This kind of failed rally is a badsign for iron ore prices.  As you can seefrom the chart above, downward pricing is intensifying. The risk of a positivefeedback downward spiral is on full alert. In the ore options market, there hassome renewed interest in Q4 downside puts, but there hasn’t been much interestin Q1 or Q2 and the volatility hasn’t ripped higher in any of thoseperiods.  It feels like there is more togo.  The HSBC flash manufacturing indexfor China is set to be released tonight (tomorrow in Asia).  

For the week, (not including today)the IODEX fell $1.50 to 82 and the 3 month iron ore futures fell $2.90 to$80.92.  In China, iron ore portinventories gained 300k million tons to 112.35 million tons.  Inventory of rebar, HRC and the 5-city indexcontinued to show destocking.  All threeof these product’s inventory levels continue to be at levels well below thelowest level for any of the years we have data for 2010 – 2013 again this week(see charts at bottom of results tab). 

The rally in steel stocks continuedlast week galvanized by USS announcement regarding the Canadian bankruptcy. Pricesdid the following: X +13.2% to $45.19, MT +3.71% to $14.82, AKS +3.4% to $9.42,NUE +4.88% to $57.64 and STLD +2.57% to $24.365.  Iron ore miners followed ore prices lower withVALE -2.44%to $12, BHP -2.84% to $63.31, RIO -1.15% to $51.68 and CLF -.99% to$14.   

Zinc was flat at 2268.25.  Gold slipped 1.21% to 1216.6 and silver was down4.1% to 17.84.

Crude oil was about flat at $92.41whilenatural gas shed .52% to $3.84.

Currencies:  The dollar index gained again up 0.59% to84.735 against the yen (-1.58% to 109.04) and Euro (-1.03% to 1.283).  In the emerging markets Brazil (-1.25% to2.368), Australia (-1.25% to .8925) and Russia (-1.79% to 38.43) got hit whileCanada rallied (1.19% to .9123).

10 year rates settled back down fromtheir rally with US -1.38% to 2.57%, Germany -3.6% to 1.04%, Spain -6.14% to2.2% and Italy -3.58% to 2.37%.  Chineseshort term rates were up 2.77% to 3.28%.

Last week’s manufacturing data showed a muchbetter than expected Empire Manufacturing Index (27.5 vs 14.7 august andexpectations of 16), but a worse than expected Philadelphia Fed manufacturingreport that was down to 22.5 from 28 in August (expectations of 23.5). ThePhilly number was tempered by the extremely strong August reading ie things arestill going very well there,  just a bitof mean reversion and some retooling in auto.   Capacity utilization was down to 78.8% from 79.2% in August, missingexpectations of 79.3%. 

Housing continues to struggle as both housingstarts (956k annual) and building permits (998 annual) were down from previousmonth of 1.093m and 1.052m, respectively, while badly missing expectations.

The CPI came in at -.2% and the PPI at0%. 

MSCI data showed flat rolled shipments slipped1.67% to 2.354m mts in August while inventories increased by 3.36% or 175,000tons.  MOH was 2.29, up from 2.18 inJuly.

I currently have the following upside anddownside risk for HRC prices:

Upside Risks:

–        New:Fairfield Accident
–        Sharp drop inimport data
–        Trade Case Rumors
–        USS Mons Valleyplanned maintenance to begin Sept. 1.
–        AKS AshlandAmanda maintenance announced
–        Unplanned outages
–        Hurricane season
–        Continuedimproved demand
–        Infrastructurebill/long-term solution to highway spending bill

Downside Risks:

–        Continued weak iron ore and global finishedsteel prices
–        Weak ore leading to weak scrap prices
–        MT Indian Harbor#7 back up with an additional 500k tons of annual capacity
–        High productionlevels
–        Import tons
–        Economicdownturn, especially in China or Europe reverberating to U.S.A.
–        Weak demand inhousing or automotive
–        Big drop in oiland nat gas prices