The chart below is of the rolling 2nd month CME Midwest HRC future. The future’s time series has developed into a bullish technical pattern called an “inverse head and shoulders.” This chart pattern consists of a neckline (at $650), the head or low point in the middle flanked by two shoulders, one on each side. Once the pattern is completed, the price breaking above the neckline predicts a bullish price breakout. Last, Monday, ArcelorMittal announced a flat rolled price including a $680/st price for hot rolled tons. The January future (HRC2) traded as high as $667/st and closed as high as $660/st before settling the week at $651, officially breaking and closing above the $650 neckline.
Rolling 2nd Month CME Midwest HRC Futures
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 those announcements, the Midwest HRC price had been mostly range bound between $610 and $625 per short ton (st) until breaking out of the range during the first week of December. Last week, the index closed at $638.75/st.
January CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
Collapsing flat rolled imports (licenses), unattractive global flat rolled differentials and production cuts both domestically and in China point to tighter domestic supply over the short and medium term. November flat rolled license data is forecast to fall almost 80k short tons (st) to 943k tons. December flat rolled license data is forecast to crater to 682k st, however early month estimates have proven to be unreliable.
The November tube license forecast points to a sharp drop of 163k st to 636k. December’s tube license forecast is predicting a decrease of another 100k short tons to 537k.
The estimate for Q4 sheet and tube imports is 4.6m st, a decrease of 900k st QoQ.
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:
– 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
– Post hurricane development and production bump
– Energy industry rebound
Downside Risks:
– Political & geopolitical uncertainty (US Government shutdown)
The December CME Midwest HRC future added $5 to $640. Q1 2018 slipped $2 to $650, Q2 2018 added $5 to $650, Q3 2018 dropped $5 to $640 and Q4 2018 fell $5 to $640.
Flat rolled prices continued to rally.
The TSI North European HRC Index remains range bound gaining $3 to $574/st while the ASEAN HRC Index has started a little rally gaining another $7 last week.
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 from their lows.
Platts TSI Daily HRC Price
The SBB Platts US Midwest HRC price gained 1%. The Turkish export HRC price jumped almost 4%. The Chinese export, East Asian import and Russian export price were all up over 2% on the week.
The US Midwest CRC price was close to unchanged. There were mostly gains in global CRC prices.
The US Midwest HDG price was up 2.1% to $887.50/st. The South European and Middle East Import HDG prices gained 1.5%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization dropped to 71.7% reflecting the year end slow down.
Raw materials saw gains in ore, scrap and coal.
The January SGX iron ore future gained 2.3% or $1.56/t to $69.25 WoW. The January LME Turkish scrap future fell 0.4% or $0.50 to $352.50.
The rally in the SGX iron ore futures has moved the curve into backwardation after a couple weeks of a flattened curve.
Rebar prices saw gains in China, Europe and Turkey. US plate gained 1%.
Our corporate analyst Ben Bullock wrote the following:
Summary of the FOMC December Meeting
The FOMC, as expected, raised the Fed Funds rate at last week’s meeting by 25 basis points and said it expects 3 similar rate increases in 2018. This was Janet Yellen’s final monetary policy meeting as Chairwoman as she will leave the Board of Governors at the beginning of 2018. Additionally, the composition of the voting members will change with the New Year as Cleveland, Richmond, Atlanta and San Francisco Reserve Bank Presidents will become voters. All of these regional bank presidents have displayed a hawkish policy tilt compared to the 2017 voting presidents. President Trump has nominated Marvin Goodfriend for one of four open positions on the Board of Governors. Goodfriend is an economist at Carnegie Mellon University and is also expected to be a monetary policy hawk in 2018.
Last week’s economic data is below. The December Empire Manufacturing Index fell 1.4 points to 18.0, missing expectations of 18.7. November industrial production gained 0.2%, missing expectations of a 0.3% gain. October’s industrial production was revised higher to 1.2% from 0.9%. November capacity utilization ticked up to 77.1% from 77%.
The November NFIB Small Business Optimism Index was better than expected at 107.5. The November PPI Ex-Food and Energy gained 2.4% YoY. The November CPI Ex-Food and Energy gained 1.7% YoY, down from 1.8% in October and missing expectations of 1.8%.
The S&P 500 continued to rally to new highs again last week up 1.7%. The Shanghai Property Index was down 3.1%.
S&P 500
Steel mills were mostly higher.
AK Steel
Service centers were mixed.
Olympic Steel
Iron ore miners were up with ore.
Base metals rebounded gaining between 2.75% and 5.75%.
LME 3 Month Rolling Nickel Future
CME Copper Future
The US dollar gave back 0.5% on the week with the Japanese yen rallying almost 1%. The Australian dollar gained 2.2%.
US Dollar Index
Australian Dollar
The February WTI crude oil future was close to unchanged at $57.55/bbl. Crude oil inventory was down over 1%, distillate inventory was down 1.1%, but a 2.6% gain in gasoline inventory offset it resulting in little change to the aggregate inventory statistic, which is has remained at its lowest level since September 2015 for the past three months. Production continued higher gaining 0.75%. The January natural gas future was unchanged at $2.77/mbtu with inventory down almost 2%.
February WTI Crude Oil Futures (white) and February Crude 15 Delta Put Volatility
This is a very interesting chart showing the steep decline in inventory and the rally in crude.
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
D.O.E. Crude Oil Production
D.O.E. Crude Oil Production Perspective (1983 – Present)
The US 10 year Treasury yield was down two basis points to 2.35%. There was some movement higher in the Spanish and Italian bond yields, while the British ten year yield fell thirteen basis points.
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
– 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