Europe earned its share of headlines last quarter. However, risks of contagion have yet to weigh on U.S. steel volume, which is good for steel companies such as Reliance Steel RS and competitors such as U.S. Steel X and Nucor NUE - particularly if steel prices can find a floor.
At 116 million metric tons, November's world crude steel production increased a shade above 1% from last year. Digging deeper shows Asia's production declined as China production fell -0.2% and Japan's production sagged -3.2%. Germany's production also fell, dropping 10%. Offsetting these regions were South Korea, where production rose 12.4%, and the United States, where an 11.8% increase brought America's share of world production to 6.21% from 5.80% last year.
Typically, steel volumes dip in the third quarter from the second. But, this past year they increased. At Reliance, the company sold 4% more metal than in Q2, and 13% more than last year. And Reliance may benefit from further growth if its biggest end market - non-residential construction - can build on recent signs of improvement. In November, U.S. construction spending rose 1.2% from October, well above the 0.3% analysts expected while non-residential spending increased 4.46% year-over-year.
Also encouraging is the rate of growth in business loan demand. In November, total commercial and industrial loans at U.S. banks rose to $1317.4 billion, up from $1310.9 billion the prior month and $1269.8 billion in July. This was the 13th straight increase in such loans.
This demand seems to have carried into year-end. C&I loans at large banks, which report weekly, rose to $699 billion in the week ending December 21st from $688.3 billion in late November. This suggests rising capital expenditures, which is good for steel demand.
Manufacturing data also supports steel volume. In December, the ISM manufacturing index rose to 53.9, up from 52.7 in November. Manufacturing capacity utilization was 75.3% in November, up from 73.1% last year and the steel industry estimates U.S. mill capacity utilization averaged 75% in 2011, up from 70% in 2010. In the week ending December 24th, U.S. production of steel rose 14.8% from the comparable week a year ago as capacity came in at 1.9mn net tons.
Industrial production of transit equipment, a source of steel demand, was 25% higher in November than the prior year. And primary metals, fabricated metal products and machinery all posted production growth of 9.6%, 7.7% and 9.4% year-over-year, respectively. Aerospace, an area Reliance has referred to as a robust end market in its earnings transcripts, saw industrial production increase 15.5% year-over-year, which is good news for aerospace sheet and plate volume.
Also supporting steel volume in Q4 is rail carload volume. Metals and products and iron and steel scrap carloads increased 11.9% and 6.9% year to date through December 24th.
Volume doesn't seem to be the problem facing steel stocks heading into 2012 - yet. Pricing is the bigger risk and will need to be watched closely. But, if manufacturing growth continues and the potential of non-residential growth becomes reality, stocks like Reliance will provide investors with upside.