In 2018, the U.S. steel industry experienced steady year-over-year growth, owing to tax reform that injected the industry with immediate cash on hand. Trade negotiations, colorfully referred to as “trade wars” in the media, created winners and losers in the American economy. With its margins largely protected by the U.S. government, in the form of export and import tariffs, the steel industry emerged as one of those winners.
Due to the atypical circumstances that impacted the industry during the last year, steel manufacturers should not expect to experience similar level of growth across the industry. A new level has been set, and if the steel industry is to see further gains from here, performance will rely heavily on improving customer demand, not added tax incentives or trade barriers.
With that in mind, economic indicators are projecting slow growth across the steel industry in 2019. To be clear, the industry is not expected to contract, but year-over-year growth will likely fall short of the growth seen in 2018.
As the level of growth for the steel industry next year will be dictated by domestic demand, it is essential for executives in the steel industry to carefully monitor economic indicators so they can accurately identify any potential speed-bumps for demand and plan for potential short-term slowdowns. To get a better sense of the ebb and flow of that demand, as well as the economic cycle on which it depends, it’s important to pay special attention to the three following indicators: Manufacturers’ New Orders: Nondefense Capital Goods, Architectural Billings Index and China’s Purchasing Managers’ Index.
Manufacturers’ New Orders: Nondefense Capital Goods
This leading indicator outlines nondefense-related orders in manufacturing, which historically has provided an accurate six-month forecast of demand for the steel industry. For the first time since the third quarter of 2016, this indicator is showing deceleration. On its own, this provides a reason for caution for the steel industry going into 2019. In the best case scenario, this could be a short-term speed bump in closing a strong year for steel, but it also shows vulnerability in the industry, especially if global demand drops due to new tariffs.
Architectural Billings Index (ABI)
The Architectural Billings Index, which monitors the total work being provided by architectural firms, is often seen as an early indicator of a changing construction market, but it has also proven to be a very reliable indicator for overall industrial production in the U.S. Like the previous indicator, ABI is starting to show deceleration as we approach the end of the year. This can be a long term indicator for the demand for steel in 2019, particularly in the second half of the year.
While ABI is starting to slow, there is a short-term positive indicator for the steel industry, as the indicator for U.S. housing units authorized, but not yet started is currently at an all-time high with more than 175,000 residential homes ready to be built. This can overcome the immediate challenges that the housing industry may face, but, given that much of the residential market is less important to the steel industry than commercial construction, the long-term potential of slowed demand for steel will still loom. .
China’s Purchasing Managers’ Index (PMI)
This is an important indicator for projecting the demand of steel globally. China is both the world’s biggest producer and consumer of steel, and is also a large investor into foreign-direct investment in many countries. As such, China is a good overall metric to watch for the overall steel market worldwide, in spite of the U.S. not engaging in much direct steel trade with China.
China’s PMI serves as a reliable leading indicator for the health of China’s manufacturing industrial production, which is showing signs of weakness, growing at its slowest rate in 2 ½ years in September. Given the relationship with our trade with China—not necessarily directly with steel but indirectly in many other ways—seeing negativity in this indicator can also lead to negativity for domestic steel producers by impacting their customers who may be reliant on a healthy Chinese economy as either a customer or financial backer.
The steel industry cannot plan to use the results of this past year as a reliable indicator for planning production next year. There are many geo-political circumstances, both globally and domestically, that can greatly influence the industry, which is already showing too many signs of vulnerability. In forecasting sales and production for next year, steel industry executives should understand the forecast of production for key industries related to steel, such as construction, auto and durable goods (machinery, in particular), to best determine the growth of demand.
These are all industries that depend on large amounts of steel. The growth of these industries, especially in the context of the aforementioned indicators, will provide the most complete view of the demand for steel in the next year and will be instrumental in anticipating and adjusting for impending market fluctuations.
Andrew Duguay is a senior economist and data scientist at Prevedere, a predictive analytics company.