US steel demand
Because steel demand drives production, we should look at the steel demand trends in the US (DIA) (DOW). Steel demand is the major driver of US steelmakers’ (SLX) volumes and prices. These steelmakers are Cliffs Natural Resources’ (CLF) customers.
Construction is one of the most important sectors to track when assessing steel demand. In this article, we’ll discuss housing starts and building permits, which are the leading indicators of residential construction activity.
After disappointing in April, the data for housing starts once again disappointed in May. US housing starts totaled ~1.1 million in May against expectations of ~1.2 million, representing a drop of 5.5% year-over-year. This decline was the lowest level reached in the last eight months. May was the third straight month of the slowdown in the housing construction market.
US building permits fell 4.9% month-over-month to ~1.2 million units in May—its lowest level since April 2016.
Although housing starts and building permits showed a decline in May, the ABI (Architecture Billings Index) posted a gain. The ABI, which is a leading indicator of non-residential construction spending, rose from 50.9 in April to 53.0 in May. This trend reflects an increase in design services. A score above 50 indicates an increase in billings.
US steel demand
The latest construction data has raised some concerns about the slowdown in the US construction market. However, housing construction is expected to rebound, led by strong job and wage gains.
On the other hand, a pickup in infrastructure investment, as promised by President Trump, could boost non-residential construction. Higher construction activity is beneficial to steel demand, which in turn is positive for steel companies and Cliffs Natural Resources (CLF).
Next, let’s look at the trend in the seaborne iron ore prices and the impact on Cliffs Natural Resources.