Week Over Week – December 1st

The biggest story last week was OPEC’sdecision to not cut production in the face of falling prices.  The price of crude oil reacted immediatelydropping to as low as $63.72 before finishing the week down $10.36 to $66.15/barrel;a loss of 13.54%.  The drop reverberatedinto equities exposed to oil prices, including steel stocks and railcarmanufacturers, as well as currencies and other commodities. 

NYMEX WTI Crude Oil Futures


In the iron ore futures market, the excitementsurrounding the PBOC’s rate cut from Friday, Nov. 21st dampened early in theweek. On Wednesday, rumors that additional stimulus would be announced over theweekend sent ore prices on a tear from as low as $67 to $72/t. 

Iron Ore Futures


Scrap prices and scrap indexes wererelatively flat last week after weeks of devaluing.  Crashing ore and oil prices coupled withweakening currencies and global steel prices (ie Russian billet & slabs)are raising concerns that scrap prices are just taking a breather and havefurther to go from here.  If that occurs,how much pressure will that add to an already weakening US HRC price?

TSI Turkish Scrap Index


November flat rolled Import licensedata is ticking up (usually it moves down over the course of the month) to 1.25m short tons.  Flat rolled imports forall of 2014 look are projected to land in the 14 to 14.5 million short tonrange.

Last week, CRU printed: US$ 629 -5,Germany $471 -3, Italy $461 -2, China $454 unch (all in short ton).  The Flack Steel Global Weighted Index dropped1 to $464/st.  Domestic price differentialsstill remain extremely elevated ranging from $96 – $193 with Chinese CRC at $205below US HRC.  TSI daily prices did the followingWoW: US HRC prices $640 -6, NE HRC €407– 1 ($459.96/st +1), ASEAN $490 -6 ($444.43/st -5.4) and Turkish Scrap $304 flat. 

Platt’s has HRC flat at 640, whileFlacksteel.com has HRC down 10 to 620.  AISIweekly production increased 28k tons to 1.882 million while capacityutilization moved up 1.1% to 78.2% (this is for all steel production).

Octoberdurable goods orders increased 0.4% MoM beating expectations, however, durablegoods orders ex-transportation and orders ex defense were down 0.9% and 0.6%,respectively, below expectations. The November Chicago PMI also missedexpectations of 63 dropping to 60.8 from 66.2 in October.

Homeprices in September rose 4.9% annually according to the Case-Shiller 20 cityindex beating expectations of 4.6% but down from 5.6% in August.  October new home sales slipped to a 4.58million annualized pace from 4.67m in September missing expectations of 470m.October pending home sales was down 1.1% vs. a gain of 0.3% in September andexpectations of an increase of 0.5%. Consumer confidence weakened to 88.7 from 94.5 in November and the U of Msentiment index increased to 88.8 from 86.9 in October, but missed expectationsof 90.

The S&P 500 closed the week up 4.5at 2066.3 while the VIX was up 0.4 to 13.33. NUE was down 0.77 to $53.63.  US Steelfinished the week down 1.34 at $33.35. STLD shed 0.43 to $22.54.  AKSdropped 0.48 to $5.92, while MT was down .24 to $12.25.

Iron ore miners continued to move lowerwith ore prices.  BHP was down almost 10%(-5.71) to $51.63.  CLF shed .79 to $9.12,RIO shed 0.91 to $46.6 and Vale lost 0.40 to $9.01.  

For the week, zinc dropped 3.64% to $2211.25/mt,gold lost 1.91% to $1175.5 while silver dropped 5.49% to $15.556.

As discussed above, WTI crude oil futuresgot smashed by 13.54%, down $10.36/barrel to $66.15. Natural gas gave up 4.17%settling at $4.09/Mbtu reversing some of the previous week’s gains.  The average U.S. gas price dropped again to $2.78/g,the lowest since 2010.  While the actualpressure on energy related steel consumers remains unknown and a function ofhow low oil prices ultimately fall, there is no doubt the lower prices at thepump will add to US GDP via consumer spending.

Average Gas Price

The dollar index was flat for the weekat 88.36. Currencies making notable moves last week were the Brazilian realdown 2% to 2.5654, the Aussie dollar down 2% to .8492, the Canadian dollar down1.7% .8752, the Mexican peso down 2.19% to 13.92 and the Russian Ruble down 8%to 49.47.  All of these countries haverevenues exposed to commodities and/or oil.  The currency advantage to foreignerslooking to export to the U.S. remains impressive. These current foreignexchange rates should pressure the entire commodity sector at large and provideattractive opportunities for international exporters to sell steel to theUS.  A larger macro concern would be theeffect of a sovereign debt default on global financial markets and the knock oneffects into asset pricing and demand potentially causing an economic recession.

The U.S. 10year interest rate broke below the 2.3% floor it had held for weeks dropping6.3% to 2.16%.  European rates also fell with the German tenyear at 0.7% (-9.09%), the Spanish ten year breaching 2% at 1.9% (-5.86%) and the Italian ten year atto 2.03% (-8.09%).  

In additionto the above, the domestic Chinese stock market (CSI 300) and the Shanghaiproperty index had a nice rally of 8% and 12%, respectively in response to thePBOC rate cut.  On the flip side, theBaltic dry index slipped 13% and the S&P global commodity index dropped 8%(although much of it is related to oil). 

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 priceseffecting demand
        Year-endinventory destocking
        High productionlevels
        Economicdownturn, especially in China or Europe reverberating to U.S.A.
        Weak demand inhousing or automotive