Flat rolled imports have fallen dramatically since last October with the last three months of imports tracking below the lowest monthly import level since early this decade.

Flat rolled exports have also fallen abruptly starting shortly after the U.S. applied 25% steel tariffs.

Net import data through December shows a steady twelve-month average of 600k st/m with November and December falling below the average.

Annual U.S. flat rolled net imports actually increased by 32k tons YoY to 7.2m in 2018 vs. 7.17m in 2017.  However, digging deeper into the data, there was an increase of almost 800k hot rolled tons, while CR, HDG and galvalume (AZAL) imports fell significantly.  Tube imports fell 13% or almost 930k tons YoY.

While the tariffs have yet to materially change flat rolled net imports, production has grown significantly as evidenced by this 52-week moving sum of the AISI’s weekly crude steel production.

With the reopening of U.S. Steel’s Granite City, new entrant JSW steel and the AISI steel capacity utilization remaining above 80% since mid-October 2018, the sum of the previous 52 weeks has grown to 96 million annualized tons, the highest level since March 2015.

Last week’s U.S. employment report was a massive disappointment with a change of 20k new jobs vs. expectations of a 180k job gain. The manufacturing industry added 4k jobs versus expectations of 12k, but January’s 13k job gain was revised higher to 21k.  The unemployment rate fell to 3.8%, better than expected despite the Labor Force Participation Rate remaining unchanged at 63.2%.  This report raises a big question of whether this was an anomaly or indicative of continued weakness.

The unemployment rate saw its three-month moving average cross above its twelve-week moving average.

The chart below shows MoM net change in nonfarm payrolls.  A significant drop in MoM nonfarm payrolls occurred once in 2016 and 2017, both of which saw a significant rebound the next month.

The chart below shows the YoY percentage change in nonfarm payrolls rolling over.

The manufacturing industry added four thousand jobs in February, the lowest net change since July 2017.

December new home sales of 621k annualized units beat expectations of 600k, but November’s rate was revised lower to 599k from 657k.  The chart below shows four consecutive months of YoY contraction in new home sales.

U.S. housing starts of 1.23m annualized units were better than expected, but December’s rate of 1.08m units was revised lower to 1.04m.  Similar to new home sales, housing starts have seen four straight months with negative YoY growth.

January U.S. annualized building permits rose to 1.35m from 1.33m in December and beat expectations.  YoY growth rates have been negative or barely positive for the past six months.

Last week provided another swath of diverse data indicating a slowing U.S. economy.   This chart shows an inverted U.S. employment rate, annualized U.S. auto sales and how correlated the two are over time.  Employment is typically a lagging indicator.  Does the downtrend in auto sales indicate a weakening job market to follow?

As 2019 moves forward, the health of the economy will become apparent.  Perhaps the economy reverses course in the coming months, but right now, the steel industry is seeing weakening demand, increased supply at steel mills, increased steel production and a wounded service center group with potential for the removal of steel tariffs to boot.  Continue to proceed with caution.

The following issues provide the foundation of our cautious view:

• Declining rates of growth in manufacturing and tariff induced demand destruction
• Increased/increasing domestic steel production capacity
• Weakening global economics and manufacturing PMIs
• Crude oil price correction
• Higher interest rates
• Strengthening U.S. dollar
• S. residential construction industry slowing
• Slowing auto sales
• Tariff resolution potential