Flack Metal Bank | Ferrous Financial Insider

February 24, 2023 – Issue #368

Market Analysis

While price increase announcements from mills in North America and Europe are significant talking points for current pricing dynamics, what is likely more significant over the long-term is the Federal Reserve’s fight against inflation. January PCE (Personal Consumption Expenditure) data from last week confirmed that the fight is far from over.

The YoY topline and core (ex. Food and energy) measures both printed higher than December readings, and above consensus expectations. The current target rate for the FOMC is 450-475. Leading up to the Friday release of data, the market had already priced in the expectation of 3 additional rate 25 bps increases from the Federal Reserve, which would bring the peak terminal rate up to 525-550 in June (based on Fed funds futures). This was already an extreme move from just several months ago when the market was expecting a peak rate at 475-500 and multiple rate cuts by the end of 2023.

What does this mean for the current rally in steel? In the coming months, price action will be driven by the imbalances of supply and demand. Recently on the supply side, data suggest that both mills and buyers expected weak demand to start the year. Imports and production are as low as they have been in two years. Turning to demand, it has clearly come off the heights of 2021 & 2022. However, it appears that supply side expectations overreacted. Strong backlogs in the auto sector and stabilization around 2019 levels in construction and manufacturing have resulted in a shortage of material. Historically, supply side forces would quickly increase to fill the shortage, however, with the Federal Reserve signaling that they will continue raising rates to slow demand we anticipate reluctance from the mills to oversupply the market.

Topline & Core PCE


  • Reluctance to place import orders,
    leading to a dramatic reduction in arrivals
  • Increasing input costs continuing to elevate the floor for domestic producers
  • China further introducing stimulus measures to bolster its construction sector
  • Easing supply chain restraints and labor shortages causing an increase in activity
  • Unplanned & extended planned outages causing production to fall below demand
    levels and cause a physical “short squeeze.”


  • Rapid increases to domestic production capacity overshooting demand
  • Steel consumers substitute to lower-cost alternatives
  • Economic slowdown caused by increasing interest rates and sustained restrictive policy from the Federal Reserve
  • Differentials rapidly increase and cause buyers to flood the domestic market with foreign material in 2H23


U.S. Domestic

U.S. Domestic HRC future and spot prices printed significantly higher last week. A flurry of mill price increase announcements culminated in a 21% increase in the March future and 17.6% increase in the spot price.

Tandem products are trailing HRC in momentum, but both also increased sharply, with CRC up 11.3% and HDG up 10.6%. This dynamic has also resulted in the tightest HDG – HRC spread since mid-March 2021, nearly 2 years ago, down to $160.

Domestic production surprisingly decreased last week, with capacity utilization down 0.4% after 5 straight weeks of increases. At this point, we view the move as an anomaly. Reduced imports and anecdotal evidence of increased buying interest suggest that domestic production will likely continue to trend higher alongside the rally in prices.

Midwest HRC Spot Price
Midwest HDG – HRC Differential (Monthly Avg.)
AISI Raw Steel Capacity Utilization
Midwest HRC (2nd Month Future)


February Projection – Sheet 655k (down 138k MoM); Tube 558k (up 25k MoM)

January Projection – Sheet 794k (up 50k MoM); Tube 533k (down 88k MoM)

The current projection for February sheet import arrivals would be the lowest level since January 2021, over 2-years ago. Prior global price dynamics suggest that imports should remain subdued in the near-term.


Differentials popped, as expected, with the U.S. domestic price up by 17.6%. Based on historical analysis, there is a 2 to 3-month lag between positive differentials and increasing import arrivals.

Sheet Imports & Tube Imports
Global Differentials (including Transport & Tariffs)

Raw Materials & Freight

The April busheling future rose another 9.7% and is currently pricing in a $90 increase over the next two months. What is more notable, however, is that even with the $50 increase, the mill margin is up another 36.3%, highlighting just how far the HRC price has moved above its major input cost.

The April Aussie coking coal future sold off by 11.8% after rallying 52.9% since the end of November. The spot price also sold off, down 11% on the week.

Dry Bulk / Freight

The Baltic Dry Index rallied sharply, up 54%, after reaching its lowest level since May 2020 at the end of last week.

Busheling (2nd Month Future)
Mill Margin (HRC – Busheling)
Coking Coal (2nd Month Future)
Baltic Dry Index

Energy Market

The April WTI crude oil future ended the week down slightly, $0.02, to $76.32/bbl.

The April WTI natural gas future gained $0.27, or 12%, up to $2.55/bbl.

The aggregate inventory level continues to increase, up another 1% last week to 841k.

The Baker Hughes North American rig count fell further, down another 11 rigs and the U.S. rig count fell another 7 rigs.

Crude Oil (Active Future)
Natural Gas (Active Future)
Crude, Distillate, & Gas Accumulative Inventory
Rig Count – North American & U.S.

Base Metals

CME Copper futures fell 3.7% during the week on the back of a stronger dollar and doubts about the strength of the China reopening story. The market shrugged off news that First Quantum’s Cobre Panama mine had ceased operations.

LME Aluminum futures fell 2.2% WoW, holding up better than several other base metals as dollar strength weighed on the complex. Aluminum saw little reaction to headlines that the US would apply a 200% tariff on Russian aluminum products.

Precious Metals

Silver fell 4.2% on the week, outpacing declines in Gold which only fell 1.8% on the week despite a stronger dollar and Fed minutes that boosted expectations for more rate hikes ahead.  Furthermore, worries about a slowing global economy has cause silver to underperform other precious metals in recent weeks given its dual role as an industrial metal.

LME Aluminum
CME Copper

Economic Data

The February Kansas City Fed Manufacturing Survey printed at 0, up from -1 in January and better than expectations of -2. This signals that the manufacturing sector in the region was unchanged compared to the prior month.

The final February University of Michigan sentiment survey also signaled an improvement compared to the preliminary results, driven by better forward-looking expectations. The most notable signal from the report is the slight improvement in 1-year inflation expectations, down to 4.1%, from 4.2% in January.

Kansas City Fed Manufacturing Survey
University of Michigan Consumer Sentiment

Currencies & Rates

U.S. Dollar continues to show strength against a basket of major currencies, most significantly last week, the Japanese Yen. Signs of persistent inflation and tight labor market suggest more rate hikes and higher rates for longer.

Additionally, the British pound versus the USD reversed gains early in the week to finish just below 1.20. The currency has traded flat around 1.20 since falling steeply from 1.24 at the start of the month. Law makers will work on post-Brexit trade agreements with the EU, adding some upside risk if talks go smoothly. Investors expect a 25-bps increase from the BOE next month as policymakers continued to stress the importance of being “really, really careful” about the risk of high inflation becoming embedded. However, there is some disagreement among BOE members as some are calling for a pause or cut in the coming months. The British 10yr climbed on the week with the rest of the global market and are just shy of their recent peak at the end of 2022.

U.S. Dollar
Japanese Yen
U.S. 10-year Treasury Yield
British 10-year Treasury Yield