The big news of the week was no news. The chaos in Turkey calmed down, although scrap prices continued to move lower. There seems to be a lack of clarity in the domestic steel market. There are a number of mixed signals. For instance, August’s Empire Manufacturing Index was great, while the Philadelphia Fed Index was terrible. Domestic mill lead times have been softening, however the AISI capacity utilization rate is at the highest level (79.1%) in four years. Last week’s MSCI data showed a sharp increase in inventory levels indicating service centers brought in a good number of tons in July, but daily shipments continued to be strong. It seems the tons brought in by service centers in July hampered new orders in August. As long as the shipment rate stays high in August, new orders from service centers will follow in September as August imports look to drop significantly. Also, any time sensitive tons purchased from a Turkish mill will now have to be replaced with an order at a domestic mill.
The economy remains strong.
Inventory levels are anemic.
Supply is constrained.
The simplest answer to what feels like malaise is the calendar. It’s late August. It’s probably less likely that the industry is running to the sidelines or for cover and more likely market players are headed to the beach before the SMU conference and before the kids go back to school. The “deals” currently being offered in the market will be scooped up, that will push out lead times for those mills and then prices will snap back overnight. Don’t miss the proverbial boat.
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The following issues are the foundation of our current bullish view:
– Steel tariffs and quotas
– Domestic economic and manufacturing strength
– A rebounding and strengthening US energy industry
– Persistently low OEM inventory levels evidenced in the ISM, MSCI and Durable Goods reports
– Conditions ripe for OEM restocking
– Global economic strength
Upside Risks:
– Sharp drop in steel imports
– Increased risk of domestic supply disruption
– Section 232 tariffs and quotas restricting supply
– Chronically low inventory levels
– USW September contract negotiations
– Chinese economic stimulus measures
Downside Risks:
– Trade War Fallout
– Turkey/emerging market contagion
– 232 exclusions
– NAFTA Resolution
– Stock Market Crash
– Demand destruction due to higher steel prices
– Higher dollar
– Higher oil prices slowing growth
– Higher interest rates slowing growth
– Domestic mill reopening
– Falling iron ore and scrap prices
– Political & geopolitical uncertainty
Last week, the August CME HRC future added $1 to $902/st, while the Platts TSI Daily Midwest HRC Index fell $6.25 to $895/st.
August CME HRC Futures (orange) vs. Platts TSI Daily Midwest HRC Index (white)
The CME Midwest HRC futures curve is shown below with Friday’s settlements in orange. This was the curve’s highest close of the past five weeks.
September global ferrous futures are listed below. The September Nasdaq Shred future rebounded, while the September Turkish scrap future continued lower. Chinese rebar gained, while Chinese HRC fell.
Flat rolled indexes were mixed with only Black Sea HRC, which was down 1.8%, moving by more than 1% for the week.
The TSI North European HRC Index was unchanged WoW at €565/t. The TSI ASEAN HRC Index was down $3 to $595/t.
The AISI capacity utilization rate continues to rally now at 79.1%, its highest level September 2014.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
July’s flat rolled forecast looks to increase to just over 1m tons, but then August’s flat rolled imports are forecast to drop significantly to 834k. This forecast is likely to decline further as it includes licenses for Turkish tons, which will not be delivered.
July’s tube imports look to increase to 632k, but August’s forecast is for imports to fall back to 592k.
Flat Rolled (blue) and Tube (red) Imports
July’s galvalume import licenses are forecast to jump to 90k, but then to fall back to 58k in August.
Galvalume Imports (blue) w/ 3 Mo. Moving Average (red)
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. Differentials are moving lower.
Prices adjusted for tariffs continue to indicate imports will remain constrained. The following charts compare the normal differentials from above with the tariff adjusted differentials i.e. Midwest HRC – (1.25 x China Export) plus any AD/CD duties from recent trade cases (except China’s 250% tariffs were not included in the math as they obviously prevent any imports, but the Chinese export price can still be used as a proxy for the rest of Asia). The charts below compare the current tariff adjusted differentials (red line) to where it would be on their historical unadjusted charts (blue line).
Turkish HRC had been a buy starting in June, but then Trump increased the tariff on Turkish steel to 50%. The charts below show the historical differential between Midwest HRC and Turkish import HRC prices in blue and the Turkish import price adjusted for the 50% tariff in red. The increased tariff will provide boost to domestic demand not only prohibiting Turkish tons for the rest of 2018, but also displacing the tons that were already produced for August and September arrival.
Chinese and therefore Southeast Asian HRC prices are approaching the high end of their range. Brazilian and Russian steel remains unattractive.
How flat rolled imports playout for the rest of 2018 will be interesting to see. Following the increase in Turkish tariffs, the risk of additional tariffs or other defensive measures that could be taken by the Trump administration and D.O.C. must be considered more carefully and should damper imports. The window for 2018 delivery is closing fast as issues related to year-end taxes essentially cut off deliveries in late November and December. However, some are expecting imports will have a significant effect on Q1 2019 purchases with Q1 HRC futures trading around $800, roughly $100 below spot.
The SBB Platts HRC, CRC and HDG pricing is below.
Turkish scrap was crushed while iron ore prices fell around 2%.
The September LME Turkish scrap future fell $14.5 or 4.7% to $293.5/t, while the September SGX iron ore future fell $1.2 or 1.7% to $67.94/t.
The SGX iron ore futures curve has rallied in the past month, but has flattened.
The chart below shows the 2nd month SGX iron ore had broken below its longterm up trend. The “triangle” pattern predicts a significant correction to result, but the correction failed to materialize and instead rebounded back into the triangle moving higher along with the rally in finished Chinese steel futures.
2nd Month SGX Ore Future
Ex-flat rolled prices were mixed.
The August Empire Manufacturing Index gained 3 points to 25.6 and beat expectations of a drop to 20. However, the August Philadelphia Fed Index fell 13.8 points from 25.7 to 11.9, badly missing expectations of 22. July industrial production rose 0.1% while June’s data was revised higher to a 1% gain from a 0.6% gain. July capacity utilization was unchanged at 78.1%.
July housing starts fell slightly and missed expectations badly, but building permits rose MoM and were in line with expectations. The National Association of Home Builders Housing Market Index dropped one point to 67, but remains near the highest levels since 2004-2005.
Preliminary second quarter nonfarm productivity saw a nice gain of 2.9%. July retail sales beat expectations. The NFIB Small Business Optimism Index rose to 107.9, the highest level since 1983. However, August’s preliminary University of Michigan Sentiment index fell to 95.3 from 97.9, missing expectations of a gain to 98.
The S&P 500 keeps moving higher, while the sell-off in China’s stock market continued.
S&P 500
China CSI 300
Steel mill stocks were mostly lower again.
ArcelorMittal
Service center’s stocks were mostly lower with Ryerson and Olympic down sharply.
Ryerson Holdings
Iron ore miners were lower.
LME base metals were lower across the board.
LME 3-Month Rolling Zinc Future
CME December Copper Future
LME 3-Month Rolling Aluminum Future
Currencies settled down with the Turkish lira rebounding to finish the week just above 6 lira to the dollar. The US dollar was down slightly to 96.1. The Brazilian real and Indian rupee fell by 1.2% and 1.9%, respectively.
Turkish Lira
US Dollar Index
Brazilian Real
The September WTI crude oil future fell $1.72 or 2.5% to $65.91/bbl. Crude oil and distillate inventory rose, but gasoline inventory levels dropped slightly. The aggregate inventory level rose 1.3%. Crude oil production rose slightly to 10.9m bbl/day. The US rig count was unchanged, while the North American rig count added 3 rigs. The September natural gas future was unchanged at $2.95/mbtu, while inventory rose 1.4% to 2.4 trillion cubic feet.
September WTI Crude Oil Future and Sept. 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 ten-year Treasury yield settled the week down one basis points to 2.86%.
U.S. Ten-Year Bond Yield
German Ten-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:
– Sharp drop in steel imports
– Increased risk of domestic supply disruption
– Section 232 tariffs and quotas restricting supply
– Chronically low inventory levels
– USW September contract negotiations
– Chinese economic stimulus measures
– Potential Russian sanctions cutting off Russian steel
– 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:
– Trade War Fallout
– Turkey/emerging market contagion
– 232 exclusions
– NAFTA Resolution
– Stock Market Crash
– Demand destruction due to higher steel prices
– Higher dollar
– Higher oil prices slowing growth
– Higher interest rates slowing growth
– Domestic mill reopening
– Falling iron ore and scrap prices
– Political & geopolitical uncertainty
– 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