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Is US Steel Demand Showing Signs of Moderating?

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US steel demand

The construction and automotive sectors are the top two consumers of steel in the United States (SPY). By looking at the demand indicators of these two end markets, investors can get a sense of the underlying steel demand.

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Housing demand

Building permits and housing starts act as leading indicators of residential construction activity. Housing starts fell 5.8% to a seasonally adjusted annual rate (or SAAR) of ~1.1 million units in August 2016. Building permits also fell 0.1% to ~1.1 million units SAAR. Notably, both housing permits and building permits came in lower than market expectations. However, Reuters attributes lower housing activity to bad weather in the South.

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. The ABI fell to 49.7 in August. This is the second month since January 2016 that the ABI has fallen below 50 in 2016. Nucor (NUE) is the leading steel supplier to the nonresidential construction sector. Gerdau (GGB) and Commercial Metals Company (CMC) are the other leading suppliers.

Automotive demand

Car sales have also shown signs of stagnation after growing steadily over the last few years. US auto sales fell 4.2% in August. ArcelorMittal (MT) is the leading steel supplier to the automotive industry. AK Steel (AKS) also gets most of its revenues from automotive customers. Any stagnation in auto sales is negative for these companies.

In the final article in this series, we’ll look at the August service center activity report.

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