The Midwest HRC price continues the rally that began in December, 2015 at $365/st. After correcting 10% from the $660 high set on March 20th, 2017, the TSI Daily Midwest HRC Index has bounced off a low of $591 closing this past week up $6 to $630, while the September CME Midwest HRC future was flat at $638. Global and domestic steel industry fundamentals continue to strengthen. Global flat rolled prices rallied sharply last week, especially in Asia. Hurricanes Harvey and Irma’s destruction will result in demand growth as automobiles and trucks are replaced and communities are rebuilt.
September CME HRC Futures vs. TSI Daily Midwest HRC Price
Data continues to show persistently low inventory levels at OEMs and service centers. August’s ISM report indicated a major imbalance between producer and consumer inventory levels. The imbalance hasn’t been this large since the 2010 – 2011, when HRC prices rallied from $550/st to $875/st. Current conditions are ripe for a massive restocking rally.
ISM Prod. Inv. – Cust. Inv. Differential (white) vs. TSI Daily HRC Index (orange)
We see the following issues as the foundation of our current constructive view:
-Rallying ferrous raw materials, global finished steel and base metal prices
-Persistently low flat rolled inventory evidenced in the MSCI, ISM and Durable Goods reports
-Conditions ripe for distribution and customer restocking
-A global uptrend in manufacturing purchasing managers indexes
-A rebounding US energy industry
-Falling imports volumes expected for the remainder of 2017
At the end of each “Week Over Week” report is a list of upside and downside risks that influence the domestic HRC price. That list will remain at the end of the report, but going forward the risks deemed to be most timely and significant will be listed below.
At its core, the purpose of this report is not to forecast HRC prices, but to present possibilities to be considered in FGM’s “If this, then what?” framework in order to evaluate risk tied to steel prices and availability.
Upside Risks:
– Rallying ferrous raw materials and global finished steel prices
– Low inventory levels/domestic or global restocking
– Post hurricane development and production
– China pumping up its “old economy”
– Energy industry rebound
– Weaker dollar
– Graphite Electrode Shortage
Downside Risks:
– Political & geopolitical uncertainty
– Domestic automotive industry under pressure
– Rebound in import volumes
– Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma
The table below compares the prices changes of a cross section of steel related raw materials and finished products. Midwest HRC prices remain near the bottom of the list.
The next two charts narrow the focus to the TSI Daily Midwest, North European and ASEAN HRC indexes and the Chinese spot HRC price. The first chart normalizes the data as of one year ago. In other words, it looks at the percentage change in each product. Midwest HRC has drastically underperformed vs. the others.
TSI Midwest HRC, North European HRC, ASEAN HRC and Chinese Spot HRC
The next chart takes the same data comparing the actual prices of the four indexes all in US dollars per short ton. This charts shows how the US price premium to R.O.W. has diminished significantly as a result of it underperformance.
TSI Midwest HRC, North European HRC, ASEAN HRC and Chinese Spot HRC
Imports have materially increased in recent months, most likely in response to the potential threat of the 232 Investigation. However, concerns over the 232 Investigation were drastically reduced in July. Nevertheless, new import deals during the months of May, June and July were curtailed as all parties to import transactions looked to avoid the potential risk of a strict policy change. While the threat of the 232 still looms, the effect was all but eliminated in the short-term as President Trumps Agenda has floundered. In the mean time, the price differential that makes imports attractive is gone. The conclusion is that the development of these events will result in a sharp drop in flat rolled imports over the near and medium-term thus constricting supply.
SBB Platts HRC and CRC differentials charted below. Differentials have moved sharply lower.
As of Friday’s settlement, the September CME Midwest HRC future ended the week flat at $638/st. Q4 gained $2 to $642. Q1 2018 gained $2 to $642, while Q2 fell $1 to $639.
Flat rolled prices in Asia were up 5 -7%. Prices were up in Europe and the US as well. No indexes were lower.
The TSI ASEAN HRC continued to rally gaining $28/st to $539/st while the TSI North European HRC Index gained $17 to $588/st.
August flat rolled imports are projected to move lower vs. July, however remain elevated YoY.
Tube imports have exploded this year, but may have peaked in July.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. There were big shifts lower in HRC and CRC differentials this week. The lack of deals made in Q2 due to the Section 232 Investigation and now the closing of the price window affirms our belief that imports will decline precipitously in the near term and stay depressed until early 2018 at the earliest.
HRC prices were led higher by a 10% increase in Turkey, 7.4% pop in China and 7.2% gain in East Asia.
Chinese domestic CRC gained 4.4% and South European CRC gained 3.8%.
No major moves in HDG, but all the price changes were positive.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
AISI capacity utilization was down to 74.9%.
Iron ore prices were under pressure while coking coal fell 1%. Midwest shred declined 6% as September scrap settled lower than expected. Black Sea pig iron gained 1.4%.
Iron ore and TSI Turkish Scrap paused their respective rallies.
The iron ore curve has shifted higher vs. early August and the curve continues to move towards a steeper backwardation.
Turkish rebar gained almost 3%. October Chinese rebar futures fell 4%.
July factory orders fell 3.3%, in line with expecations while June was revised higher to 3.2%. July factory orders Ex-transportation gained 0.5% and June was revised 0.3 points higher to a 0.1% gain. The July Durable Goods Orders Ex-Transportation report showed a gain of 0.6% MoM. Cap goods orders gained as well. The ISM Non-Manufacturing Report increased to 55.3, but missed expectations of 55.6. Second quarter productivity was up 1.5%, beating expectations of 1.3%. Second quarter unit labor coasts gained 0.2%, missing expectations of a 0.3% gain.
The S&P 500 fell 0.5%, while the VIX jumped 20%. The Nikkei fell 2.7%.
S&P 500
Steel stocks were mixed, but mostly lower.
AK Steel
Iron ore stocks were all down with ore prices.
Base metals were all lower with zinc down almost 5%, nickel down almost 4% and copper down 2.5%.
LME 3 Month Rolling Zinc Future
CME December Copper Future
LME 3 Month Rolling Aluminum Future
The US dollar fell to fresh lows reflecting decreased expectations for another 2017 FOMC rate increase in response to economic disruptions caused by Hurricanes Harvey and Irma. Next week brings a FOMC meeting, decision and press conference.
US Dollar Index
Euro
Japanese Yen
Canadian Dollar
British Pound
The October WTI crude oil future inched higher to $47.48/bbl. The US rig count added one rig. Production was down almost 8% due to Hurricane Harvey. Crude oil inventory added 1% while the sum of crude, distillate and gasoline inventory was flat. Natural gas fell 5.9% to $2.89/mbtu, while inventory gained 2%. The average gas price jumped 3% to $2.67.
Octber WTI Crude Oil Futures and October Crude 15 Delta Put Volatility
Aggregate Energy Inventory (Blue) vs. WTI Crude Oil Futures
D.O.E. Crude Oil Inventory
D.O.E. Crude Oil Inventory Perspective (1982 – Present)
Baker Hughes US Rig Count
D.O.E. Crude Oil Production
D.O.E. Crude Oil Production Perspective (1983 – Present)
Treasury yields were under pressure with the 10 year US Treasury yield down 12 basis points to 2.05.
U.S. 10 Year Bond Yield
German 10 Year Bond Yield
The list below details some upside and downside risks relevant to the steel industry. The bolded ones are occurring or look to be highly likely. The upside risks look to be in control.
Upside Risks:
– Rallying ferrous raw materials and global finished steel prices
– Low inventory levels/domestic or global restocking
– Post hurricane development and production
– China pumping up its “old economy”
– Energy industry rebound
– Weaker dollar
– Graphite Electrode Shortage
– Flatbed trucking availability
– Section 232 Investigation
– President Trump’s agenda
– Infrastructure bill/long-term solution to highway spending bill
– China getting serious about curtailing steel production
– Transportation supply constraints
– Post-election economic pick up
– Unplanned domestic supply side disruptions
Downside Risks:
– Political & geopolitical uncertainty
– Domestic automotive industry under pressure
– Rebound in import volumes
– Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma
– Sharp and persistent drop in oil and iron ore prices
– US domestic producers bringing back on capacity
– Higher interest rates slowing residential construction and auto sales
– Tightening financial conditions pressuring auto sales driven by sub-prime financing
– Chinese restrictions in property market
– The Chinese Financial Crisis
– Unexpected sharp China RMB devaluation
– Increasing import differentials
– Economic downturn, especially in China or Europe reverberating to U.S.A.
– Weak demand in housing or automotive