Flack Capital Markets | Ferrous Financial Insider

Market Analysis

Overview:

• US domestic HRC prices remained stable, but future prices decreased, while tandem products saw a slight increase
• Global prices were mixed, with Europe experiencing a notable increase, while China’s price lost some steam
• Mill production pulled back further, with capacity utilization hitting its lowest level since early February 2023.
• Imports continued to indicate an upward trend forming
• Raw material prices stayed the same or increased, although some their futures had slight decreases
• Base and precious metals faced significant price reductions

Steel

U.S. Domestic

The HRC spot price continued to remain stagnant at $1,100, while the 2nd month future fell by $40 or -3.6% to $1,058. This is the second week in a row of price reductions, causing the five-week price change to fall by $38 or -3.5%.

Tandem products both increased by $30, resulting in the HDG – HRC Differential to increase by $30 or 15.0% to $230.

Mill production continues to be restrained, with capacity utilization ticking down to 73.1%, the lowest level since early February 2023, bringing raw steel production down to 1.680m net tons.

Midwest HDG – HRC Differential

AISI Raw Steel Capacity Utilization

Midwest HRC (2nd Month Future)

Imports

December Projection – Sheet 784k (up 86k MoM); Tube 446k (up 162k MoM)

November Projection – Sheet 699k (down 24k MoM); Tube 284k (down 145k MoM)

Differentials

Watched global differentials were mixed this week, with North Europe HRC increasing by 1.8% and the Brazil domestic HRC price falling by -0.4%. Other notable countries were Mexico HRC increasing by 5.3% and Japan HRC falling by -2.8%.

Sheet Imports & Tube Imports

Global Differentials (including Transport & Tariffs)

Raw Materials & Freight

Scrap

The 2nd month busheling future fell by $30 or -5.5% to $520, resulting in a $50 price drop since hitting recent price high of $570 three-weeks ago.

The LME Turkish scrap 2nd month future increased by $5 or 1.3% to $415, seemingly stabilizing above the $400 price level after falling from recent price high of $431.50.

The 2nd month iron ore future fell by $1.05 or -0.8% to $137.65, this comes after hitting the 2023 price high of $138.70.

Dry Bulk / Freight

The Baltic Dry Index continued to fall, albeit not as sharply, decreasing by $8 or -0.4% to $2,086. However, remains above the $2,000 level, which is relatively elevated compared to the levels seen in 2023.

LME Turkish Scrap (2nd Month Future)

Iron Ore (2nd Month Future)

Baltic Dry Index

Energy Market

WTI crude oil future gained $2.04 or 2.8% to $73.81/bbl.

WTI natural gas future gained $0.34 or 13.1% to $2.89/bbl, continuing to climb up after recent price drop.

The aggregate inventory level was slightly up by 2.0%.

The Baker Hughes North American rig count saw another big decrease in rigs, this time reducing by 20 rigs, bringing the count to 746. The US rig count gained 1 rig, bringing the total count to 621 rigs.

Natural Gas (Active Future)

Crude, Distillate, & Gas Accumulative Inventory

Rig Count – North American & U.S.

Base Metals

Aluminum dropped below the $2,300 per tonne level, down by $105 or -4.4% to $2,274, a sharp decline from the eight-month peak of $2,387 reached on December 27th, due to evolving market perspectives on Guinea’s bauxite supply. This drop follows an explosions at the Guinean fuel depot that disrupted the nation’s industrial activities and briefly spiked aluminum prices late last year. Guinea is the world’s third-largest bauxite exporter, crucial for aluminum production. However, prices have stabilized since the new year, thanks to significant investments from the UAE in Guinea’s bauxite infrastructure, alleviating fears of a supply shortage. Meanwhile, expectations of China’s economic stimulus boosting manufacturing activity continue to sustain demand. The PBoC has recently injected CNY 350 billion into state banks, such as the China Construction Bank, supporting the market for base metals like aluminum.

Copper fell by $11.85 or -3.0% to $381, the lowest price in a month, influenced by a strengthening US dollar, fluctuating demand, and rising stock levels. The US dollar’s surge, driven by revised expectations of the Fed’s policy changes, made copper more expensive for importers who use the dollar for transactions. Additionally, mixed signals from China affected market sentiments. While the official Chinese manufacturing PMI showed a decline, the broader Caixin data indicated improvement, leading to uncertainty about China’s copper demand.

Precious Metals

Silver took a sharp decline, dropping by $1.06 or -4.3% to $23.32, due to a stronger dollar and rising yields, as the likelihood of an early Fed interest rate cut diminished. This shift in expectations followed the recent US Nonfarm Payrolls report, which revealed a higher-than-expected job growth in December, indicating a strong labor market. Consequently, investor confidence in a March interest rate cut dropped to about 60%, down from 90% at the end of December. Market focus now turns to the upcoming US inflation report, which is expected to provide further insight into potential monetary policy adjustments.

LME Aluminum

CME Copper

Silver

Economic Data

While there were some signs of stability and strength in certain sectors like manufacturing and the labor market, the overall economic picture remains mixed with challenges in services and a cautious approach in the industrial sector. This dynamic has impacted monetary policy expectations, causing wider implications on financial markets.

The ISM Manufacturing Index showed a modest improvement, rising from 46.7 to 47.4, slightly above market expectations. However, the ISM Services Index underperformed, dropping from 52.7 to 50.6. These figures present a somewhat weaker economic outlook, albeit with some signs of progress.

For the industrial sector, Construction Spending MoM grew by 0.4%, less than the anticipated 0.6% increase from the previous month. The final data for Durable Goods Orders in November remained unchanged at 5.4%, aligning with market expectations and suggesting some stability in the market.

Labor market data continues to come in hot. Initial Jobless Claims fell significantly more than expected, dropping to 202k from 218k. The Challenger Job Cuts YoY reported the lowest job cuts since July 2023. Additionally, the Change in Nonfarm Payrolls rose to 216k, surpassing expectations of a decrease to 175k. However, JOLTS Job Openings eased, declining to their lowest level since early 2021. These indicate that the labor market remains tight, despite a cooling in demand for workers, which has reduced the likelihood of a Fed cut in March. This shift in expectations has driven yields higher and the dollar stronger, presenting a headwind to global metals.

ISM Manufacturing PMI

Change in Nonfarm Payrolls