When the floor fell out in the Asian Iron Ore market, it hit with such an impact that it kicked up a wind, that has taken time, but is now blowing through the domestic HRC futures market.  The front of the curve has dropped $30 over the last 6 trading days. Today, $600/t  traded. In the physical market, rumors are circulating that mills are now willing to negotiate on terms as lead times have come in.  The USW settlement with USS and the USW non-strike and what look to be agreeable negotiations with AMUSA have helped fuel that fire.

Rebar, Billet and ore were having another tough week; HRC futures getting hit hard; scrap prices starting to falter.  Iron ore looks to have stabilized and the chart is showing technical indications of a reversal.  Today, Iron ore is up 11% while rebar is up 3% induced by China’s announced $150B infrastructure stimulus project.  Short covering, mill buying and speculation are all contributing to the rise most likely. Some market sources and analysts expect Chinese mills to start restocking soon

Manufacturing numbers have been downright awful this week with China’s August Steel Industry PMI fell to 39.9 down from 44.5 in July, with steel output index down from July’s reading of 48.5 to 36.5.  August PMI slides to 49.6 for third month in US to its lowest level since July 2009, indicating contraction in the sector for the third-consecutive month.

The supply side is starting to react to the collapse of ore and coal price, however, China is still maintaining current production.  Stories continue about ore and coal miners cutting current and future projects, the latest being Australia’s Fortesque Metals Group deferring a mine expansion and completion of a berth project due to price volatility. Consol Energy is suspending operations at its Buchanan metallurgical coal mines in Southwestern Virginia, citing weak global demand for steel. SBB However, “Chinese Mills warned off output cuts despite over-supply. There is a growing consensus that Chinese steel mills are unlikely to cut production significantly, at least before the People’s National Congress in late October. Market sources told Platts Steel Business Briefing that local governments have continued to pressure state-owned steel mills to avoid cutbacks in a bid to maintain GDP growth and employment. An industry source says a major state-owned steel mill in northern China requested a reduction in output but was turned down by its local government given the political concerns before the national congress. This mill employs more than 30,000. Meanwhile, sources with Hebei Iron & Steel Group (Hegang) admitted that local government has discouraged output cuts other than through routine maintenance.   Overproduction has been the main culprit behind plummeting steel prices, some traders complain.”  SBB 

Another supply issue yet to play out is in the logistical side of the business.  In the US, the water levels prior to Hurricane Isaac were too low and had backed up barge shipping significantly.  I do not know if much has changed there. Across the pond, however, “Freight on the Danube hampered by low water levels. Deliveries of ferrous and products are being delayed. With less water, vessels are often only partially loaded.” SBB

Wall Street is getting in the mix, which is always a concern.  I have noticed a number of articles regarding Wall Street analysts in the past few days, see below.

Merrill Lynch’s lead metals analyst Timna Tanners made a big splash with: “Absent a labor-related production disruption at ArcelorMittal or U.S. Steel, we expect U.S. steel prices should drop up to $100/t, reflecting newly discounted input costs. Most global mills should experience cost discounts of about $115/t from early summer… Restocking may boost iron ore and met coal.”  SMU

Analysts for Goldman Sachs are looking at Chinese commodity prices with increasingly bearish opinions, warning this week that their confidence onChinacontinues to wane and the fourth quarter pick up that other analysts have called for is meeting with more widespread scrutiny.  4.5 million lots of January rebar traded today (9/6) amidst a market that has seen no profit taking induced rebounds.  Chinese CRC being offered at prices cheaper than domestic hot rolled.  SW

Deflationary expectations and downward spiral contagion?

Mills hear to be cancelling scrap orders. A slate of bearish news today is led by talk that scrap order cancellations at “several”Midwestmills, a move that significantly alters our outlook for September prices. The talk of such cancellations tends to have a psychological effect, dealers on edge about a drop off in pricing may be all the more willing to settle on a  lower price considering this development where we now hear as many as five separate producers are cancelling at least some orders this week. SW

Steelmakers across China continue to lower their domestic scrap buying prices. SBB

US East Coast dock scrap prices moving down. SBB

Tokyo Steel cuts its scrap prices yet again SBB

Iron ore’s plunge was a result of the slowdown in the Chinese economy, but the crash in ore and coke prices was a result of expectations that prices will be cheaper tomorrow. These “deflationary expectations” led to mills stocking a just enough 17-18 days worth and then when they go back to buy, they are only buying in small to restock for a short period.  Perhaps the story above is foreshadowing similar behavior in the scrap market in the US and Europe.

ECB stimulates; Fed on deck?

After reading Ben Bernanke’s Jackson Hole speech, I highlight below a couple parts of that speech that I believe indicate QE3 will be announced next Wednesday. I am not exactly going out on a limb here as the “risk on” trade is in full effect as gold, silver and now copper are rallying strongly as well as US equities.  Since his speech, expectations have increased greatly, especially with today’s weaker than expected job number.     

“But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods. These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates,”

“The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”