Last week saw two interesting developments on the domestic front. First, information surfaced that a furnace at US Steel’s Great Lakes Works plant was having operational issues and will be taken down for repairs and maintenance and could result in an unplanned outage. At the same time, it was learned that Granite City was ahead of schedule and could be melting as soon as mid-June. The Great Lake Works story falls into the upside risk category of “increased risk of domestic supply disruption” as with higher capacity utilization comes increased risk of over worked mills needing to schedule more or earlier maintenance as well as the risk of an unintended disruption. Considering the extended lead times and supply tightness, a material unplanned disruption would result in another sharp leg up in domestic flat rolled prices.
Later in the week, it was announced that ArcelorMittal was internally increasing their base hot rolled price from $850 to $900 leaving domestic HRC pricing in the $880 – $900 range for the week.
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 May CME HRC future closed the week down $6 at $829/st and the Platts TSI Daily Midwest HRC Index was down $6.25 to $876.
May CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
Midwest HRC futures were a little higher in the front and down sharply in the back of the curve. April was up $11 to $870, May was up $5 to $840 and June dropped $5 to $813. July was up $4 to $800, August added $3 to $784, while September shed $13 to $762. Q4 was down around $23 to $747 and Q1 2019 was down $12 to $738.
Domestic CRC and Chinese HRC saw gains, while domestic HRC was down. HRC in Antwerp and Black Sea also fell around 1%.
The TSI North European HRC Index gained $4, while the TSI ASEAN dropped $3.
The AISI capacity utilization moved down to 76.1%.
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 forecast is in line with March at 1.08m short tons.
March forecast is indicating a rebound of almost 180k tubular short tons to 723k while April is forecast at 707k.
Combined flat rolled and tube imports are forecast to jump back up to just under 1.8m in March and 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 $292.25 or 50% 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 another month of flat rolled imports of 1.08m short 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 in ahead of the May 1st exclusion deadline could be amplifying April imports. 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 countervailing 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 fell 0.7%. Chinese HRC prices were up, while HRC in Turkey fell 2.3%.
The US Midwest CRC was up 0.5% to $1,014 while Chinese CRC was up 1.1%.
The US Midwest HDG price was up 0.4%.
Iron ore prices were up 2.5%-3.25%, while Australian coking coal, Turkish/European scrap and Black Sea pig iron prices were under pressure.
The May SGX iron ore future settled up $1.86 or 2.9% to $66.98 while the May LME Turkish scrap future was up $7 to $352.
The backwardated SGX iron ore futures curve is up about $5 MoM maintaining its shape.
The chart below shows the 2nd month SGX iron ore future failing to break above its long-term down trend and now bouncing higher after finding support at 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
The price of Chinese physical rebar gained 1.2%.
The April Empire Manufacturing Index fell 6.7 points to 15.8 and missed expectations of 18.4. The April Philadelphia Fed Business Outlook Index rose 0.9 points to 23.2, beating expectations of 21. March industrial production was up 0.5% MoM, beating expectations of a 0.3% gain. Capacity utilization rose to 78% in March beating expectations, however, February data was revised lower to 77.7% from 78.1%.
March housing starts rose 1.9% MoM from upwardly revised February starts. March building permits were up 2.5% MoM also from upwardly revised February data. Both beat expectations. The April NAHB Housing Market Index fell to 69 from 70 and missed expectations of 70.
US Housing Starts
US Building Permits
The S&P 500 rose 0.5%. The major global markets all moved higher, except China.
S&P 500
Steel mills were up across the board with ArcelorMittal leading the charge gaining 6.9% following earnings announcements from Steel Dynamics and Nucor.
ArcelorMittal
Service centers saw solid gains.
Ryerson Holding
Iron ore miners had another strong week.
Aluminum continued to rally sharply trading as high as 2718/mt before reversing course on news that US sanctions against Rusal would be lifted for five months in return for Oleg Depriska divesting his interest in the company. Nickel prices rallied over 11% on the week over speculation that further US sanctions against the Russians could result in supply constraints in nickel similar to those seen in the aluminum market. Zinc and copper futures were also up nicely on the week.
LME 3 Month Rolling Nickel Future
LME 3 Month Rolling Aluminum Future
LME 3 Month Rolling Zinc Future
The US dollar rose 0.6%, but remained in its multi-month range. The Russian ruble rebounded adding 3.3%, while the Mexican peso, British pound, Indian rupee, Canadian dollar and Australian dollar were under pressure.
US Dollar Index
Russian Ruble
Mexican Peso
The June WTI crude oil future continued higher gaining 1.5% or $0.99 to $68.38/bbl. Crude oil inventory dropped by 0.25%, gasoline inventory was down 1.24% and distillate inventory fell 2.4%. The aggregate inventory level fell 0.9%. Crude oil production inched up 0.14% to 10.54m bbl/day, which was 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 June natural gas future was unchanged at $2.74/mbtu, while inventory fell 2.7%.
June WTI Crude Oil Futures and June 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 ripped higher gaining thirteen basis points to 2.96%. There was little change in the yield curve.
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