US steel consumption
As per the World Steel Association (or WSA), US (SPY) steel consumption grew at 11.7% last year. US steel demand grew at the fastest pace among the major steel-consuming countries. However, for this year, the WSA expects US steel consumption to decline 0.4% over the previous year. Demand slowdown from the energy sector, which accounts for almost 10% of US steel consumption, is the prime reason behind the slowdown in steel demand.
Non-residential construction spending
The construction sector accounts for over 40% of US steel consumption. Non-residential construction spending makes up two thirds of the total construction spending. Non-residential construction spending has been on an uptrend, rising 4.5% in the first three months of the current year.
The architectural billing index is a leading indicator of non-residential construction spending. Lower architectural billing generally translates into lower future construction spending. This index leads the actual construction spending by around nine to 12 months.
The previous chart shows the recent trend in the architectural billing index. The index fell below 50 in the latest reading in April. This is the second time in the current year that this index has dipped below 50. A reading below 50 is associated with a decline in architectural billing. The index went below 50 only once last year.
Lower architectural billing would negatively impact future non-residential construction spending. The sector is a key end consumer for steel companies like U.S. Steel (X), Nucor (NUE), and POSCO (PKX).
Please note that Nucor has one of the highest dividend yields among US steel companies. It currently forms 1.36% of the SPDR S&P Dividend ETF (SDY).
We’ll look at how the residential construction sector is playing out in our next part.