Key Variables: Why Pressure on Iron Ore Prices Could Persist
Housing starts strong
The residential construction sector accounts for over one-third of the total construction spending in the US (SPY), making it a major end steel consumer. In this article, we’ll analyze the current state of the US housing market.
The following chart shows the trend in housing starts in the US. Housing starts are a leading indicator of residential construction activity. Higher housing starts bode well for future residential construction spending.
These figures are released on a monthly basis by the US Census Bureau. Housing starts in May increased 4.6% on a year-over-year (or YoY) basis. However, as compared to April, they dipped 11.1% to a seasonally adjusted annual rate of 1.036 million.
Building permits increase
In May, building permits increased by an impressive 25.4% on a year-over-year basis. As compared to April, building permits increased 11.8% to reach a seasonally adjusted rate of 1.28 million, which is the highest level in the last eight years.
Positive for US steel and iron ore companies
Construction indicator improvement is a positive sign for steel companies such as US Steel (X), Nucor (NUE), Arcelor Mittal (MT) and Steel Dynamics (STLD). This in turn is positive for the supplier of raw material (iron ore) to these companies. Cliffs Natural Resources (CLF) is the largest supplier of iron ore pellets to US steelmakers. Thus, improvement in housing should bode well for CLF.
The SPDR S&P Metals and Mining ETF (XME) seeks to build a diversified portfolio of these companies. US Steel currently forms 4.1% of XME.
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