The chart below is of the rolling 2nd month CME Midwest HRC future.  The now February future (HRC2) continues to make new highs closing last week at $664/st and clearly breaking above the neckline of a bullish “inverse head and shoulders” chart pattern (see past WoW reports for more on this).

Rolling 2nd Month CME Midwest HRC Futures

The December ISM Manufacturing PMI gained 1.5 points to 59.7 beating expectations of 58.2.  This is the seventh straight month the PMI has been above 56.

ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)

The chart below shows the 6 month moving average of the ISM Manufacturing PMI now at 58.75 (red dashed line).  58.75 is the 5th highest data point in the last 30 years illustrating the strength and resilience of the current manufacturing cycle.

ISM Manufacturing PMI 6 Month Moving Average

The chart below includes the ISM Manufacturing PMI subindexes.  New orders and prices jumped while employment and customers’ inventories fell.

December ISM Manufacturing PMI

The new orders subindex jumped 5.4 points to the highest level since January, 2004 while the backlog subindex gained one point to 56.

ISM Manufacturing PMI New Orders (white) and Backlog (orange)

The chart below shows the ISM PMI new orders subindex minus the backlog subindex.  The red dashed line is the long term average and this month’s 13.4 differential is very high indicating the difference will converge in the coming months.  While the convergence might occur due to a slowing of new orders, an increase in the backlog subindex seems more likely due to the persistent strength in new orders kicking into backlogs. 

ISM Manufacturing PMI New Orders Minus Backlog of Orders

Inventory data from the ISM, MSCI and durable goods reports have and continue to indicate inventory levels that are too low. This month’s ISM customers’ inventory index slipped back down to 42.  Over the past five months, the customers’ inventory subindex has been 41, 42, 43.5, 45.5 and now 42.    

ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)

This chart overlays the Platts TSI Daily Midwest HRC price with the ISM manufacturing PMI.  There is a strong correlation between the two and the higher ISM should pull the HRC price higher.

ISM Manufacturing PMI Prices (white) & Platts TSI Daily Midwest HRC Index (orange)

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, especially in the backlog subindex.  

The regional manufacturing reports were mixed.  All of the reports are significantly improved YoY.

The colors in the table above correspond with the appropriate PMI index below. The chart on the right indexes the data starting at 100.   The data shows a broad based uptrend.

December US auto sales at a 17.76m seasonally adjusted annualized rate was better than the 17.5 SAAR that was expected. 17.13m autos were sold in 2017, down 1.9% YoY, but still very strong.

December US Auto Sales SAAR

The continued strength in employment has been a primary reason behind the strength in auto sales.  Moreover, the unemployment rate (inverted below) continues to decrease with last month’s rate at 4.1%. Look for a steady low unemployment rate to maintain or strengthen auto sales.

December US Auto Sales (white) and the Inverted Unemployment Rate (orange)

1.596m motor vehicles were sold in December.

US Monthly Auto Sales

The December 3-month monthly auto sales moving average was up 3.4% to 1.44m.

US Monthly Auto Sales 3-Month Moving Average

The daily sales rate was up 10.5% MoM, but down 1.45% YoY.  In regards to 2017’s total sales, Nissan had a very nice year growing sales by almost 2% while Honda saw marginal YoY growth.  Ford, GM and Toyota’s sales were down YoY, but by less than the industry’s average.  FCA had a disappointing month and year with sales down 8.4% YoY.

These pie charts show the percentage of sales of the top six auto manufacturers (relative to each other).  The chart on the left is market share in December and the chart on the right is for all of 2017.

Automotive dealers destocked sharply in December with inventory days-on-hand falling 10 days to 61 D.o.H.  GM saw the largest drop falling 20 days to 63 from 83.

The automotive industry is looking lean coming into 2018. 

WardsAuto Inventory Data per Auto Manufacturers

This is December inventory for the past four years.  This chart paints a healthy picture for the top six with FCA being the lone weak spot.

Wards Auto Inventory Days On Hand

November’s US construction spending rose 0.8% MoM, beating expectations, however, October’s spending was revised lower to a 0.9% gain from a 1.4% gain.  Unadjusted spending was down across the board MoM.

November US Construction Spending

YTD total construction spending was up 4.25%, the sixth straight year of growth and making new all-time highs.

YTD private residential construction spending was up a whopping 11.5%.

YTD private construction spending was up 6.5%, the sixth straight year of growth and making new all-time highs

YTD private nonresidential construction spending was up 1.05%, the sixth straight year of growth and making new all-time highs

This chart looks at the past five years monthly nonresidential construction spending.  Spending will ramp up in the coming months and that will translate into higher demand for steel.

US Nonresidential Construction Spending

The chart below shows the same phenomenon in residential construction, although not at as intense of a rate.

US Residential Construction Spending

There was a mixed bag on the manufacturing PMI front.  The US and Eurozone remain red hot at 59.7 and 60.6, respectively.  Germany at 63.3 is worth pointing out as is Turkey and India jumping 2 points.  Asia remains the weak spot with South Korea and Indonesia’s PMI’s falling below 50. 

Europe remains strong led by Germany.

Eurozone (white), German (blue), Italian (green), Spanish (red), and French (yellow) Manufacturing PMIs

Eurozone (white) and Platts TSI North European HRC Index (orange)

There were gains in the manufacturing PMIs of the US, Germany and Japan while China was close to unchanged.  Japan broke higher out of the range it has sat in throughout 2018.

US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs

China’s Caixan PMI, which is dominated by smaller firms than the official PMI dominated by state owned enterprises, saw a nice gain MoM.

China Official (white) and Caixan (orange) Manufacturing PMIs

There was little change MoM in the official Chinese PMI.

The new orders subindex was down slightly, while Chinese spot HRC and the TSI ASEAN HRC Index prices have consolidated at their highs of the past few months. 

China New Orders (white), TSI ASEAN HRC Index (red) & Chinese Spot Price (blue)

Inventory at Chinese manufacturers was down.

China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)

The Midwest HRC price continues the rally that began more than two years ago in December, 2015 at $365/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 imports of 902k st fell 120k MoM while December flat rolled license data is forecast to crater to 738k st, a MoM decrease of almost 165k short tons.

November tube imports of 600k were down 25% or 200k sts MoM.  December is on pace to fall another 90k st.

The estimate for Q4 sheet and tube imports is 4.6m st, a decrease of 945k 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, 2017 CME Midwest HRC future settled at $629.  Q1 2018 gained $2 to $664 in a very quiet holiday week. Q2 also gained $2 to $663, Q3 gained $1 to $661 and Q4 was unchanged at $660 while the curve remains very flat.

Flat rolled prices were up in the US and Europe and down in Asia.

The TSI North European HRC Index has started to rally gaining $3 to $574/st while the ASEAN HRC Index has gave back $3 to $512/st.

Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. 

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 last week of the year was very quiet across the globe.

Same with CRC prices.

The US Midwest HDG price gained 0.7% and the North European HDG price gained 1.3%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rebounded to 73.7%.

Coking coal added another 2% while the rest of the raw material complex was quiet.

The January SGX iron ore future fell 0.4% or $0.43/t to $72.42 WoW.  The January LME Turkish scrap future gained 1.24% or $4.50 to $367 and is running hot.

The rally in the SGX iron ore futures continues with new highs and a pretty consistent backwardated curve.

Turkish rebar gained 1.3% while May Chinese rebar futures fell 2%.

On the economic front, the October Case-Shiller 20 City Home Price Index rose to a 6.38% YoY increase.  November Pending Home Sales wre up 0.6% YoY.  Sales were up 0.2% MoM, beating expectations of a drop of 0.4%.

The S&P 500 took a respite at year end closing down 0.4% to 2676, but up 20% for the year.  The Euronext was down 1.4% on the week.

S&P 500

Steel mills were mixed.


Service centers were also mixed.

Olympic Steel

Iron ore miners were mostly up.

Base metals showed serious strength at year end with nickel close to the year’s highest level and aluminum, copper and zinc all closing at the highest level of the year.

LME 3 Month Rolling Nickel Future

LME 3 Month Rolling Aluminum Future

CME March Copper Future

The US dollar fell 1.3% approaching the lows seen in September.  The euro rallied 1.25% closing above 1.20.  There was a broad based rally with the Canadian dollar, Australian dollar, Russian ruble, British pound and Korean won all up at least 1%.  

US Dollar Index


The February WTI crude oil future closed up 3.3% or $1.95/bbl at $60.42/bbl, the first time it has closed above $60 since mid-2015.  Crude oil inventory was down over 1% but the distillate inventory was up 0.85%. The aggregate inventory statistic, which is has remained at its lowest level since September 2015 for the past three months, was down 0.4%.  Production fell 0.4%.  The US rig count dropped two rigs. The January natural gas future was up 10.7% to $2.95/mbtu with inventory down almost 3.25%.

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 eight basis points to 2.41%.  There was some movement higher in Spanish and Italian bond yields.

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