Construction MMI Down Again as Steel, Aluminum Keep Falling

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Our Construction MMI was, once again, a victim of a brutal commodity environment with high production from China and a strong dollar encouraging import purchase and dwindling market share for US producers of aluminum, steel, stainless and other construction metals. The index dropped 3% to fall to 65, yet another all-time low.

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US construction spending actually rose in September to its highest level in seven-and-a-half years as both private and public outlays increased, suggesting a modest upward revision to the third-quarter GDP growth estimate.

Construction Up As Prices Lag

Estimators and procurement professionals are clearly taking advantage of the low-cost environment and buying forward, which is not a great strategy in this market as we have seen every indication that prices will continue falling. Buying now is, essentially, attempting to catch a falling knife.

Construction_Chart_November_2015_FNLConstruction spending has actually increased every month this year in the US. This week, Economists from the Associated Builders and Contractors (ABC), American Institute of Architects (AIA), and National Association of Home Builders (NAHB) predicted continued construction industry growth in 2016 during a joint economic forecast web conference Tuesday.

Oversupply for Export

The low-cost environment has created a domestic boom that builders and contractors are taking advantage of. One would think that increasing demand must eventually cause prices to rise, but that’s simply not the case for aluminum, steel and stainless as so much overcapacity has been built up, mostly by overproduction in China.

My colleague, Stuart Burns, recently wrote oversupply from China in these commodities will ensure we have a dead cat bounce kind of bottom.

“Prices of these commodities aren’t likely to rise far or fast for years to come,” he wrote.

An unfortunate continuing theme of our MMI series this month is that not all markets will experience a similar bottom. Some aren’t even close to bottoming out despite the historic low prices we have seen. At least in some commodities, currencies are shielding producers from the worst effects of falling global prices while others, such as the strong US dollar, are encouraging end users to buy less-expensive imports over dollar-enumerated-and-produced domestic supplies.

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Copper is one of the metals keeping the construction MMI from falling more. Its relative strength of late is causing some producers to hope it has already found its bottom and it was a sharp one, at that. We caution buyers to stay conservative and not make large purchases until the overall commodity picture is better.

Actual Construction Metal Prices

Chinese rebar was up this month to $322.89 per metric ton from $319.26 in October, an increase of 1.1%. Chinese H-Beam steel, however fell to $333.97 from $339.70, a decrease of 1.7%. US shredded scrap fell a whopping 16% hitting $179 after recording a price of $314 in October.

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