The Good

  • Stimulus out of the Chinese government and U.S. Federal Reserve
  • Stabilization and speculative buying in the Chinese iron ore and rebar markets
  • Continued strength in the auto industry


The Bad

  • U.S. steel prices sent lower following settlements of USW/AMUSA/USS labor negotiations as service centers and manufacturers are well supplied from strike hedging purchases
  • Mills are heard to be willing to negotiate at lower prices with shrinking lead times and weak demand. Order cancellations expected.
  • Scrap prices look to be heading lower fast.


The Feldstein

News of American and Chinese stimulus packages dominated the headlines since the posting.  First, China announced an infrastructure spending plan in the neighborhood of $150 billion dollars to be spread out through 2018, while the U.S. Federal Reserve announced QE3.  The latest move from the Fed included the extension of operation twist, continued  re-investment of principal payments from their agency backed securities (prime residential mortgage backed securities), as well as a new plan to invest $40 billion dollars each  month into agency backed securities.  The monthly investment will occur indefinitely until the unemployment rate improves.  The FOMC also changed the wording in their statement extending the time interest rates will be held at extremely low levels out to mid 2015 from late 2014.  Both stimulus announcements resulted in significant rallies in “risky” assets, which include equities and commodities, globally.   This included a sharp rebound in the price of iron ore after weeks of relentless selling; more on this below. 

China’s announcement initially boosted prices of iron ore and rebar for three straight days.  By Wednesday, the ore rally looked to have faltered after the speculative boost subsided and prices of ore and rebar moved lower on pessimism regarding the effect of the Chinese stimulus plan in the short-term.  “The approved projects include 25 urban railways, 13 highways, 10 municipal facilities and 7 ports and shipping lanes; some of these were actually approved back in May but announced last week. Twelve out of the 25 railways have only had their feasibility studies approved and do not yet have construction timetables,” (SBB 9/11).  This led to steel market participants questioning whether the stimulus would lead to any immediate demand for steel.  After a brief sell off, iron ore prices were boosted higher again following the FOMC’s announcement in a week of highly volatile trading.

The stimulus package announced by the FOMC is focused on supporting the nascent recovery in the residential real estate market, which has shown three straight months of improvement.  In addition, the auto industry has produced strong numbers globally.  Regardless, the fact that the U.S. and China have followed the ECB and Brazil with economic stimulus makes me a bit skeptical about economic growth in the short term, since the reason for the global stimulus is individual and collective weakness of the world’s largest economies.  ISM manufacturing numbers in theUS,ChinaandEuropeare very weak so the concern that the stimulus is too little and/or too late has to be considered.  In addition, there is significant uncertainty surrounding the upcomingU.S.election, Chinese changing of the guard and, most especially, the outcome of theU.S.fiscal cliff.  Never the less, “don’t fight the Fed” is an adage to keep in mind. 

Steel Production – According to AISI, the US steel industry produced 2.8% less net tons of raw steel in the first week September vs. the last week in August.  AISU estimated current capacity utilization to be at 73.3%, yet total raw steel produced was up 5% YOY.  In China, crude steel output during the last eleven days of August averaged 1.87m tons/day which is about 3% lower than mid-August’s 1.93m t/d, according to China Iron & Steel Association (CISA).   While this represents about a 2M ton difference in China’s output, taken in the context of annual steel production, dropping from 720M tons to 718M tons is not going to solve the problems related to oversupply of steel in China.  Were this to be the beginning of a trend, perhaps this is  a step in the right direction, however, the reason behind the decreased production was maintenance and to date, there have been no major idling of steel mills in China. In fact, The China Iron & Steel Association (CISA) predicted and also warned that over production by steel mills would remain a problem in the market.   What is making matter worse is prices have found a floor (for now), which has led to Chinese steel exporters withdrawing offers made the previous week.  Wuhan Iron and Baosteel have announced they are maintaining their October prices, adding that other flat steel producers might follow suit.  While some traders are skeptical that the nascent rebound in Chinese steel prices is anything more than a speculative bounce from the stimulus announcement, others are worried that steel mills cold ramp up production should the uptrend in prices continue.  Further exacerbating the overcapacity issue in China is the low cost of iron ore as well as the politics surrounding sentiment and Chinese employment leading up to the 18th National Congress of the Communist Party taking over in late October.

Hot Rolled Coil – Lead times shrink as mills are becoming more flexible in price negotiations.  Steel Market Update reported last week that average lead times dropped significantly from 3.87 to 3.35. Further, “as market sources confirmed Wednesday some mills are breaking ranks to cut deals significantly lower than prevailing spot prices,” SBB 9/13. HRC imports jumped up by 28% in July vs. June; almost 200,000 more tons of HRC was imported than exported in July.

“Our expectation is for a move toward inventory reduction as prices peak and start to decline and/or when we approach the end of the year lead times. Most service centers are very comfortable with their inventory levels with 71% reporting they are maintaining inventory levels. Manufacturing companies are reportedly more interested in obtaining foreign steel according to our most recent SMU steel market survey results,”  SMU.

“The just concluded labor negotiation was the only factor keeping prices propped up at their current level…Customer demand in our phase of the business continues to remain less than robust. Unfortunately, we hedged some due to the labor situation, and as a result we are quite aggressive with our efforts to move this steel. We are not alone in this effort-a number of larger service centers are out aggressively cutting some deals as well,” (Midwest Service Center/Distributor).  SMU

“Some mills may see cancellation of orders they got from consumers that thought a long strike might be a possibility and with a work stoppage now out of the picture at two major domestic mills and global demand still slumping , market sources said downward pricing pressure is likely to continue in the near term,” SBB.


One of the most consistently seen headlines this past week was that scrap prices are headed lower.  The primary reason would seem scrap has to realign with the decreased prices of ore, coal, rebar, billet, HRC, etc. US export to Turkey is weak, which is causing USEC scrap exporters to drop their dockside pricing.  Some dealers are becoming fearful and starting to drop prices.


The volatility in iron ore is enormous, moving 10% a couple of days last week while in a range between $95 and $110.  Ore found stability and rallied 10% off the Chinese stimulus announcement.  Prices then started heading lower fast reaching $95/ton until the FOMC announcement brought prices back to the $105 level to close the week.