In the US steel sector, demand for steel drives revenues for US steelmakers (SLX) (XME). As a result, investors interested in Cleveland-Cliffs (CLF) track US steel demand. In this part of our series, we’ll see how investors can track the demand for US steel by monitoring demand indicators.
Investors interested in analyzing US steel demand should track the construction sector, which accounts for ~40.0% of US steel demand. The construction sector includes both residential and non-residential construction.
In January 2018, US housing starts rose to the highest level since October 2016. The starts rose 9.7% year-over-year (or YoY) to 1.3 million units as compared to the expectations of 1.2 million units. The rise was driven by a surge in apartment buildings. 2017 was the best year in a decade for new construction in the US. The momentum seems to be continuing into 2018 as well.
Building permits in the US also increased by 7.4% YoY in January to 1.4 million. The continued increase in building permits is a positive forward indicator for the housing sector. Average building permits in 2017 were below 1.3 million, but improving employment conditions and lower taxes could push consumers towards homeownership in the year ahead.
The Architectural Billing Index (or ABI), which is a leading indicator of non-residential construction, kicked off the new year with highest level for January since 2007. The ABI came in at 54.7, up from 52.8 the previous month. The ABI Index remained above 50 in the past 11 months. A value above 50 indicates an increase in billing, and higher architectural billing translates into increased future construction spending.
Higher non-residential construction spending boosts demand for steel products such as reinforcing bars from Nucor (NUE) and Commercial Metals (CMC), the leading rebar suppliers in the United States (STLD).