uploads/2018/04/Housing-Starts-1.jpg

US Steel Demand and Tariffs: The Impact on Cliffs

By

Updated

Steel demand

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.

Residential 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.

After surging in January 2018, US housing starts fell 7% year-over-year (or YoY) in February. January’s gains were the highest since October 2016. The fall in February was driven by a 28% drop in starts for multi-family buildings.

Building permits, which are an indicator of future construction, also fell 5.7% to an annual pace of 1.3 million in February. In January, building permits increased 7.4% YoY.

While rising employment and higher wages should support residential building growth, higher interest rates could constrain some of that momentum. Moreover, going forward, higher domestic US prices could also negatively impact discretionary construction spending.

Non-residential indicators

The Architectural Billing Index (or ABI), which is a leading indicator of non-residential construction, kicked off the new year with its highest level since 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 rebar from Nucor (NUE) and Commercial Metals (CMC), the leading rebar suppliers in the United States (STLD).

More From Market Realist