Welcome to the USA Steel Industry; Economists Need Not Apply.
The structure of this report has been devised to take an objective approach at weighing issues that could have a positive (The Good) and negative (The Bad) effects on the price of steel. On the good side, strength in the automotive, a rebound in U.S. residential construction coupled with relatively lean service center inventories and improving manufacturing data of late make for a compelling case for increased steel demand and higher HRC prices.
CME HRC Settlement Prices through 2015
From a macro perspective, a U.S. economy bumping along at a “moderate pace”(according to the Fed), potential near-term QE tapering, U.S. fiscal uncertainty, the U.S. government shutdown, weakening emerging market growth, especially in China and India, and China’s economic rebalancing are downside risks. From a micro perspective, increasing supply of iron units (ore, DRI, production supply shocks reversing) and imports combined with backwardated iron ore and U.S. HRC futures markets help make the case for lower HRC prices, but the timing is difficult to determine. The expectation for U.S. prices to converge with global HRC prices is reasonable, but it remains to be seen whether the differentials shrink due to increased foreign prices, decreased domestic prices or a combination of the two.
In my opinion, the macro downside risks significantly outweigh the micro upside risks. Moreover, the potential magnitude of the individual downside risks dwarfs the potential magnitude of the individual upside risks (a hard landing in China versus an additional 2 million units of annual U.S. automotive production, for instance). Perhaps none of the downside concerns detailed above come to fruition, but, regardless, they command that a cautious approach be taken. Nevertheless, the idiosyncratic steel industry issues just may trump the macro in the short-term. While CRU prints will be difficult to forecast, a great deal of volatility is likely. Q1 HRC prices could be in the high six hundreds or near Bank of America Merrill Lynch’s 2014 estimate of $555/st. Increased volatility seems to be the only certainty today.
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