Less Optimism, More in Touch with Reality. The June Institute of Supply Management (ISM) survey indicated that steel buyers are becoming increasingly more pessimistic in the face of deteriorating macroeconomic fundamentals. In our view, last month’s survey indicated that buyers were a bit out of touch with reality with a meaningful disconnect between more optimism but less strength in the economic and industry fundamentals. This month reality has set in with some 25% of respondents anticipating a deteriorating economy – the highest level since last spring. While inventories remain in good shape overall, with 84% of respondents indicating inventories of 2 months or less, we see fewer buyers planning on increasing inventories going forward as well. So the inventories are getting a little top-heavy relative to an increasingly worrisome economic outlook.
Employment Outlook Collapses. Hiring plans collapsed in June, with some 17% of respondents indicating plans to hire, down from 50% in May, the biggest monthly decline on record. More chilling was that for the first time in the recent past, and for a second month in a row, not a single buyer reported that current receipts are ahead of current shipments – this is a key forward-looking metric that has been steadily deteriorating for the last few months. While in the May survey buyers remained optimistic on anticipated orders, this month reality set in with only 17% of buyers indicating that receipts in the next 3 months will be higher than current levels – down from 36% last month, and the lowest level since last fall.
Foreign Steel Retreating? Last monthwe saw a small pickup in interest in foreign steel, with 15% of buyers saying they plan on increasing their reliance on foreign steel in the next six months, up from zero in April and the highest since last fall. This reversed in June with only 9% indicating plans to increase purchases of foreign steel. This most probably is due to a combination of pricing and increased worries about the economy; generally uncertainty enhances domestic market share where lead times are far shorter.
Outlook – Economy Double Dipping? This is an economy of fits and spurts and while the bright spot in the economy – automotive – continues at a surprising pace, the weakness from non-residential construction markets has only worsened. The export economy has held a potential bright spot but now with worries about various European economies, that bright spot may be fading fast.
Disclosure: No positions