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What Do Leading Indicators Tell Us about US Steel Demand?

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Aug. 26 2016, Updated 11:06 a.m. ET

US steel demand

The construction sector is the leading steel consumer in the US. It accounts for ~40% of the total steel demand. Within the construction sector, nonresidential construction accounts for almost two-thirds of total construction spending. This includes both public and private spending.

We should note that nonresidential activity was subdued in 2Q16 and we saw monthly declines in April, May, and June. However, this was preceded by a strong performance in the first quarter.

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Leading indicator

From an investor’s perspective, it’s also important to look at leading indicators of nonresidential construction activity. The ABI (architectural billing index) is a leading indicator of nonresidential construction spending. The index is based on a survey of architects. Participants answer whether their billing increased, decreased, or stayed the same in the month. A value above 50 indicates an increase in billing.

Higher architectural billing generally translates into increased future construction spending. This index leads actual construction spending by about nine to 12 months.

Index above 50

The ABI stood at 51.5 in the most recent July reading. The index has fallen on a monthly basis for two straight months. However, it’s still above 50—indicating higher billing. The ABI has been above 50 in six out of the seven months in fiscal 2016.

Higher construction activity leads to more demand for steel products like rebars. Nucor (NUE) is the largest rebar supplier in North America. Commercial Metals Company (CMC) and Gerdau (GGB) are the other leading rebar suppliers.

In the next part of the series, we’ll look at the residential construction activity.

ETF alternatives

Almost one-quarter of the SPDR S&P Global Natural Resources ETF’s (GNR) holdings are invested in steel and other metal companies. Alternatively, investors who want to gain exposure primarily to US-based steel companies can consider the SPDR S&P Metals and Mining ETF (XME). Almost half of XME’s holdings are invested in US-based steel companies. U.S. Steel forms 4.6% of XME’s portfolio.

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