The Week Over Week Report compares prices from the previous week’s Friday close.  While writing this week’s report, there have been important developments this week so the next few pages were updated with pricing as of Wednesday, April 18th.

In the past few weeks, there have been a number of geopolitical events that have had major impacts on the price of crude oil and aluminum.  Tensions across the Middle East on a number of fronts have helped push crude oil futures to almost $70/bbl.  Crude oil is a major factor in transportation, inflation and commodity prices in general. 

May WTI Crude Oil Futures

While the developments in oil are critically important, the over 25% rally in less than two weeks in aluminum provides the steel industry with a warning for a risk that could send the Midwest HRC price over $1000.

LME 3 Month Rolling Aluminum Future

The US sanctions against Russian Oligarch Oleg Deripaska has resulted in his company, Russian aluminum giant United Co. Rusal (Rusal) losing its ability to accept payment in dollars.  The sanctions have essentially blocked Rusal from the global financial system.  This has immediately halted all deliveries and resulted in a major global aluminum supply shock.  This immediate effect is powerful as not only does aluminum supply lose Rusal’s production, but also the orders on Rusal’s books all go poof and those orders need to be placed elsewhere, exacerbating the short term supply shock. Last week, Glencore announced force majeure on 50,000 tons of aluminum expected from Rusal.  While this could this lead to incremental steel demand to substitute for aluminum in short supply, there is something much larger looming. 

This week, nickel prices started going vertical on growing fears a fresh round of sanctions against Russia could affect nickel in the same way as it has aluminum.

LME 3 Month Rolling Nickel Future

What if additional sanctions had the same effect on carbon products?  The table below shows the short tons imported in the most recent twelve months from March, 2017 through February, 2018 (Dept. of Commerce).  28% of slabs imported into the US were from Russia.  During this period, Russia accounted for 8.5% of US carbon imports and 15% of CRC imports.

To give perspective on the size of this potential supply disruption, below is a list of domestic steel mills with annual flat rolled production close to Russia’s cumulative carbon imports.

Whether or not sanctions that affect Russian steel imports in the same way that they affected aluminum occur or not is anyone guess, but it is clearly a major risk.  That risk in and of itself should depress demand for Russian import.  Would you want to take that risk or prefer to look to a different country of origin for imported steel?

Licenses posted on the D.O.C. website indicate an increase of imported steel in March and April.  Multiple month import lead times indicate these tons were probably ordered in November and December of 2017.  Orders for new imported material have been virtually nonexistent since February; first due to the uncertainty of the 232 and then due to unattractive tariff adjusted prices.  Extrapolate that forward and figure there will be a steep drop off in June through at least August. 

Below are the monthly OCTG imports in mt from Korea.

The 2017 monthly average of 87.1k t/m multiplied by the 70% quota equals an annual limit of 731,640 mt in 2018, 323k less OCTG tons YoY.  The recent increase in imported OCTG tons means less tons can be imported over the rest of the year.  Through March, 288,500 OCTG tons have been imported leaving a balance of 443k or 49,240 tons per month. 

The point being that there are all kinds of frictions created by the tariffs and quotas and as the year goes on, those frictions increase and will result in unforeseen consequences and problems.  For instance, what happens when the 2018 cumulative OCTG tons nears the 731.6k ton OCTG quota?  At what point to buyers start to back away fearing their tons show up and the quota limit has already been reached.

On the import front, you have risks related to Russia, currently unattractive import prices leading to the assumption there will be a steep drop off in imports as early as June through at least August and the uncertain frictions from the quotas as the year draws on.  Yet, the second half of the Midwest HRC futures curve has fallen sharply with Q4 trading below $750/st, over a $100 discount to even the lowest HRC index.  This indicates HRC buyers expect the market to fall sharply as soon as this summer.  The only flaw in that expectation is the math. First, if buyers aren’t taking actions either in the futures market or through import orders, then domestic lead times will likely continue to remain elongated and OEMs and service centers will have to continue to purchase tons in response to these longer lead times.  Again, where will the supply needed to pressure the market lower come from?

March MSCI flat rolled shipments were up 170k short tons MoM, but the daily shipment rate (DSR) fell slightly to 107.3k st/d with two more days in March versus February.  Flat rolled inventory surprisingly increased 27k st MoM, probably a result of the sharp increase in imported tons in March.  Months-on-hand (MOH) of 2.1 fell slightly MoM, while MOH DSR adjusted was incrementally higher also at 2.1.

March flat rolled shipments  of 2.36m short tons were up 7.7% MoM, but down 3.8% YoY.

March flat rolled inventory of 4.96m st was up 27.6k tons or 0.6% MoM and 498k st or 11.2% YoY.

The March flat rolled DSR fell to 107.3 st/day down 2.05% MoM, but was up 0.5% YoY.

March flat rolled DSR adjusted MOH rose slightly to 2.1 from 2.04 in February and 1.9 in March, 2017.

March flat rolled MOH fell to 2.1 from 2.25 in February, but rose from 1.82 in March, 2017.

Year to date flat rolled shipments of 6.9m st is up 0.5% YoY.

The following issues are the foundation of our current constructive view:

–     25% tariffs on steel

–     Steel tonnage Quotas

–     A global uptrend in manufacturing purchasing managers indexes

–     A rebounding and strengthening US energy industry

–     Persistently low OEM inventory levels evidenced in the ISM and Durable Goods reports

–     Conditions ripe for OEM restocking 

Upside Risks:

–        Potential Russian sanctions cutting off Russian steel

–        Chronically low inventory levels/domestic or global restocking

–        Increased risk of domestic supply disruption

–        Section 232 tariffs and quotas restricting supply

–        Sharp drop in steel imports

–        China strict steel capacity cuts/China getting serious about curtailing steel production

Downside Risks:

–        232 exclusions

–        Higher domestic prices

–        Domestic mill reopening

–        Falling iron ore and scrap prices

–        Political & geopolitical uncertainty (US Government shutdown)

–        Stock market crash

The April CME HRC future closed the week up $10 at $859/st and the Platts TSI Daily Midwest HRC Index gained $11.75 to $882.25. 

April CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)

Midwest HRC futures were up across the board last week.  April gained $10 to $859, May added $11 to $835 and June increased $13 to $818.  July was up $3 to $796, August added $3 to $781 and September gained $5 to $775.  Q4 was up $10 to $770 and Q1 2019 was flat at $750. 

Domestic indexes saw gains as did Chinese spot HRC.

The TSI North European HRC Index gained $4, while the TSI ASEAN dropped $3.

The AISI capacity utilization moved up to 77%. 

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

March is forecasting a large gain in flat rolled back above 1m short tons and April’s early forecast is for another sharp gain above 1.3m short tons, but the April forecast is too early to be deemed reliable.  

March forecast is indicating a rebound of almost 180k tubular short tons to 722k while April is forecast at 692k.  

Combined flat rolled and tube imports are forecast to jump back up to 1.8m in March and above 2m in April, perhaps as low cost deals from months ago arrive with some beating the tariff deadline and others priced at enough of a discount relative to domestic spot prices even inclusive of the tariff.

Flat Rolled (blue) and Tube (red) Imports

Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts.  Differentials are making new highs in HRC pricing and reaching toward previous highs in CRC.   

(This has not changed in months) Notice in the charts above the last two times the differentials bottomed; first in March, 2016 and second at the end of October, 2016.  Now look at the chart below and notice the massive rally in the Midwest HRC price that followed in both instances.  The rally that started in March, 2016 gained $231 or 58% from low to high.  The rally that started in October, 2016 gained $192 or 41% from low to high. 

As of last Friday, the rally that started in October, 2017 has rallied $298.5 or 51% from low to high.  The current rally has exceeded the gain of 41% that was seen in the rally starting in October 2016.  If the current rally gains 58%, as it did in the rally started in March, 2016, then the index will print above $920/st.

Platts TSI Daily HRC Price

Differentials are making new highs in HRC pricing and reaching toward previous highs in CRC while March and April import licenses are indicating a significant jump in tons, however, this data might be misleading.  First, this increase in March imports is most likely a response to have rushed tons in before the March 23rd tariff deadline.   A second wave of rushing tons ahead of the May 1st exclusion deadline is most likely occurring now.  Also, imports ordered months ago are still at a good relative value even with the tariff added due to the spike in domestic HRC prices, especially considering the complications with availability and domestic mill lead times.

However, going forward, the tariff adjusted differentials are rather unattractive and that probably means a sharp drop in imports throughout the third quarter.  The following charts compare the normal differentials from above with the tariff adjusted differentials i.e. Midwest HRC – (1.25 x China Export).  Taking the current tariff adjusted differentials in red and comparing them on their historical charts, none of the current differential are at threatening levels.  Considering the big themes discussed in this report of low inventory levels at OEMs and service centers, unattractive import levels and the multiple months lag once import orders become attractive, it is hard to see where the supply needed to drive down domestic lead times will come from.  Paying close attention to the global pricing could be an indication of when prices in the US will adjust lower, but remember to add a few months.  The bottom line is there doesn’t look to be a supply solution from the import front after we get past this current wave of imports from deals made in late 2017.  In fact, supply looks to tighten further over the next few months.

The one country included in the differentials but not included in the adjusted differentials above is Brazil.  Brazil was exempted from the tariffs, however, Brazilian HRC and CRC still remains under prohibitive anti-dumping and coutnervailing duties.  The red line adjusts the Brazilian flat rolled price only for the AD/CD duties.  The chart below is somewhat controversial as the duties were enacted before the first date on the chart so adjusting prices might not be accurate.   Currently, the Brazilian export price adjusted for AD/CD duties subtracted from the Platts TSI Midwest HRC price is nonthreatening and there hasn’t been a big jump in Brazilian imports so far this year.

The SBB Platts’ US Midwest HRC price gained 1.4% and Chinese domestic HRC was up 2.8%, while HRC in Turkey and the Middle East were under pressure.

The US Midwest CRC was up 1% to $1,009 while Chinese CRC export was down 1.7%.

The US Midwest HDG price was down 0.7%.

Brazilian pig iron and iron ore jumped while Australian coking coal fell 2.3%.

The May SGX iron ore future settled up $2.03 or 3.2% to $65.12 while the May LME Turkish scrap future was down $1 to $345.

The backwardated SGX iron ore futures curve continues to be under pressure in the past month flattening in the front of the curve.

The chart below shows the 2nd month SGX iron ore failing to break above its long-term down trend and now testing the uptrend that started in in December, 2015.  This “triangle” pattern predicts a large move to come in the direction the price breaks out of the apex of the triangle.

2nd Month SGX Ore Future

Chinese rebar futures gained 3% even though physical rebar in China and Turkey saw prices fall.  Black sea billet was also down on the week.

The March Producer Price Index Ex Food and Energy rose 2.7% YoY, above expectations of a 2.6% gain. The March Consumer Price Index Ex-Food and Energy rose 2.1% YoY, in line with expectations.

The March NFIB Small Business Optimism Index was down almost 3 points to 104.7 and missed expectations.  The preliminary University of Michigan Consumer Sentiment Index fell to 97.8 in April from 101.4 in March and missed expectations.

The S&P 500 rose 0.4%.  The major global markets above all moved higher.   

S&P 500

Steel mills were up across the board with ArcelorMittal leading the charge gaining 5.1%.


Service centers were mostly higher.

Ryerson Holding

Iron ore miners were all higher with RIO & BHP gaining over 7%.

Aluminum has exploded 12% since the announcement of sanctions against Russia, most specifically Rusal owner Oleg Deripaska as discussed above.  Nickel, facing the threat of similar issues, rose 5.1%.  Zinc fell 3.6%. 

LME 3 Month Rolling Aluminum Future

LME 3 Month Rolling Nickel Future

LME 3 Month Rolling Zinc Future

The US dollar was close to unchanged.  The Canadian dollar was higher while the Russian ruble fell significantly.  The Turkish lira and Brazilian real also fell 2.5%.

US Dollar Index

Russian Ruble

Canadian Dollar

Mexican Peso

Turkish Lira

Brazilian Real

The May WTI crude oil future rocketed higher gaining 8.6% or $5.33 to $67.39/bbl after Middle East tensions escalated.  Crude oil inventory rose 0.8% and gasoline inventory was up 0.2%, while distillate inventory fell 0.8%.  The aggregate inventory level gained 0.3%.  Crude oil production continued higher up 0.6% to 10.53m bbl/day; another new all-time record.  The US rig count added 5 rigs and the North American rig count cut 4 rigs.  OCTG prices were unchanged.  The May natural gas future gained three cents or 1.3% to $2.74/mbtu, while inventory fell 1.4%.

May WTI Crude Oil Futures and May Crude 15 Delta Put Volatility (white)

Aggregate Energy Inventory (white) vs. WTI Crude Oil Futures

D.O.E. Crude Oil Inventory

D.O.E. Crude Oil Inventory Perspective (1982 – Present)

Baker Hughes US Rig Count

Baker Hughes North American Rig Count

D.O.E. Crude Oil Production

D.O.E. Crude Oil Production Perspective (1983 – Present)

The US 10 year Treasury yield added five basis points to finish the week at 2.83% while the yield curve flattened further. There was little change elsewhere.

U.S. 10 Year Bond Yield

German 10 Year Bond Yield

The list below details some upside and downside risks relevant to the steel industry.  The bolded ones are occurring or look to be highly likely.  The upside risks look to be in control.

Upside Risks:

–        Potential Russian sanctions cutting off Russian steel

–        Chronically low inventory levels/domestic or global restocking

–        Increased risk of domestic supply disruption

–        Section 232 tariffs and quotas restricting supply

–        Sharp drop in steel imports

–        China strict steel capacity cuts/China getting serious about curtailing steel production

–        Energy industry rebound

–        Graphite Electrode Shortage

–        Unexpected inflation

–        Weaker dollar

–        Flatbed trucking availability/transportation supply constraints

–        Infrastructure bill/long-term solution to highway spending bill

Downside Risks:

–        232 exclusions

–        Higher domestic prices

–        Domestic mill reopening

–        Falling iron ore and scrap prices

–        Political & geopolitical uncertainty (US Government shutdown)

–        Stock market crash

–        Crashing iron ore, scrap and finished steel prices

–        Stronger dollar

–        Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma

–        Domestic automotive industry under pressure

–        Sharp and persistent drop in oil and/or iron ore prices

–        US domestic producers bringing back on capacity

–        Higher interest rates slowing residential construction and auto sales

–        Tightening financial conditions pressuring auto sales driven by sub-prime financing

–        Chinese restrictions in property market

–        The Chinese Financial Crisis

–        Unexpected sharp China RMB devaluation

–        Increasing import differentials

–        Economic downturn, especially in China or Europe reverberating to U.S.A.

–        Weak demand in housing or automotive