The Midwest HRC price continues the rally that began in December, 2015 at $365/st. After correcting 10% from the $660 high set on March 20th, 2017, the Platts TSI Daily Midwest HRC Index bounced off a low of $591 in early June and then rallied to $630 in early September. Demand waned and the index fell through September and October until it reached a low of $583.75 on October 18th. That week, domestic steel mills began announcing flat rolled price increases. Since the announcements, the Midwest HRC price has been mostly range bound between $610 and $625 per short ton (st). The December CME Midwest HRC future price also has remained range bound between $620 and $630/st.
December CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
Flat rolled import licenses continue to fall sharply from recent highs, global flat rolled differentials remain unattractive and production cuts both domestically and in China point to tighter domestic supply over the short and medium term. November license data point to a significant drop-off in import licenses to a forecast of 922k flat rolled vs. 1.02m in October and a high of 1.25m in June.
Tubular products look to be down 145k st MoM. Flat rolled plus tube import licenses are forecast to be down a combined 250k tons MoM.
Flat Rolled (blue) and Tube (red) Imports
The following issues are the foundation of our current constructive view:
– 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
– Falling imports volumes expected for the remainder of 2017; shrinking global differentials
Upside Risks:
– 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
– Post hurricane development and production bump
– Energy industry rebound
– NAFTA related disruption/Trade War
Downside Risks:
– Political & geopolitical uncertainty (US Government shutdown)
The November ISM Manufacturing PMI fell a half a point to 58.2, just below expectations of 58.3. The ISM PMI has been above 56 for six consecutive months and above 54 for twelve straight months.
ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)
The chart below includes the ISM Manufacturing PMI subindexes. Production jumped and deliveries slowed. There was some pressure on prices.
ISM Manufacturing PMI
The new orders subindex remains rock solid at 64 gaining 0.6 MoM. The backlog of orders subindex was flat MoM at 55.
ISM Manufacturing PMI New Orders (white) and Backlog (orange)
It was another month of contracting inventory data in both the producer’s and customer’s inventory subindexes.
ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)
For many months, the data showing what look to be depleted inventory levels has been discussed using the ISM, MSCI and durable goods data. The theory is that at some point if a catalyst that drives demand higher or a shock cuts supply, there would be a sharp rally in prices due to the “herd” currently collectively holding relatively light levels of inventory having to replenish all at once. Below is an analysis with data updated as of last week’s preliminary October Durable Goods Report.
The data is the nominal unadjusted dollar value for new orders and inventory. Both are indexed at 100 starting in October of 2016 and then cumulatively adjusted based on their respective MoM percentage change. All of the charts below show the same thing; new orders have outpaced inventory over the past 12 months as evidenced by the blue line (new orders) above the red line (inventory). The following percentage changes are based on the compounded change in this twelve month index.
For total durable goods, new orders are up 12% vs. inventory gaining 3.7%.
For total durable goods ex-transportation, new orders were up 11.4% vs. 5.5% for inventory. For total durable goods ex-defense, new orders were up 11.7% vs. 3.6% for inventory.
For machinery, new orders were up 14% while inventory gained 6.2%. For primary metals, new orders were up 14.8% vs. a gain of 9% for inventory. For transportation – motor vehicles and parts, new orders gained 20.4% while inventory fell 0.8%. For fabricated metals, new orders are up 13% vs. a gain of 5.5%.
Over the past twelve months, new capital goods orders gained 26.5% vs. only 3.3% for inventory. New orders for capital goods nondefense ex-aircraft gained 15.8% vs. 4.5%.
To summarize the ISM data, the new orders subindex continues to show serious strength. (The redline is the 20 year average)
New Orders Subindex
The backlog subindex remains at a solid 55.
Backlog Subindex
The customer inventory subindex remains in contraction indicating inventory levels that are too low.
Customer Inventories Subindex
Below is the ISM Manufacturing PMI by month with subindexes; all at very strong levels, except for the two inventory sub-indexes. Notice the sharp YoY improvements.
The regional reports indicated a much larger drop in the ISM than half a point. It remains to be seen whether these weak regional indexes are indicative of a slowing manufacturing economy or simply due to year end seasonality.
The colors in the table above correspond to the appropriate PMI index below. The chart on the right normalizes the data. The data shows a broad based uptrend.
October auto sales of 17.4m annualized units missed expectations of 17.5m.
November US Auto Sales SAAR
This chart takes the inverted unemployment rate (because lower unemployment is good) and compares it with the annualized auto sales rate (because you need a car to get to work) back to 1973. The chart indicates continued solid auto sales unless the unemployment rate worsens dramatically.
November US Auto Sales (white) and the Inverted Unemployment Rate (orange)
November auto sales of 1.39m units were up 2.8% MoM and 1.1% YoY.
US Monthly Auto Sales
The three month monthly auto sales moving average moved lower to 1.39m units, but was up 2.1% YoY.
US Monthly Auto Sales 3 Month Moving Average
The daily sales rate gained 2.8% MoM and 1.3% YoY. Nissan, Ford and Honda outperformed the industry while GM lagged.
There was little to no change in market share between the top six automakers.
According to WardsAuto, light vehicle inventory was flat MoM and down slightly YoY at 71 days.
FCA’s inventory gained 3 days to 88. GM also gained 3 days to 83. Both were down a few days YoY. Nissan has done a fantastic job correcting their bloated inventory level from a few months ago.
Wards Auto Inventory Data per Auto Manufacturers
FCA, Ford, GM, Honda and Nissan all saw their days on hand inventory levels fall YoY, with Honda and Nissan down nicely. Toyota was up slightly YoY.
Wards Auto Inventory Days On Hand
Total construction spending continues to trend higher, albeit at a slower pace with a gain of 1.4% MoM, beating expectations of a 0.5% MoM increase. Seasonally adjusted data rose in all categories with total nonresidential up 2.1%.
October US Construction Spending
Total unadjusted October spending rose 0.65% MoM, 2.4% YoY and 4.13% YTD.
Total unadjusted October private spending rose 1.5% MoM, 2.7% YoY and 6.6% YTD.
Total unadjusted October private nonresidential spending rose 1.8% MoM, fell 2.1% YoY and gained 1.5% YTD.
Total unadjusted October private residential spending rose 1.5% MoM, 7% YoY and 11.2% YTD.
The next two charts show monthly nonresidential and residential construction spending on an unadjusted basis for the last five years. Everyone knows construction ramps up in the spring and summer, but sometimes a picture speaks a thousand words. Expect construction related steel demand to start picking up soon.
US Nonresidential Construction Spending
US Residential Construction Spending
November was another very positive month on the global manufacturing PMI front. Europe continues to lead and strengthen while Mexico and Brazil saw nice gains MoM. The Australian PMI gained 6.2 points, which might have to do with the rally in iron ore and coal prices, but might also be an indication of economic strength brewing in China.
The Eurozone PMI reached new recent highs with the German PMI at 62.5.
Eurozone (white), German (blue), Italian (green), Spanish (red), and French (yellow) Manufacturing PMIs
The Platts TSI North Europe HRC Index looks overdue for a rally when compared with the Eurozone manufacturing PMI.
Eurozone (white) and Platts TSI North European HRC Index (orange)
Japan gaining some momentum in November as the US and China remain status quo.
US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
Chinese PMIs have been stuck in the same low 50s spot for most of 2016.
China Official (white) and Caixan (orange) Manufacturing PMIs
The table below shows the Chinese official PMI and each of the PMI’s subindexes. It’s interesting and telling to walk through each of China’s PMI subindexes. Output, new orders, input prices and expectations remain the highest of the subindexes, while employment, backlogs, inventory and delivery time remain in contraction.
The new orders subindex moved up this month, a positive for the price in China as you can see in the chart below.
China New Orders (white), TSI ASEAN HRC Index (red) & Chinese Spot Price (blue)
Taking this one step further, this regression shows a 91% correlation over the last 24 months between the new orders sub index and the Chinese spot HRC price.
Below are the producer and customer inventory subindexes continuing to stay below 50 since 2013.
China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)
The new orders and backlog subindexes inched higher in November, but backlogs are still in contraction.
China New Orders (white) & Backlogs of Orders (red)
November CME HRC futures settled the month at $610/st up $17 MoM. The December future added $9 to $629. The first half of 2018 was basically unchanged in the $636-$638 range. Q3 2018 rebounded $8 to $634 while Q4 gained $6 to $632.
Most of the HRC indexes were up WoW. The Platts TSI Midwest HRC index fell almost 2% while the North European HRC Index fell almost 1%.
TSI North European HRC Index fell almost 1% while the ASEAN HRC Index was flat.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. HRC and CRC differentials remain near multi-year lows. The lack of import deals made in the May through July period due to the Section 232 Investigation and now the closing of the import price window supports our belief that imports will decline precipitously in the near term and stay depressed into 2018 unless global price dynamics change.
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. Midwest HRC prices have started to rally with the HRC and CRC differentials rebounding noticeably.
Platts TSI Daily HRC Price
SBB Platts US Midwest HRC fell 1.67% last week. Japanese HRC gained 5%, Chinese domestic HRC gained 3% and Mexican HRC gained 2.75% WoW.
The US Midwest CRC price were up 1.2% and Mexican CRC price gained 2.7%.
The Chineses domestic HDG price gained 5% while the Chinese export HDG price was up 2% WoW.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate fell 2.5% to 73%.
Ferrous raw materials were up across the board last week with scrap and coal leading the charge.
The December SGX iron ore future was up 2.6% or $1.77/t to $68.95 WoW. The December LME Turkish scrap future gained $11.50/t to $341.50.
The rally in the SGX iron ore futures has moved the curve into backwardation after a couple weeks of a flattened curve.
January Chinese rebar futures gained 7%, physical rebar in China gained 4.25%, US Plate rose 3.6% and Black Sea billet gained 2.7%.
Most of last week’s economic data has been discussed above. October new home sales were up 40k homes to a SAAR of 685k vs. expectations of 628k, however, September data was revised lower to 645k from 667k. The September S&P Case Shiller 20 City Home Price Index gained 6.2% YoY, ahead of expectations and up from 5.82% in August. October pending home sales were up 3.5% MoM, well ahead of expectations.
Q3 US annualized GDP beat expectations gaining 3.3% at an annualized QoQ rate. The October Core Personal Consumption Expenditures Index gained 1.4% YoY, in line with expectations.
The Federal Reserve released their Beige Book report last week. The summaries below are copied directly from the report.
“Overall Economic Activity
Economic activity continued to increase at a modest to moderate pace in October and mid-November, according to anecdotal reports from contacts across the 12 Federal Reserve Districts. There was a slight improvement in the outlook among contacts in reporting Districts. Pre-holiday reports of consumer spending on retail and autos were mixed but largely flat; still, the outlook for holiday sales was generally optimistic. Many Districts highlighted growth in the transportation sector, although the New York District reported a slight softening and the San Francisco District noted that North-ern California wildfires temporarily reduced shipping volumes. Residential real estate activity remained constrained, with most Districts reporting little growth in sales or construction. By contrast, nonresidential activity was consistent with previous reports of slight growth. Loan demand was steady to moderately stronger. All Districts reported that manufacturing activity expanded during the reporting period, with most describing growth as moderate. Among reporting Districts, manufacturing contacts predominantly expected activity to continue to pick up, although the Philadelphia and St. Louis Districts noted signs of a slowdown.
Employment and Wages
Employment growth has increased since the previous report, with most Districts characterizing growth as modest to moderate. Reports of tightness in the labor market were widespread. Most Districts reported employers were having difficulties finding qualified workers across various skill levels, and several Districts reported that an inability to find workers with the required skills was a key factor restraining hiring plans. Wage growth was modest or moderate in most Districts. Wage increases were most notable for professional, technical, and production positions that remain difficult to fill. Many Districts reported that employers were raising wages as well as increasing their use of signing bonuses and other nonwage benefits to retain or attract employees.
Prices
Price pressures have strengthened since the last report. Most Districts reported modest to moderate growth in selling prices and moderate increases in non-labor input costs. In particular, construction-material costs rose in most regions, with many Districts citing increased lumber costs and/or increases in demand for materials due to hurricane rebuilding efforts. Residential real estate prices generally increased as well. There were also reports of increases in costs in the transportation sector. Additionally, several Districts noted input cost increases in manufacturing. In many cases, these increases in transportation and manufacturing were passed through to consumers. Fuel prices also rose, with multiple Districts reporting upward pressure on oil and natural gas prices. However, agricultural price pressures remain mixed.
The S&P 500 continued to rally to new highs again last week. China was mixed, Europe fell 1.6% and the Nikkei gained almost 1%.
S&P 500
Steel mills were up across the board.
ArcelorMittal
Service centers were all up except for NWPX.
Olympic Steel
Iron ore miners were mixed.
Base metals were mostly lower with nickel falling over 6%.
LME 3 Month Rolling Nickel Future
CME March 2018 Copper Future
LME 3 Month Rolling Aluminum Future
It was a quiet a week on the currency front with only the Japanese yen falling more than 1%.
US Dollar Index
Japanese Yen
Oil prices continue to stay near highs, but were down 1% or $0.59 to $58.36/bbl. The US rig count gained 6 rigs to 929 while crude oil production continued to inch higher. Crude oil inventory fell 0.75%, while the aggregate inventory gained 0.4%. Natural gas gained almost 9% to $3.06/mbtu, while inventory fell almost 1%. OCTG prices were unchanged.
December WTI Crude Oil Futures and December Crude 15 Delta Put Volatility
This is a very interesting chart showing the steep decline in inventory and the rally in crude. Considering production is at highs for the year, one could assume strong energy demand is underpinning these metrics.
Aggregate Energy Inventory (Blue) 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
D.O.E. Crude Oil Production
D.O.E. Crude Oil Production Perspective (1983 – Present)
The US 10 year Treasury yield was 2 basis points higher to 2.36%. European yields were under pressure.
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:
– China strict steel capacity cuts/China getting serious about curtailing steel production
– Chronically low inventory levels/domestic or global restocking
– Post hurricane development and production
– Energy industry rebound
– Graphite Electrode Shortage
– NAFTA related disruption/Trade War
– Sharp drop in steel imports
– Unexpected inflation
– Weaker dollar
– Flatbed trucking availability/transportation supply constraints
– Section 232 Investigation
– President Trump’s agenda
– Infrastructure bill/long-term solution to highway spending bill
– Unplanned domestic supply side disruptions
Downside Risks:
– 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