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Our Advance/Decliner Index increased to 70% from 66% last week, and has now risen two weeks in a row since falling below the critical 50% level.  Strength was most evident in the MENA region, the CIS and East Asia as prices have rebounded mainly on the back of higher scrap prices as well as modestly improved demand in some countries following China’s Golden Week holidays.

Our China Index remained flattish at 53% compared with 50% the week before as the Chinese market is still treading water.  We suspect the usual post-holiday pickup in the country is not yet appearing largely because the holidays were so early this year and winter is still blunting construction demand.

In the global market, flat product pricing continues to remain strong, while long product prices showed a meaningful improvement last week as international scrap prices continued to climb and iron ore prices have now rebounded over 6% in the last 10 days.

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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Steel Market Production Cuts – Stoppages caused by disgruntled workers cost Sidor, a Venezuelan steel and iron ore producer, US$361m in lost output in 2011, and recent protests may mean that the company misses its 2012 production target of 3.7 mt of crude steel.

Steel Market Production Increases – Eastern China’s Xiwang Special Steel Company will commission a 500,000 tpy heavy bar rolling mill by the end of this month, increasing its finished steel capacity to 2.1 mtpy.

Steel Market Production Increases – Northern China’s Anshan Iron & Steel (Angang) is expected to begin production at its Putian mill with an annual production capacity of 700,000 annealed CRC and 300,000 HDG in the middle of this year.

Steel Market Production Increases – A slew of new SBQ bar capacity expansion projects are in the works due to steady demand from the automotive and heavy equipment markets. So far, the announced capacity increases include a $76m expansion by Steel Dynamics; an $85.2m project by Republic; a $67m expansion by Gerdau; a $290m expansion by Nucor, and a $225m expansion by Timken.

Steel Market Production Increases – UAE-based steelmaker, Emirates Steel, is currently taking bids for equipment for phase 3 of its expansion, which will increase HRC output by more than 50% to 4.6 mtpy from 3 mtpy, and the contract will be awarded in April, nine months earlier than initially scheduled.

Sources: Steel Business Briefing, American Metal Market

New orders for durable goods in January 2012 declined 4%, following a 3.2% gain in December, according to the U.S. Census Bureau. The median of a Bloomberg survey of economists was for a decline of 1%, a full 3% better than the reported number.

The decline comes after a string of 3 months of increases, and mirrors the decline in January 2009, when the economy was still in the early stages of contraction. We believe that the data is misleading, however, as the magnitude of the decline was likely exaggerated by the expiration of a full-depreciation tax incentive on December 31, 2011, which most probably “borrowed” some fixed investment from the 1Q 2012 into the 4Q of 2011.

Excluding transportation, new durable goods orders fell about 3%, from $155.8 billion to $150.8 billion, while durable goods shipments fell about 1% from $159.3 billion to $157.5 billion. Excluding defense, new durable goods orders declined roughly 4%, from $207 billion to $197.7 billion, but durable goods shipments fractionally from $197.1 billion to $197.7 billion.

Transportation Orders Fall

New orders of transportation equipment fell 6% between December 2011 and January 2012, from $58.8 billion to $55.2 billion. However, shipments rose 5%, from $47.7 billion to $50.3 billion.

Primary, Fabricated Metals Orders Trend Differently

Month-over-month trends in new orders for primary metals and fabricated metal products differed in January 2012. New primary metals orders fell about 6.5%, from $28.9 billion to $27 billion, while new fabricated metal products orders rose almost 1%, from $26 billion to $26.2 billion.

In terms of shipments, $27.5 billion worth of primary metals were shipped in January 2012, down about 3% from $28.3 billion the prior month, and $26.3 billion worth of fabricated metal products were shipped in January 2012, up slightly from $26.2 billion in December 2011.

Source: Steel Market Intelligence, US Census Bureau, Bloomberg News.

Consumer confidence surged in February, with the Conference Board reading rising from 61.5 in January to 70.8, exceeding not only the forecast level of 63 from the median of the Bloomberg survey of 77 economists, but surpassing even the most optimistic forecast in the group, which ranged from 58-67.6.

Both components of the Index contributed to this overall increase with the Present Situation Index rising from 38.8 to 45, while the Expectations Index climbed from 76.7 to 88.

Highlights of each individual index follow.

Present Situation Index

The percentage of consumers rating current business conditions as “bad” decreased 18.5% during the past month, from 38.3% to 31.2%. The percentage of consumers rating current business conditions as “good” fractionally rose from 13.2% to 13.3%. Slightly more consumers now think jobs are easy to get, as the percentage of consumers finding jobs “plentiful” rose from 6.2% to 6.6%. The percentage finding jobs “hard to get” changed more dramatically, falling 11% from 43.3% to 38.7%.

Expectations Index

Consumer optimism about economic conditions in the next six months improved in February as compared to January. The percentage of consumers expecting business conditions to get worse in the next six months dropped 19%, from 14.6% to 11.8%, while the percentage of consumers expecting an improvement in business conditions in the next six months increased 12%, from 16.7% to 18.7%.

In the area of employment, 16.9% of consumers now expect fewer jobs in the next six months, down 11.5% from 19.1% in January. Meanwhile, 18.7% of consumers expect more jobs in the next six months, up 14% from 16.4% the prior month.

The proportion of consumers expecting an increase in their incomes improved roughly 12%, to 15.4% from 13.8% in January.

Source: The Conference Board, Bloomberg News

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Graftech International (GTI)’s adjusted 4Q EBITDA of $75M missed the Street’s outlook of $84.9M.  Guidance for 2012 fell 30-40% short of consensus causing the shares to drop sharply on Thursday and Friday of last week and sent a chill through the steel sector, as some read the lowered guidance as commentary on the steel outlook for 2012.

We suspect that the shortfall was due to some over-optimism from the company.

Our full report is available to subscribers only and provides further thoughts on Graftech’s 4Q earnings report and conference call as well as the implication for the stock and other equities.

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Vallourec (VK) reported 4Q EBITDA of €254 million, beating the Street’s estimate of €233 million with 4Q EBITDA margins at 16.4%.  First quarter results could be weaker on seasonal impact together with softness in Europe and Brazil’s non-oil and gas activities.

However, the company expects sales to increase 10% in 2012 driven by continued strength in oil and gas operations and the price increases achieved in 2011, but EBITDA margins are likely to decline versus 2011 as start-up costs from new mills in the US and Brazil hurt results.

The company said the new 500,000 tpy OCTG mill in Youngstown, OH is near completion with commercial production expected to start in the summer.  VK aims for a “rapid” ramp-up of the facility to meet growing OCTG demand related to nearby shale plays.

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Weekly domestic raw steel production decreased 0.6% to 1.930 million tons (mt) for the week ending February 25, 2012, but is up 4.8% from the year-ago level.  The highest production since the recession began was 1.945 mt on December 17, 2011, while the lowest was 0.8 mt on December 27, 2008.

The capacity utilization rate declined from 78.6% last week to 78.1% this week, but is still above the 75.3% rate recorded a year ago. The highest capacity utilization since the recession began was last week’s 78.6%, while the lowest was 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.

Source: AISI and Steel Market Intelligence

The number of active oil and natural gas rigs in the United States fell 0.7% to 1,981 for the week ending February 24, 2012, hitting the lowest count since September 10, 2011.  However, the rig count is up 16.6% from the year-ago level.

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 705 last week to 701, but was 12.5% 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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Gibraltar Industries (ROCK) recorded a loss of $(0.22)/share in 4Q, which adjusted to a loss of $(0.17) excluding acquisition-related and exit activity costs, below the Street’s $0.03/share as an increase in expense for equity-based compensation, caused by a spike in ROCK’s stock price in 4Q, contributed to the surprise.

Management expressed optimism that the residential construction market was finally starting to turn around and noted that recent Architectural Billings Index (ABI) readings indicate the nonresidential construction market may have bottomed and might improve “modestly” in 2012.

Our full report is available to subscribers only and provides further thoughts on Gibraltar’s 4Q earnings report and conference call as well as the implication for the stock and other equities.

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Ternium S.A. (TX) reported 4Q EBITDA of $369.6m, beating the Street’s forecast of $346.3m and 4Q 2010 EBITDA of $237m but down 18% sequentially.

Guidance is for operating income to decrease sequentially in 1Q mainly because of higher costs owing to exchange rate changes and higher cost slabs flowing through inventory. Shipments are expected to be stable, with stronger shipments in Mexico in 1Q as North American demand improves offsetting a seasonally slower period in Argentina.

Management noted that it will have more details about the company’s Usiminas investment in March.

Our full report is available to subscribers only and provides further thoughts on Ternium’s 4Q earnings report and conference call as well as the implication for the stock and other equities.

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