Last week was relatively quiet as the flat rolled market continues to consolidate with spot HRC in the $850 to $900 level with lead times at eight weeks.  Market confusion continues as the Trump administration’s protectionist rhetoric was ramped up with additional tariffs on Chinese imports and the enacting of sanctions against Russia.  China was closed for most of last week due to a national holiday. 

US import licenses in March are forecasting a material MoM gain to just above one million short tons. There seems to be a great deal of caution in buyers minds with HRC in the high $800s.  However, steel mill lead times continue to be extended and the latest data from the ISM Manufacturing Report and the Durable Goods Report continues to show inventory levels are too low across the manufacturing industry.  The increase in imports, much of which were ordered back in November and December, looks to be the main culprit in the dampening of animal spirits in the flat rolled market, but be cautioned that this could be a head fake as a concrete supply solution has yet to become apparent.   Further, the reluctance of buyers to commit to future tons and address their low inventory levels today combined with economically unattractive import prices will hamper supply from arriving in Q3 and this dynamic could result in prices staying up at these levels longer than expected.  Last, as mentioned in previous reports, any domestic supply disruption is a major risk that would push prices sharply higher in this supply constrained, high capacity utilization type of environment.

The market hasn’t been this opaque in many months, but the forward curve’s steep backwardation is presenting reasonable opportunities to mitigate risk in the second half of 2018.  One certainty is to expect continued developments in this ultra-volatile environment.

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

–     25% tariffs on steel

–     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:

–        Chronically low inventory levels/domestic or global restocking

–        Increased risk of domestic supply disruption

–        Increased trade policy risks (Section 232, NAFTA)

–        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

April CME HRC futures closed the week down $10 to $849/st and the Platts TSI Daily Midwest HRC Index gained $1 to $870.5. 

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

Midwest HRC futures were down across the board last week.  April fell $10 to $849, May dropped $17 to $824 and June lost $12 to $805.  July was down $2 to $793, August lost $12 to $778 and September was down $15 to $770.  Q4 was down $16 to $760 and Q1 2019 shed $5 to $750.  Most of the pressure on the curve came on Friday.

Global prices were mixed with relatively light volatility.

The TSI North European HRC Index gained $2, while the TSI ASEAN was unchanged.

The AISI capacity utilization moved down to 76.2%. 

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

March is forecasting a large gain in flat rolled back above 1m short tons.  

March forecast is indicating a rebound of 176k short tons to 719k.  

Combined flat rolled and tube imports are forecast to jump back up perhaps as low cost deals from months ago arrive with some beating the tariff deadline and others priced at a 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 $286.75 or 49% 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 peak at be $922/st.

Platts TSI Daily HRC Price

Again, differentials are making new highs in HRC pricing and reaching toward previous highs in CRC while March import licenses jumped significantly, 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.   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.

SBB Platts’ US Midwest HRC price was close to unchanged at $870.50.  Mexico HRC prices jumped 11% to $888/st.    

The US Midwest CRC was up slightly to $999 while Mexican CRC jumped 10%.  Brazilian export and Chinese export gained 4.8% and 3.4%, repectively.  East Asian import fell 4.8%.

The US Midwest HDG price was up almost 3% to $1,116 (including zinc extra), but prices were lower globally.

Raw materials were mixed with domestic scrap prices printing higher and European scrap prices falling.  Iron ore futures moved lower while the Baltic Dry Index fell 10% to its lowest level since last August. 

The May SGX iron ore future settled down $1.32 or 2.05% to $63.09 while the May LME Turkish scrap future gained $4 to $346.

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

Domestic plate gained 1.1%, while Black Sea billet fell 1.4%.

Much of last week’s economic data was discussed in the previous report.  The final February Durable Good Report was slightly lower than previous estimates with new orders ex-transportation up 1% MoM.  February factory orders ex-transportation gained 0.1% MoM and 1.2% YoY. The ISM non-manufacturing report was down 0.7 to 58.8 and missed expectations. 

The March Employment Report showed a gain of 103k new jobs, down from a 313k gain in February and badly missing expectations.  Net revisions fell by 50k jobs.  Manufacturing jobs rose 22k in line with expectations.  The unemployment rate was 4.1% and the labor participation rate ticked down to 62.9%.  Wages were a major focus of this report with average hourly earnings up 2.7% YoY, in line with expectations.

The FOMC concluded its two-day monetary policy meeting in March where it raised the Fed Funds rate as expected by 0.25% to 1.50%-1.75%. The committee updated their growth projections for 2018 due to the recently enacted tax reform. The FOMC’s “dot plot” of the expected Fed Funds rate path was unchanged for 2018 with a total of 3 rate hikes expected.

For some time, this report has been using the ISM customer inventory subindex, MSCI flat rolled inventory and durable goods data to determine the health of inventory levels held by flat rolled buyers.  The charts below takes new orders and inventory data from the Durable Goods Report and indexes monthly percentage changes in unadjusted dollar terms starting at 100 in February, 2017 and then compounding monthly percentage changes through February, 2018. For some time, these charts have shown new orders have outpaced inventory.  The March ISM customers’ inventories subindex fell to 42 indicating OEMs inventory levels continue to be depleted.  The charts below confirm this as evidenced by gains in new orders increasing faster than gains in inventory in most categories.

The S&P 500 was unchanged last week and global markets were mixed. 

S&P 500

Steel mills were mostly quiet with Posco giving back the previous week’s gains and AK Steel falling 3.1%.


Service centers were mixed; Northwest Pipe gained 14.4%.

Northwest  Pipe Co.

Iron ore miners were all lower.

The gain in aluminum doesn’t reflect the sharp price jump that occurred after the regular trading session as a result of the announcement of sanctions against Russia, most specifically Rusal owner Oleg Deripaska.  Copper was up and zinc fell.

LME 3 Month Rolling Aluminum Future

CME May Copper 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

Canadian Dollar

Turkish Lira

Brazilian Real

Russian Ruble

The May WTI crude oil future continues to be range bound falling 2.3% or $1.48 to $63.46/bbl.  Crude oil inventory fell 1.1% and gasoline inventory fell 0.5%, while distillate inventory levels rose 0.4%.  The aggregate inventory level fell 0.7%.  Crude oil production continued higher gaining 0.3% to 10.46m bbl/day; another new all-time record.  The US rig count added 10 rigs and the North American rig count cut 13 rigs.  OCTG prices were unchanged.  The May natural gas future fell eight cents or 3% to $2.65/mbtu, while inventory fell 2.1%.

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 three basis points to close the week at 2.77%.  The Ted Spread continues to rise gaining 1.81 to 62.98; its highest level since the financial crisis.

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:

–        Increased trade policy risks (Section 232, NAFTA)

–        Sharp drop in steel imports

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

–        Chronically low inventory levels/domestic or global restocking

–        Increased risk of domestic supply disruption

–        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:

–        Political & geopolitical uncertainty

–        Stock market crash

–        Falling iron ore and scrap prices

–        232 exclusions

–        Higher domestic prices

–        Domestic mill reopening

–        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