Flack Capital Markets | Ferrous Financial Insider

Market Analysis

Overview:

• Domestic spot steel prices continued to drift lower, and the HRC 2nd month future dropped to its lowest point since September.
• Globally, steel prices largely declined or remained unchanged, except for Europe, which experienced a slight increase. Price differentials mainly contracted.
• The preliminary estimate for May imports arrivals was revised lower, coming in just under the 1M level. However, it continues to indicate a trend higher from April’s census data.
• Domestic production ramped up for its fifth consecutive week and reached the post-pandemic average level.
• Raw material futures all declined, while their spot prices were more mixed. Of note, both the busheling spot price and 2nd month future hit their lowest price since December 2022.
• The energy sector varied, with the crude oil future declining, while the natural gas future increased. This occurred as the aggregate inventory experienced a slight gain, and the NA rig count grew, while the US rig count reached its lowest level since January 2022.
• Base and precious metals continued to retreat from recent price highs amid signs of weakening demand.
• The week’s industrial data highlighted the uneven recovery as these sectors face strong headwinds. In contrast, the strength in recent labor market data (albeit potentially overstated) suggest that the window has likely closed for pre-election rate cuts.

Midwest HRC Spot Price

U.S. – Global HRC Differential

Steel

U.S. Domestic

The HRC spot price declined further, falling by $10 or -1.3% to $740, hitting its lowest level since October 2023. At the same time, the HRC 2nd month future dropped by $40 or -5.2% to $731, reaching its lowest point since September 2023.

Tandem products both held steady, resulting in the HDG – HRC differential to rise by $10 or 3.7% to $280.

Mill production continued to scale up, with capacity utilization ticking up by 0.4% to 78.5%, bringing raw steel production up to 1.743m net tons. This marks the fifth consecutive week of increases.

Midwest HDG – HRC Differential (Monthly Avg.)

AISI Raw Steel Capacity Utilization

Midwest HRC (2nd Month Future)

Imports

May Projection – Sheet 998k (up 11k MoM); Tube 471k (up 95k MoM)

April Projection – Sheet 987k (up 31k MoM); Tube 376k (down 60k MoM)

Differentials

All watched global differentials contracted this week. Main price movements from these were from the N. Europe HRC increasing by 1.2% and from Brazil Domestic HRC falling by -1.9%, while its Export HRC was unchanged.

Sheet Imports & Tube Imports

Global Differentials (including Transport & Tariffs)

Raw Materials & Freight

Scrap

The busheling 2nd month future dropped by $16 or -3.8% to $410, hitting its lowest price since December 2022. Meanwhile, the busheling spot price fell by $35 or -8.4% to $380, also hitting its lowest level since December 2022.

The Aussie coking coal 2nd month future edged down by $3 or -1.1% to $258, resulting in its five-week price change to be up by $5 or 2.0% as it continues to fluctuate in this price range.

The 2nd month iron ore future declined by $6.15 or -5.4% to $107.35, marking its second consecutive week of a downturn and reaching its lowest point since early April.

Dry Bulk / Freight

The Baltic Dry Index inched up again this week, climbing by $66 or 3.6% to $1,881, nearing the $1,900 price level.

Aussie Coking Coal (2nd Month Future)

Iron Ore (2nd Month Future)

Baltic Dry Index

Energy Market

WTI crude oil future lost $1.46 or -1.9% to $75.53/bbl.

WTI natural gas future gained $0.33 or 12.8% to $2.92/bbl.

The aggregate inventory level experienced a slight increase of 0.8%.

The Baker Hughes North American rig count added 9 rigs, bringing the total count to 737 rigs. At the same time, the US rig count reduced by 6 rigs, bringing the total count to 594, breaking below the 600-rig level for the first time since January 2022.

Natural Gas (Active Future)

Crude, Distillate, & Gas Accumulative Inventory

Rig Count – North American & U.S.

Base Metals

Aluminum futures fell by $75 or -2.8% to $2,578, retreating from recent high amid a broader downturn in base metals driven by concerns over demand from major consumers. Recent official PMI data revealed an unexpected contraction in China’s manufacturing activity for May, and skepticism regarding the effectiveness of governmental support for the property sector tempered expectations for an economic rebound. Despite these demand concerns, supply risks have maintained prices 14% above the levels at the beginning of the second quarter. Contributing to these supply concerns, Rio Tinto declared force majeure on alumina shipments from its Australian refineries due to gas shortages. Additionally, unpredictable weather conditions in Yunnan, a critical aluminum-producing region in China, have jeopardized hydroelectric power availability, further straining production capabilities.

Copper futures declined by $11.85 or -2.6% to $448, reaching a one-month low and negating May’s rally that saw prices hit a record high, due to signs of weakening demand. Following an unexpected contraction in China’s manufacturing sector, trade data revealed a 7.1% decline in copper ore imports despite rising prices, with refiners increasingly turning to scrap metal to sustain production. This shift contributed to a rise in Chinese copper inventories to their highest levels since 2020, counteracting typical seasonal drawdowns. As a result, prices for deliveries from Shanghai bonded warehouses continued to be lower than those on the LME for the second consecutive week. Despite the recent downturn, copper prices are still up 15% year-to-date, buoyed by speculative investments anticipating potential shortages.

Precious Metals

Silver fell below $30 to $29.44, a sharp decline from the 11-year high, amid a broad downturn in bullion influenced by strong US economic data that supported a hawkish Fed outlook. A significant increase in May’s nonfarm payrolls, underscored the strength of the US labor market and exerted upward pressure on US Treasuries, which in turn reduced the appeal of non-yielding bullion assets. The decline in precious metals was further exacerbated by the PBoC pausing its gold purchases, which had been a major factor in the asset class’s strong performance earlier this year. Additionally, the US implemented 50% tariffs on Chinese imports of solar cells, a key industrial use for silver, aiming to curb production in major Asian panel factories with corporate bases in China. Despite these pressures, robust demand within China’s domestic market helped prevent an even steeper drop in silver prices, highlighted by the recent activation of the world’s largest solar farm in northwestern Xinjiang.

LME Aluminum

CME Copper

Silver

Economic Data

In the recent manufacturing data, the S&P Global US Manufacturing PMI exceeded expectations, rising to 51.3 versus the expected 50.9. Conversely, the ISM Manufacturing PMI dropped to 48.7, surprising to the downside as was anticipated for a slight increase to 49.5. Furthermore, Construction Spending MoM disappointed for the fourth consecutive month, slipping by -0.1% instead of the forecasted 0.2% increase. This decline was mainly due to a -0.2%  decrease in public spending and a -0.1% fall in private spending. However, residential spending edged up by 0.1%. Additionally, Wards Total Vehicle Sales surpassed expectations of 15.80m and jumped to 15.90m from April’s 15.74m. This marks the third straight month of sales growth. However, sales have still yet to consistently reach the pre-pandemic levels of 16-17m.

The latest labor market data presents a complex picture. Nonfarm Payrolls surged by 272k in May, the highest in five months and well above the forecasted 185k, reflecting robust hiring. Manufacturing Payrolls also beat expectations, holding steady at 8k instead of the predicted decline to 5k. Meanwhile, Challenger Job Cuts for May decreased significantly by -20.3% year-over-year, the lowest since February 2021. Despite these positive indicators, the Unemployment Rate rose to 4.0%, up from the forecast to stay at 3.9% and reaching the highest level since January 2022. This increase, alongside the sharp drop in JOLTS Job Openings to 8059k, well below the anticipated 8350k, signals potential challenges in labor demand. The divergence between rising payrolls and unemployment suggest that the true state of the labor market likely lies between these mixed readings, indicating a resilience but also cooling underlying structural changes.

ISM and S&P Global US Manufacturing PMIs

Total , Residential, & Nonresidential Construction Spending SA

US Auto Sales (SAAR)