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Does US Steel Demand Support Cleveland-Cliffs’s Bright Outlook?

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Demand indicators

US steel production is the main driver of steelmakers’ (SLX) revenue. However, demand ultimately drives production. Therefore, it is vital for US steel investors to keep tabs on steel demand drivers in the United States (SPY) (SPX), which is where Cleveland-Cliffs’s (CLF) customers are based.

Construction, which accounts for ~40% of US steel demand, is one of the most important sectors to consider when assessing steel demand. Housing starts and building permits are the main indicators of residential construction activity.

US housing starts continued to disappoint for a fifth month. They fell by 0.8% month-over-month in August 2017, to 1.3 million units. Economists were expecting permits to fall 0.8% to 1.2 million units.

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Since building permits lead residential construction by a few months, pressure on residential construction may ease in the coming months. The Architectural Billing Index (or ABI), which is a leading indicator of non-residential construction, stood at 53.7 in August, compared with 51.9 in July. A reading of above 50 indicates an increase in billings.

US auto demand

US auto sales fell 1.9% YoY to 1.5 million units in August 2017. Month-over-month, however, auto sales were higher in August.

Weakness in the auto sector is also hurting automakers (FXD) such as Fiat Chrysler Automobiles (FCAU), Ford Motor (F), General Motors (GM), and Toyota Motor (TM). Steelmakers such as AK Steel (AKS) get most of their revenue from the auto sector. ArcelorMittal (MT) is a main supplier to the automotive industry.

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