Macroeconomics

Minutes were recently released of the Federal Reserve Board’s most recent meeting and another rosy forecast for the US construction market was released.

Construction Starts About to Surge?

Construction starts for residential and nonresidential construction in the second quarter should improve after weak numbers in the first quarter, according to a forecast by consultancy CMD.

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However, construction starts overall in the US could rise 9.2% this year, even though both residential and nonresidential starts have been downgraded, CMD said. The CMD forecast is derived by combining proprietary data with macroeconomic factors.

No June Rate Hike

Federal Reserve officials believed it would be premature to hike interest rates in June even though most felt the US economy was set to rebound from a dismal start to the year, according to minutes from their April policy meeting released on Wednesday.

The central bank debated whether a slew of disappointing data, including weak consumer spending, signaled a temporary slump or evidence of a longer-lasting slowdown, with most participants agreeing economic growth would climb to a healthier pace and the labor market would strengthen.

The US economy grew an anemic 0.1% in the first quarter, according to the most recent government data.

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ast week UGI Energy Services announced plans to build a liquefied natural gas production facility in Wyoming County, Pennsylvania.

Why Manufacturers Need to Ditch Purchase Price Variance

The facility will draw Marcellus Shale gas from UGI’s Auburn gathering system, then chill it to produce up to 120,000 gallons per day in liquid form. While we have regularly reported the slowdown in both new shale oil and LNG projects in the US this year — and the subsequent cutbacks in oil country tubular goods production — investments are still being made, in the US and overseas, in drilling.

Plants, Projects Planned

Bloomberg Business reported this week that Anadarko Petroleum Corp. selected a group of developers including Chicago Bridge & Iron Co. for a potential $15 billion LNG project in Mozambique.

CBI’s joint venture with Japan-based Chiyoda Corp. and Saipem SpA, based in Italy, will work on the onshore project that includes two LNG units with 6 million metric tons of capacity each, Anadarko said Monday. Construction plans also include two LNG storage tanks, each with a capacity of 180,000 cubic meters, condensate storage, a multi-berth marine jetty and associated utilities and infrastructure, according to Texas-based Anadarko, which says it will make a final investment decision by the end of the year.

Last week, the Department of Energy gave Cheniere Energy Inc. final approval for the nation’s fifth major export terminal at Corpus Christi in Texas, which will ship the fuel from 2018.

What’s Driving Infrastructure Investment?

While oil prices have bounced back from lows seen earlier this year, it’s certainly not the market that’s driving these investments. While high-cost projects, such as those in Canada’s oil sands, have been canceled by oil exploration companies, relatively inexpensive projects with a quicker path to payback, such as these LNG projects, are still being funded.

The payback is diverse and not confined to domestic home heating. LNG has been priced at a fraction of diesel prices for the last four years. Domestic trucking (18-wheelers and other heavy consumers of diesel) have yet to make a large-scale commitment to LNG, and most places where fuel is dispensed have yet to put in expensive infrastructure to handle the product, but there has been enough success for UGI to justify committing resources to its adoption.

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An interesting post in the FT by a leading economist examines the growing concern that seven years after the financial crisis and the use of unprecedented stimulus measures and extended near-zero interest rates,the world may be stuck in a long-term trend of low growth.

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The author, Gavin Davis, is not to be dismissed as just another academic, he was head of the global economics department at Goldman Sachs from 1987-2001, and served as an economic policy adviser to the British government in addition to being an external adviser to the British Treasury.

Chinese, Japanese Growth Down

Global growth is unquestionably slowing.

The three largest independent economies are all struggling to achieve strong growth. Chinese activity dipped sharply last month, and the estimated rate of growth is now 5.3%, well below the government’s 7% target for the 2015 calendar year leading many to hope yet another stimulus is on the way, but so far we have not seen much more than a relaxation in lending and reductions in interest rates.

Japanese growth remains weak in spite of Abenomics. Remarkably, after recessions in parts of the Eurozone the only major economy showing some resilience is the EU where overall growth could be approaching 1.8% in spite of excessive austerity measures.

Davis cites a colleague’s research that tracks two measures of US activity used to summarize the “state of the economic cycle.”

The Slow Normal

According to his models, the probability that the economy is now in a state of strong expansion has dropped from 70% in December 2014 to under 40% now. Over the same period, the probability that the economy is in recession has risen from zero to 14% – still low he admits, but not entirely negligible.

The expectation is that US growth will rebound in Q2 but will not be enough to raise 2015 growth as a whole and could well result in a downgrade for the year as a whole. It’s hard to see China, the engine of growth for the last ten years or more, suddenly creating the level of demand that will significantly lift global GDP in the next few years.

US Growth Nearly Halted

In the US, the official GDP growth rate in Q1 was only 0.2%, while Davis’ model of underlying activity is showing 1.8%. This may, as in some previous years, be more down to a weak first quarter due to weather but the real worry is that the rate of productivity growth is slowing and with it the potential for a long-term rise in living standards and, hence, growth. The long-term growth rate of the US economy has fallen from 3.3% in 2003 to 2.3% now.

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With HR coil prices at $450 per ton in mid-April (although big buyers could get $420/ton), HR coil prices had dropped $250/ton since late summer. US mills blamed imports – which is true – but forgot to mention that they had kept steel prices at elevated levels for 9-12 months while prices in the rest of the world were tanking. What did they expect?

Why Manufacturers Need to Ditch Purchase Price Variance

It is our view that we are now at the bottom and in late April, ArcelorMittal led the industry with a $20/ton increase for June deliveries. Since then, transaction prices have edged up to $460/ton and slightly above. So where do we go from here?

Lead times across the industry vary from around 3-5 weeks for hot-rolled coil. The aim of the price increase was to extend those order books and lead times and therefore create momentum for further price gains. It certainly brought some buyers back in with any remaining May tonnage sold out quickly at the lower price.

Inventory Surplus

At this point in the cycle, the inventory situation is critical. Inventories remain elevated, but total flat-rolled stocks appear to have stabilized at just over 6 million tons (around 10-11 weeks of demand) and we expect them to begin to fall steadily over the next few months as service center order levels have been slack for much of 2015 as they received earlier orders – both domestic and import.

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Gilbane, Inc., recently released its Spring “Building for the Future” construction economics report and predicted that even if new starts growth were to turn flat for rest of 2015 (which is not expected), starts already recorded over the past 12 months indicate spending for nonresidential buildings in 2015 will increase 15% over 2014, the best growth since 2007.

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Nonresidential new starts have been increasing at an average of 16% per year since a post-recession low was reached in 2012.

The Gilbane report states that nonresidential building starts from April 2014 through February 2015 reached the best three-month average and best six-month average since July 2008 this month.

The construction industry is, by far, the largest consumer of steel products worldwide. Approximately 100 million tons of steel is produced annually in the US. More than 40 million tons of that is delivered to the construction industry. The next largest industries combined (automotive, equipment and machinery) do not consume as much steel as construction.

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In today’s MetalCrawler update, the jobless rate fell again even as the world’s largest steelmaker, ArcelorMittal, said it might idle more US plants.

Jobless Rate Falls

The US economy added a solid 230,000 jobs in April, according to government data released Friday morning by the Bureau of Labor Statistics, a sign that the labor market is regaining its footing after taking a slide earlier this year.

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The unemployment rate fell to 5.4%, a seven-year low.

The latest numbers offer encouragement that the recent economic slowdown marks a temporary blip rather than a sign of deeper problems. Both the jobs growth in April, as well as the tick down in the unemployment rate, were almost exactly in line with market expectations.

ArcelorMittal May Close US Plants

ArcelorMittal SA said it might follow U.S. Steel Corp. in idling more American plants as it struggles to cope with a global steel glut, weak iron-ore prices and a surge of imports into the US.

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Long seen by successive administrations as a fair and independent arbiter of global exchange rates the International Monetary Fund is about to upset some in Congress if, as expected, it announces that China’s yuan (or renminbi) fairly valued for the first time in more than a decade, a Wall Street Journal article reports.

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Few outside of China argued back in the last decade that China gave its companies an unfair competitive advantage by keeping the currency below a level that normal market forces would have achieved. Now, after a decade in which the yuan has been allowed to appreciate by more than 30% against a basket of currencies, senior IMF officials say the exchange-rate value is roughly appropriate the WSJ reports.

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The US steel industry is suffering because a barrage of imports has reached a record 34% of market share, steel executives said today at the American Iron and Steel Institute‘s press briefing in Chicago.

Nucor Corp. CEO John Ferriola said 4 million people whose livelihoods depend on the steel industry are at risk, but also that enforcing existing trade and anti-dumping laws consistently would make a wealth of difference for today’s producers.

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“The first step is enforcing existing law as written,” he said. “Legally and consistently enforcing the laws on the books would help immensely… The American worker is still the most efficient worker in the world. We have relatively inexpensive energy, we have the raw material available, we have the best market in the world. When you look at those natural advantages, it makes no sense we should be operating at 60-70% capacity while the rest of the world is overproducing.”

Chinese Dumping

“While many nations continue to engage in unfair trade practices, China is of particular concern,” Baske said. “Last year, China exported 101 million metric tons. A surge of 60% over the previous year and that increase continued at record levels in the first quarter of this year. Some estimates are as high as 468 million mt. Steel demand in China declined last year and is expected to decline this year, too, according to the World Steel Association. China also manipulates its currency to give its products an unfair advantage.”

Baske also noted the business decisions US steelmakers have had to make due to declining prices due to the import surge and they are still in a difficult position due to what the glut has done to prices on the London Metal Exchange.

“On Sept. 3, almost eight months ago, hot-rolled ran $676 a ton. Now it’s $440 a ton,” he said. “In any industry, a 35% to 36% price reduction in that period of time would put pressure on the business. Fair trade will correct it.”

WTO Relief

The executives also noted that while bringing anti-dumping cases with the US International Trade Commission and the World Trade Organization has been somewhat successful, the process has not always worked in the favor of US producers. Even cases that were won, such as last year’s rebar case against Turkey, have not had high enough tariffs to discourage dumping. Gibson said the standard in a safeguard case is higher than in a trade case and the AISI, and the industry as a whole, continue to evaluate all options under the law.

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New metal technologies play a key role in all we do here at MetalCrawler and none could be more promising than Tesla Motors‘ line of batteries for the home. The Chinese yuan may also be on the cusp of being declared not manipulated by the International Monetary Fund.

Tesla Home Batteries

The idea is that homes and businesses powered by solar panels could harvest and store energy during the day that could be used to run homes at night, or be used as a backup during a power outage.

Why Manufacturers Need to Ditch Purchase Price Variance

Although the exact technology involved in the battery, called Powerwall, is a closely guarded Tesla secret, it probably isn’t based on revolutionary concepts, Jordi Cabana, a chemistry professor at the University of Illinois at Chicago told Live Science. Cabana studies new battery materials and said the batteries look as if they are based on the same lithium-ion batteries in Tesla’s cars.

“Just looking at the specs that they publicize, it doesn’t look very different — in terms of the cost — to what they’re putting in their cars,” Cabana said.

The company is also planning to unveil a business-based battery-storage system, called the Powerpack, though the price for that system has not been released yet. Tesla is already taking orders for its residential system, but the products won’t ship until late summer, company representatives said at the news conference.

IMF Close to Calling Chinese Yuan ‘Not Manipulated’

In what would be a blow to US manufacturers, particularly steelmakers, the International Monetary Fund is close to declaring China’s yuan fairly valued for the first time in more than a decade, according to the Wall Street Journal, a milestone in the country’s efforts to open its economy that would blunt US criticism of Beijing’s currency policy.

The fund’s reassessment of the yuan—set to be made official in IMF reports on China’s economy due out in the coming months—follows years of IMF censure of Beijing’s management of the currency.

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This is a fourth post on a series of posts on exponential technologies (see part 1, part 2 and part 3).

Why Manufacturers Need to Ditch Purchase Price Variance

Yesterday, I realized I was running out of underwear, which means that I didn’t have any more excuses to not do my laundry. As I was walking down the street, I pulled out my phone and without clicking any button I said: “Ok Google, remind me to do laundry when I get home.”

Despite my strong Spanish accent, the phone perfectly understood what I meant to say. Four hours later, as soon as I opened the door to my apartment I felt a vibration in my pants. My phone knows where I live and it used its GPS to figure out that I had just arrived home. I looked at the screen, and saw the reminder. A couple of hours later… I had a new set of clean underwear. Thank you, Google!

This is not just an example of low-level artificial intelligence, but also a sign that AI is reaching the knee of the exponential growth curve, getting ready to run wild as a disruptive technology. AI is an exponential technology about to be found everywhere in our daily lives and jobs.

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