US manufactured steel products for pipelines.

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

Next, we’ll look at the trend in US steel prices, which could impact the realized prices for Cliffs’s customers.

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