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Rising Rates Could Mar US Steel Demand Outlook

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US steel demand

In this article, we’ll look at some indicators of US steel demand (SPY). The construction and automotive sectors are leading steel users.

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Construction sector

Activity rebounded in the residential construction sector in August. US housing starts rose 9.2% to a SAAR (seasonally adjusted annual rate) of 1.282 million units. The data was better than expected, and the Commerce Department also upwardly revised July’s housing starts data. However, while housing starts rose last month, building permits fell 5.7% to a SAAR of 1.229 million units. Leading indicators show a rebound in nonresidential construction activity. The Architectural Billing Index came in at 54.2 in August as compared to 50.7 in July. The index has been above 50 for 11 consecutive months now. An ABI above 50 signifies an increase in billing.

US auto sales SAAR stood at 16.72 million units in August, up from 16.58 million units in August 2017 according to Autodata. Meanwhile, US steel companies also sounded upbeat about domestic steel demand. According to Steel Dynamics (STLD), “Based on strong steel demand fundamentals and customer optimism, the company believes steel consumption and market dynamics will remain strong.”

Rising rates

Having said that, rising interest rates could dampen the sentiments. Higher interest rates increase the ownership costs of goods like real estate and automotive, both leading steel end-users. While US new home sales jumped in August, according to Reuters, “the underlying trend still pointed to a weakening housing market against the backdrop of rising mortgage rates and higher home prices.” Steel companies including Nucor (NUE), U.S. Steel (X), and AK Steel (AKS) expect their third-quarter earnings to rise sequentially. You can read Steel Companies in Q3 2018: Earnings, Tariffs, and the Trade War for a comparative analysis of steel companies’ Q3 2018 earnings guidance.

In the next article, we’ll look at some global steel industry indicators.

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