The dominant story (again) last weekwas oil prices in free fall mode.  Withno end in sight, WTI crude traded as low as $57.42/barrel. Volatility continuedto reverberate throughout the energy sector and currencies of countries heavilydependent on commodity revenue, but this past week also caused a shift in riskas investors sold the stock market and bought up safe haven assets i.e. bonds.  The S&P 500 was down just over 4% for theweek.

WTI Crude Oil Futures

S&P 500

The primary reason behind the selloffwas related to concerns that crashing oil prices is indicating weak short-termgrowth and deflationary pressures.  Whileexcess supply seems to be the main culprit behind the price of oil droppingfrom $75 to $57.50 in a matter of weeks, shoot first and aim later seemed to bethe strategy employed by investors last week. The massive price moves incommodities, currencies, bonds and equities has led to forced liquidation asleveraged players unwind positions and hedge funds face redemptions.  This has surely exacerbated price movesleaving us wondering what is actually happening out there. 

In addition to concerns over globaldemand for oil as a proxy for economic health, the U.S. energy sector and thepotential consequences lower oil prices entail for profits has crushed many ofthe equities in the energy sector.  Expectationsfor a sharp curtailment of 2015 capex projects has led to increasing correlationbetween the oil prices and the share prices of manufacturing sectors with tiesto the energy space. The concerns for the steel market are decreased demand forall things related to the energy sector including not only pipe and tube, butalso in railroads and rail car manufacturers. The flip side of this is the savings by consumers and commercials buyersof energy.  The latter looks to outweighthe former, however, it seems to be a mismatch in timing as the benefits ofcheaper oil might take a while to seep into the market. However, of the feweconomic reports announced last week, November retail sales released lastThursday crushed expectations (of 0.4%) coming in at 0.7%.

Lower oil prices are also good newsfor Japan and Europe, both of which are large importers of oil.  The currencies of both rallied last week,even though both Japan and the Eurozone are in the midst of quantitative easingprograms.

Yen & Euro Currencies

The dollar index was down 1% for theweek at 88.36. Emerging market currencies were sold off while the Yen, Euro andPound rallied.  The currency advantage toforeigners looking to export steel to the U.S. remains impressive.  A larger macro concern would be the effect ofa sovereign debt default on global financial markets and the knock on effectsinto asset pricing and demand potentially causing an economic recession.

Especially hard hit was the RussianRuble down 10% last week to 58.28.  Thissank prices for black sea and Turkish products. Black Sea billet dropped $58over the past month while Black Sea slabs and CIS plate dropped $45 in a week.Turkish billet was down $55, Turkish plate down $25 and Turkish HRC export wasdown $20.   

Prices for ferrous raw materials weremixed with ore moving lower and scrap prices ticking up.  The IODEX shed 1.75 to $69.5, while the Februaryiron ore futures fell 1.5 to 68.62. HMS Turkey gained $7.5 to 312.50 and EastCoast Shred was up $5 to 287.50.   

HRC prices fell across the board. CRUprinted: US$ 614 -9, Germany $463 -9, Italy $445 -18 and China $453 -1(all inshort ton).  The Flack Steel GlobalWeighted Index dropped $7 to $457/st. Domestic price differentials still remain extremely elevated rangingfrom $103 – $212 with Chinese CRC at $195 below US HRC.  TSI daily prices did the following WoW: USHRC prices $616 -7, NE HRC €404 -6 ($456.64/st -0.1), ASEAN $481 -4 ($436.27/st-3.60) and Turkish Scrap $308 -2.  CME HRCfutures moved lower as well.

HRC Futures Curve

November flat rolled import licensedata increased to 1.37 m short tons while December’s data is pointing to 1.33 mst.   The 2014 flat rolled import forecast is at 14.8mst.

Platt’s has HRC down $10 to 615, has HRC down 5 to 610.  AISIweekly production gained 2.3% to 1.877 million while capacity utilizationinched up to 78% (this is for all steel production).

The S&P 500 closed the week down4% at 1990 while the VIX spiked 78% to 21.08. NUE dropped by $2.57 to $51.88.  USSteel finished the week down $4.28 to $27.82. STLD dropped by $2.31 to $20.37.  AKSdropped $0.48 to $5.20, while MT was down $1.27 to $10.88.

Iron ore miners followed suit.  BHP was down $4.20 to $46.18.  CLF shed $1.23 to $6.74, RIO shed $3.51 to $41.78and Vale lost $1.19 to $7.31.  

For the week, zinc dropped 2.3% to $2178.75/mt.Gold gained 2.7% to $1222.5 and silver was up 5% to 17.06.

WTI crude oil futures were crushedslipping $8 to $57.81. Natural gas mostly unchanged at $3.80/Mbtu.  The average U.S. gas price dropped again to $2.559/g,down 5% for the week.   

The U.S. 10year interest rate tanked last week to finish the week at 2.08%.  The German ten year yielddropped by 20% to 0.62%. The Spanishand Italian ten year yield gained 2.5 and 4% to 1.88% and 2.06%, respectively.

In additionto the above, the domestic Chinese stock market (CSI 300) and the Shanghai propertyindex continued rallying last week up 2% and 9.4%, respectively.  On the flip side, the Baltic dry indexslipped a further 12% to 863.

I currently have the following upside anddownside risk for HRC prices:

Upside Risks:

        Strongmanufacturing data
        Sharp drop inimport data
        Trade case filings
        Supply sidedisruptions
        Infrastructurebill/long-term solution to highway spending bill
Downside Risks:

        Currency issues
        Another recordmonth of imports
        Increasedinventories at service centers
        Continued weakiron ore and global finished steel prices
        Weak scrap and/orpig iron prices
        Oil prices affectingpipe/tube and railcar demand
        Relatively warmwinter leading to lower natural gas and scrap prices
        Year-endinventory destocking
        High productionlevels
        Economicdownturn, especially in China or Europe reverberating to U.S.A.
        Weak demand inhousing or automotive