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Does Further Downside Await Cliffs Natural Resources?

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Part 4
Does Further Downside Await Cliffs Natural Resources? PART 4 OF 10

Why Current US Steel Demand Indicators Are Worrying for Cliffs

US steel demand

Demand drives production. The same is true for US (DIA) (DOW) steel demand, which is the major driver of US steelmakers’ (SLX) volumes and prices. 

Remember, these steelmakers are the companies to whom Cliffs Natural Resources’ (CLF) sells its final product. Therefore, it’s important to track steel demand data.

Why Current US Steel Demand Indicators Are Worrying for Cliffs

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Demand indicators

Housing starts and building permits are the leading indicators of residential construction activity. The data for housing starts weren’t particularly good in April 2017. According to the US Department of Commerce, housing starts fell 2.6% annually to 1.2 million units. They’d fallen 6.6% in March as well. Since April, home building has fallen to its lowest level since November 2016.

US building permits also fell 2.5% month-over-month to 1.2 million units in April. This was, however, a rise of 5.7% year-over-year (or YoY).

The ABI (Architectural Billings Index), which is a leading indicator of non-residential construction spending, fell to 50.9 in April, compared to 54.3 in March.

How’s steel demand shaping up?

The construction data and the ABI have raised some concerns about the slowdown in the US construction market. Market participants, however, expect housing construction to rebound led by strong job and wage gains.

As promised by President Donald Trump, a boost in infrastructure investment could also lead to a spur in non-residential construction. Higher construction activity is conducive to steel demand, which bodes well for steel companies and for Cliffs Natural Resources.

Nucor (NUE) is the largest rebar supplier in North America. Commercial Metals Company (CMC) and Gerdau (GGV) are other leading rebar suppliers. U.S. Steel Corporation (X) is a leading steel producer in the United States.

Next, let’s look at the trend in US steel prices, which could affect realized prices for Cliffs’ customers.

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