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After falling to a 10-week low of 49% last week, our Advance/Decliner Index rebounded to 66% as steel prices strengthened in the MENA region on the back of higher scrap prices, pushing our Ex-China Index up to 71% from 50%.

Our China Index remained mostly stable at 50%, compared with 46% the week prior.  The Chinese market is still treading water – with some increases here and there, but just as many decreases.  We suspect the usual post-holiday pickup is not yet appearing largely because the holidays were so early this year and winter is still blunting construction demand.

Our full report provides further thoughts about global steel pricing trends and our outlook as well as implications for steel equities.

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The American Institute of Architects’ ABI Index – a leading economic indicator of non-residential construction activity 9-12 months into the future –  remained above 50 in January, coming in at 50.9, virtually unchanged from 51.0 in December, and the first three-month string of readings above 50 since last spring.  The reading above 50 means the number of architects reporting “rising billings” outpaced the number reporting “declining billings.”

The new inquiries index remained near a four and a half year high at 61.2, while six out of the eight sub-indices posted readings above the 50 mark, indicative of billings growth.

Our full report is available to subscribers and provides further thoughts on the January ABI Index as well as the impact on steel equities.

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January global steel production rose a less than seasonally normal 0.9% to 116.7 million tonnes (mt), compared with the typical monthly gain of 2.5%, as Chinese production fell by 0.2% and output in South Korea dropped 13.9%.  Production was down some 7.8% compared with year-ago levels as production in Asia and the EU were down some 11.4% and 5.6%, respectively, with China posting the largest year-on-year decline – at 13.0% – since October 2008.

Production in the EU rose a seasonally-normal 11.9% driving the overall gain, while US production increased for the third straight month to the highest level since September 2008.

Korea also posted a significant year-over-year decline of 9.6%, which was unexpected given the additional steelmaking capacity Korean steelmakers have brought online.  The decline is good news for the US market which saw a 39% increase in imports from Korea in 2011.

Our full report is available to subscribers only and provides further thoughts on global steel production and pricing and the implications for steel equities.

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Steel Market Production Cuts – Steelmaking operations at China’s Angang Heavy Machinery (AHM), one of China’s largest machine manufacturers, have been idled indefinitely after an explosion on February 20^th that has left 13 workers killed and 17 injured. The cast steel plant involved in the incident has a 450,000 tonnes/year EAF and is capable of producing 30,000 t/y of steel castings, 100,000 t/y of ingots and 280,000 t/y of steel billet, according to company data.

Steel Market Production Cuts – The Sparrows Point, Md.-based steelmaker, RG Steel LLC, has temporarily idled its 4,000 tpd blast furnace at its Warren, Ohio, steelmaking complex following a Saturday morning tuyere failure, and the company expects the repairs to take about a week.

Steel Market Production Cuts – Turkish steel producers’ association (DCUD) expects February production to fall below January figures because of electricity and natural gas cuts that have affected steel production since the beginning of February.

Steel Market Production Increases – Argentinean longs producer Acindar’s expansion plan is progressing well as the company – controlled by global steel giant ArcelorMittal – prepares to make an extra 25,000 tonnes/year of special bar quality (SBQ) products in the short to medium term.

Steel Market Production Increases – Colombia’s steel industry may record 5% growth this year and reach 1.82m tonnes of production as a result of investments made by domestic and foreign steelmakers.

Steel Market Production Increases – Russia’s NLMK is conducting hot trials on a second 2m tonnes/year ladle furnace (LF), and the fourth LF in total, at its steelworks in Lipetsk, and the company expects to bring its combined ladle furnace capacity to 12 mtpy shortly.

Steel Market Production Increases – Tata Steel expects to complete the installation of two roller hearth furnaces at its thin slab casting and rolling plant at its integrated works in Jamshedpur (India) by the end of the first quarter of 2012. Both the furnaces have a reheating capacity of up to 280 tonnes/hour of slab.

Steel Market Production Increases – Korea’s Dongkuk Steel Mill expects capacity utilization at its heavy plate facilities to return to normal from next month after conducting output cutbacks since last December as it foresees plate demand recovering steadily after the first quarter.

Steel Market Production Increases – According to the latest survey by China Iron and Steel Association (CISA), China’s daily crude steel output is expected to increase by 1.9% to 1.7045 mt in early February as steel traders replenish their stockpiles following the Lunar New Year.

Sources: Steel Business Briefing, American Metal Market, Arab Steel, and Mysteel.

Weekly domestic raw steel production increased for the third successive week, rising 0.7% to1.942 million tons (mt) for the week ending February 18, 2012, and increasing 6.7% from the year-ago level.  The highest production on record dating back to 2004 was 2.215 mt on May 13, 2006; the lowest was 0.8 mt on December 27, 2008.

The capacity utilization rate continued a three-week uptrend as well, increasing from 78.1% last week to 78.6% this week, and surpassing the 75.3% rate recorded a year ago. However, this is below the 94.7% rate recorded on January 15, 2005.  Capacity utilization hit a low of 33.5% on December 27, 2008.

Note: AISI weekly production data only includes real-time input from 50% of producing members; the remainder of the data is a guesstimate based on each company’s prior-month production and therefore the weekly AISI data lags when there are production cuts or increases going on.

The seasonally adjusted value of new U.S. construction starts dropped 2%, from almost $410.5 billion in December 2011 to about $402.2 billion in January 2012, according to figures from McGraw-Hill Construction. This included a 1% drop in the value of non-residential building starts, which fell from about $140.9 billion to $139.8 billion, an 8% decline in the value of residential building starts, which dropped from about $145.4 billion to almost $134.5 billion, and a 3% jump in non-building construction, which rose from $124.2 billion to $127.9 billion.

Dodge Index Falls

In January 2012, the Dodge Index totaled 85 (2000=100), compared to the December 2011 reading of 87. During the course of 2011, the Dodge Index moved within the range of 81 to 101, with the average for last year coming in at 90.

Unadjusted Year-to-Date Start Values Drop 14%

On an unadjusted year-to-date basis, the total value of new construction starts fell 14%, from roughly $31.3 billion in January 2011 to $27 billion in January 2012. This figure included a 16% drop in the value of nonresidential building construction starts, which went from $11.1 billion to $9.3 billion, as well as a 17% hike in the value of residential building construction starts, which rose from $7.5 billion to $8.7 billion, and a 30% plummet in the value of nonbuilding construction starts, which fell from $12.7 billion to $8.9 billion.

Source: McGraw-Hill Construction

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The American Institute of Architects’ ABI Index – a leading economic indicator of non-residential construction activity 9-12 months into the future – remained above 50 in January, coming in at 50.9, virtually unchanged from 51 in December, and the first three-month string of readings above 50 since last spring. The reading above 50 means the number of architects reporting “rising billings” outpaced the number reporting “declining billings.”

The new project inquiry index was relatively stable at 61.2, down nominally from 61.5 at fairly elevated levels. While in the recent past, we have been somewhat cautious about putting too much weight on the new inquiries index because it does not account for rebidding, and the index has remained above 50 consistently since January 2009, and there was clearly no predictive value in calling an upturn. We would note though that the new inquiries index has been much higher the past two months than during the first 10 months of the year when it ranged from 52.6 to 58.7 and the significantly higher readings have in fact coincided with a higher overall ABI reading.

The number of active oil and natural gas rigs in the United States rose 0.3% to 1,994 for the week ending February 17, 2012, and is up 16.4% from year-ago levels.

The highest weekly rig count in the United States since 1940 was recorded on December 28, 1981, at 4,530; the lowest was recorded on April 23, 1999, at 488.

The number of rigs in Canada this week decreased 0.6% from 709 last week to 705, but was 10.9% higher than last year.

The highest rig count for Canada was 727 on February 3, 2006; the lowest was 29, recorded on April 24, 1992.

Source: Baker Hughes Inc.

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Chinese Vice Commerce Minister Zhong Shan was quoted by China Daily promising increases of export tax rebates, “at an appropriate time,” something Beijing has not done since 2009.

The government said that “labor intensive” sectors would benefit, without providing specifics, but we believe there may be some risk that this could include steel, given the sector’s prior history of export tax rebates to facilitate exports.

Our new report provides our thoughts on the near-term and longer-term impact of this news.

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Good news for the global steel industry in weak January production, which rose a scant 0.9% from December, far less than the typical seasonal uptick of 2.5%. The data may have been skewed to the negative as China’s Golden Week holidays fell earlier than usual, and in fact the China Iron & Steel Association’s production “flash” report for the first 10 days of February showed that output rose 1.9% from late January levels, although this is still nearly 15% below peak levels seen in June 2011, as Chinese steel demand has yet to recover to normal levels following the Golden Week holidays.

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