The Census Bureau reported late last week that U.S. construction spending was up during October by 0.5% compared with the September total. Year-over-year, construction spending in October was up by 3.45. During the first 10 months of the year, construction spending amounted to $972.2 billion, 4.5% above the same period in 2015.
Our Construction MMI was up 8.7% as domestic demand for construction metals shot up just as prices increased nearly across the board for the entire industrial metals complex.
Construction demand in the world’s largest metals consumer, China, continues to grow even as the central government there tries to restrict home buying, the engine for that demand.
“It’s likely that the government will expand infrastructure investment to make up for the gap left by property-related investment falling,” Julia Wang, China economist at HSBC told the Financial Times.
What is buoying construction the most is an investor class now excited about all industrial and construction metals. The election of President-elect Donald Trump promises $1 trillion in U.S. infrastructure investment and stronger protections against dumping of foreign imports.
Trump’s policies, while still in their formative stages, are seen as bullish for public construction, particularly infrastructure such as roads, bridges and airports. Stocks of construction companies and materials providers also jumped after Trump’s election.
Public construction spending actually accounted for most of the increase in U.S. construction spending in October — unusually, since that sector has been contracting in recent years — gaining 2.8% compared to September. Spending on educational facilities was especially brisk, up 4.1% for the month, while highway construction gained 1.9%. Compared with last year, however, public construction spending as a whole was off 0.6%.
While Chinese demand remains a concern, it’s a very good time to be a construction metals investor with positive sentiment nearly across the board when it comes to both construction and metals.
Our Raw Steels MMI rose 14% in November amid rising Chinese and raw material prices and a rebound in domestic prices.
Prices of flat steel products in the U.S. corrected since July but they finally showed some upside momentum in November. As we pointed out last month, there are reasons to believe domestic steel prices have found a floor and are set to rise as we move into 2017.
Chinese demand from infrastructure and construction has been robust this year. So has its auto sector, a key industry for steel demand. Domestic prices fell over the past few months, but prices in China rose, trading now at their highest levels in two years. As a result, the international price arbitrage has come down to normal levels.
In some steel product categories, like hot-rolled coil, this price arbitrage has narrowed enough that there isn’t much incentive for U.S. steel buyers to look for import offers. In October, The U.S. imported 2.4 million metric tons of steel, down 11% from the same period last year. Steel imports fell on a monthly basis for three consecutive months after they hit a one-year high in July. Fewer imports provide more pricing power to domestic steel producers in an otherwise well-supplied industry. While international steel prices continue to rise, domestic mills won’t find it difficult to find arguments for a price hike.
What changes in the steel industry Donald Trump will make are still unknown. What’s clear is that the new president-elect made trade, manufacturing and the steel industry a cornerstone of his agenda. Stocks of American steel companies were the best performers in the stock market since the election as investors are optimistic that a Trump-led government will boost domestic infrastructure, which could be a boom for steel demand. In addition he has stated he would institute more measures to protect domestic steel producers.
A good benchmark for steel prices is the Dow Jones U.S. Steel Index, which tracks major steel producers around the globe. The index recently rose to the highest level in five years. Since the stocks of U.S. steel companies are linked to domestic steel prices, this powerful price increase hints at a big rebound in steel prices.
Higher input costs help to keep supply in check as mills’ margins get squeezed. Thermal coal prices in China have more than doubled this year. Iron ore prices reached a two-year high in November, with prices trading near $80 a metric ton. This rising trend in input costs will help support the recent rally in steel prices.
Finally, another reason to expect a rebound in steel prices is the ongoing price strength across the metal complex. We are witnessing powerful moves across the board. Even copper, a metal whose fundamentals didn’t look appealing, rose over 25% in a matter of days. The bullish sentiment across base metals is another reason to expect a continuation of this recent rebound in steel prices.
Our Stainless MMI rose 3.3% in November as nickel prices continue to look strong.
The Philippines’ output of nickel ore fell 16% in the third quarter from a year earlier, as a result of several mine suspensions due to environmental violations. The country has already stopped work at 10 of its 41 mines, eight of which are nickel mines. 20 More mines, 14 of which mine nickel, could see their licenses suspended.
Environment and Natural Resources Secretary Regina Lopez recently said that there will definitely be more mine suspensions when the country releases rulings on those 20 mines, possibly within the next few days.
Meanwhile, Indonesia will cut the royalty charged on sales of processed and refined nickel to 2%, from the current 4%, to encourage more miners to develop smelters. In addition, the country appears unlikely to resume nickel ore and bauxite exports.
On the other side of the equation, higher than expected Chinese demand is adding fuel to nickel’s price rally. The Caixin Manufacturing PMI in China was 50.9 in November, the fifth straight month of expansion. In addition, the U.S. is set to increase infrastructure spending as Donald Trump takes office.
Apart from the bullish narrative of more demand and less supply, prices are acting strong as it appears that bulls are still in control. Over the past few weeks, nickel prices are resting near $11,500/mt in what it looks like a pause to be followed by another price rally. Specially, considering the ongoing bullish sentiment across the entire industrial metals complex.