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Interesting Times for Steel as Building Permits Surge in May

Mohit Oberoi, CFA - Author

Jun. 24 2015, Published 12:10 p.m. ET

Housing market gains

In the previous part, we saw that housing starts in the United States dipped in May. In this part of the series, we’ll look at the recent trend in building permits. This will help investors better understand the trend in the US housing sector.

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Building permits surge in May

To construct any building, a builder has to get a building permit from government authorities. Building permits act as a leading indicator of future activity in residential real estate. More permits mean more buildings are expected to be constructed in the future. The United States Census Bureau releases building permits data on a monthly basis.

In May, building permits increased by an impressive 25.4% on a year-over-year basis. You can see this surge in permits in the above graph. Compared to April, building permits increased 11.8% to reach a seasonally adjusted rate of 1.28 million, the highest level in the last eight years.

A positive sign for steel

An increase in building permits is positive for the US housing market and the steel industry. Steel companies like U.S. Steel (X), Nucor (NUE), and Steel Dynamics (STLD) benefit from a strong housing demand. The SPDR S&P Metals and Mining ETF (XME) seeks to build a diversified portfolio of these companies. Worthington Industries (WOR) currently forms 3.63% of XME.

Next, we’ll look at metal service centers, a major distributor channel for steel companies. They act as a crucial link between steel companies and small end users of steel products. So steel investors watch metal service center inventory figures closely. In the next part, we’ll look at the May metal service center inventory report.


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