*The next WoW report will during the week of January 7.
Domestic physical flat rolled prices continued to be under pressure last week. JSW successfully restarted its EAF mill last week. However, it is unclear if the melt was satisfactory or if they need to continue to work on perfecting it. Regardless, it represents additional tons at a time of uncertainty for not only price, but also 2019 demand.
Moreover, new import orders continued to roll in last week while we learned November service center flat rolled shipments fell to the lowest daily shipment rate since last December. Domestic mill lead times continue to fall along with domestic flat rolled price indexes. After this week, we expect the supply chain to effectively shut down for the holidays until January 7. These steel industry specific developments indicate prices will continue to head lower in the coming weeks.
In the steel market, we see downside risks outweighing upside risks warranting a prudent and risk-averse purchasing and inventory management strategy. The following issues provide the foundation of our view:
These issues saw little improvement in the past week with some getting worse, especially crude oil falling to as low as $47/bbl at the time of writing this report. The December Empire Manufacturing Report fell sharply to 10.9 from 23.3, missing expectations of 20. As you can see below, the Empire Manufacturing Index has broken below the almost three-year uptrend.
Empire Manufacturing Index
This chart pattern of not only breaking below a multi-year up trend, but also doing it with a sharp move lower is presenting itself across multiple industries, economic metrics and commodity prices indicating perhaps a sharp slowdown for the U.S. economy lies is ahead.
U.S. New Home Sales
National Association of Home Builders Market Index
CME March 2019 Copper Future
The CME WTI crude oil future continues to make new lows trading as low as $47 on Tuesday, December 18. The steep drop in price is unlikely solely due to an oversupplied market and it would seem that weakening demand is also a driver of the downward price movement.
Front Month CME WTI Crude Oil Future
Dallas Fed Manufacturing Index
The Korean stock market is a gauge of the health of the global economy as Korea is an export driven economy
Korean Stock Exchange Kospi Index
So what is next? If the sharp drop in the Empire Manufacturing Index is any indication coupled with what should be a drop in the Dallas and K.C. Fed Indexes (due to the weak oil price), then the December ISM PMI should break below current expectations of a 0.9 drop to 58.4. The trend line sits at 58.3.
ISM Manufacturing PMI
The S&P 500 continues the sell-off that began after peaking in September, now falling to its lowest level since October 2017. The longterm uptrend support starts around 2325, which is 9% below the current price.
S&P 500
The U.S. 10-Yr Treasury Yield is approaching its multi-year uptrend which currently sits around 2.79-2.8%.
U.S. 10-Year Treasury Yield
The 2017 economy was characterized by coinciding global growth. That abruptly changed at the beginning of 2018 as you can see by the downtrends in the manufacturing PMIs of the Eurozone, Japan and China. Perhaps this was a result of President Trump’s trade policy, perhaps it was cyclical, but regardless of why, the weakness abroad looks to be weighing on the U.S. economy.
Eurozone (blue), Japanese (red) & Chinese (green) Manufacturing PMI
This brings us to the crux of our focus, the flat rolled price. Below is the rolling 2nd month CME Midwest HRC future. The HRC price is approaching the uptrend that started in 2016. The trendline sits around $715-720. The Platt TSI Midwest HRC Index is almost identical. Watch this level in both the futures and the index and if prices break below the trend line, then expect prices to fall sharply.
Rolling 2nd Month CME Midwest HRC Future
Upside Risks:
– Sharp drop in steel imports
– Increased risk of domestic supply disruption
– Further section 232 tariffs and quotas restricting supply
– Chronically low inventory levels
– Chinese economic stimulus measures
– U.S. Infrastructure bill
Downside Risks:
– Declining rates of growth in manufacturing/demand destruction
– Weakening global economics/PMIs
– Crude oil prices falling sharply
– Higher interest rates
– Strengthening U.S. dollar
– Falling global flat rolled prices
– Tariff resolution and/or 232 exclusions, especially Turkey reverting to original 25%
– Increased domestic production capacity
– Trade War Fallout
– Turkey/emerging market contagion
– Political & geopolitical uncertainty
– Stock Market Crash
The January CME HRC future decreased $14 to $736 and the Platts TSI Daily Midwest HRC Index was down $14.50 to $746.50.
January CME HRC Future (orange) vs. Platts TSI Daily Midwest HRC Index (white)
The CME Midwest HRC futures curve is below with last Friday’s settlements in orange. The curve continues to move lower January and February 2019 down the most last week.
January ferrous futures are listed below. Iron Ore and Chinese HRC futures were up 6.4% and 2.4%, respectively. Australian coking coal also saw a gain over 2%, but ASEAN HRC fell 4.4%, which is somewhat perplexing. Scrap futures were also lower.
Flat rolled indexes were mostly lower. The Platts TSI Daily Midwest HRC fell 2% while the Northern European HRC index was down 2.9%.
The AISI Capacity Utilization Rate fell to 80%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Last week’s latest December flat rolled import license data is forecasting a MoM increase of 55k tons to 912k.
Last week’s December tube import license data is forecasting a 60k increase MoM.
December’s combined flat rolled and tube import license data is forecasting a 115k ton MoM increase.
Flat Rolled (blue) and Tube (red) Imports
December AZ/AL import licenses are projecting an increase of 3k tons MoM to 80k.
Galvalume Imports (blue) w/ 3 Mo. Moving Average (red)
Below are HRC and CRC Midwest vs. each country’s export price differentials using pricing from SBB Platts. HRC and CRC differentials continued their steady decline.
SBB Platt’s HRC, CRC and HDG WoW pricing is below. The U.S. Midwest HRC was down 2% and the U.S. Houston HRC price was down 2.9%. The Midwest CRC price fell 1.3%, and the Midwest HDG price fell 1.2%. The Chinese domestic HRC price rose another 1.3% while the Chinese Domestic CRC was up 1.5%. The Northern European HDG price was down 2.1%.
Listed below are ferrous raw materials WoW price changes. The SGX 2-month ore future and IODEX gained 4.4% and 5%, respectively. Scrap prices were under pressure with Turkish scrap and East Coast shred both down 3.9%.
The January SGX iron ore future gained $1.48 to $68.10 while the January Turkish scrap future dropped $3.50 to $294.50.
Ex-flat rolled prices were mixed with Turkish Rebar down 2.1% WoW.
November industrial production gained 0.6% MoM, beating expectations of a 0.3% gain, but October’s gain was revised lower to a 0.2% contraction. Capacity utilization rose to 78.5% in November from a downwardly revised 78.1% in October.
The November PPI Ex-Food & Energy gained 2.7% YoY, up from 2.6% in October and beating expectations of a 2.5% gain. The November CPI Ex-Food & Energy gained 2.2% YoY, up from 2.1% in October and in line with expectations.
The November NFIB Small Business Optimism Index fell to 104.8 from 107.4jjj and missed expectations of a slight decrease to 107.
The S&P 500 fell 1.3%, while The Shanghai Property Index gained 2.1%
S&P 500
Steel mill stocks were mostly down with U.S. Steel and AK Steel declining 6.1% and 9.2%, respectively.
US Steel
Service center’s stocks are below. Ryerson and Schnitzer were each down 5.9%, while N.W. Pipe was up 3.4%.
Ryerson
Schnitzer
Mining’s stocks were mixed with BHP Billiton up 3.5%, while Cleveland Cliffs was down 10.3%.
Cleveland Cliffs
Base metal futures prices were mixed. Nickel gained 1.6%, while aluminum and zinc fell 1.5% and 1.7%, respectively.
LME 3-Month Rolling Nickel Future
LME 3-Month Rolling Zinc Future
The U.S. dollar was up 1% to 97.44. The British Pound fell 1.1% after a week of uncertainty culminated in a no-confidence vote for the Prime Minister and lack of a clear plan for Brexit. The Indian rupee and Turkish lira also fell 1.1% and 1.5%, respectively.
US Dollar Index
British Pound
Turkish Lira
The January WTI crude oil future lost $1.41 or 2.7% to $51.20/bbl. Crude oil inventory fell 0.3% and distillate inventory fell 1.2%, while gasoline inventory added 0.9%. The aggregate inventory level decreased 0.1%. Crude oil production decreased 0.9% from their all-time high to 11.6m bbl/day. The U.S. rig count and the North American rig count decreased by four and sixteen rigs, respectively. The January natural gas future fell by $0.66 or 14.7% to $3.83/mmBtu. Natural gas inventory fell 2.6%.
Jan. WTI Crude Oil Future (orange) and Jan. Crude 15 Delta Put Volatility (white)
Aggregate Energy Inventory (white) vs. Jan. WTI Crude Oil Futures (orange)
D.O.E. Crude Oil Inventory
D.O.E. Crude Oil Inventory Perspective (1982 – Present)
Baker Hughes U.S. Rig Count
Baker Hughes North American Rig Count
D.O.E. Crude Oil Production
D.O.E. Crude Oil Production Perspective (1983 – Present)
The U.S. ten-year treasury yield gained four basis points closing the week at 2.89%.
U.S. Ten-Year Bond Yield
Japanese Ten-Year Bond Yield
Italian Ten-Year Bond Yield
The list below details some upside and downside risks relevant to the steel industry. The bolded ones are occurring or highly likely.
Upside Risks:
– Sharp drop in steel imports
– Increased risk of domestic supply disruption
– Further section 232 tariffs and quotas restricting supply
– Chronically low inventory levels
– Chinese economic stimulus measures
– U.S. Infrastructure Bill
– 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:
- Declining rates of growth in manufacturing/demand destruction
- Weakening global economics/PMIs
- Crude oil prices falling sharply
- Higher interest rates
- Strengthening U.S. dollar
- Falling global flat rolled prices
- Tariff resolution and/or 232 exclusions, especially Turkey reverting to original 25%
- Increased domestic production capacity
- Trade War Fallout
- Turkey/emerging market contagion
- Political & geopolitical uncertainty
- Stock Market Crash
– Crashing iron ore, scrap and finished steel prices
– Domestic automotive industry under pressure
– Sharp and persistent drop in oil and/or iron ore prices
– 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