The chart below is of the rolling 2nd month CME Midwest HRC future.  The future’s time series has developed into a bullish 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.         

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 the announcements, the Midwest HRC price has been mostly range bound between $610 and $625 per short ton (st).  Last week the index broke out of that range closing up $16 to $633/st.  The January CME Midwest HRC future price (also the rolling 2nd month shown above) has also broken out of its recent price range closing the week at $652.

January CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)

According to November MSCI flat rolled data, service centers shipped at a 101.1k st/day daily shipment rate (D.S.R.), down 3.4% MoM.  November shipments of 2.1m st was down 178k st MoM or 7.75% with 21 shipping days in November versus 22 in October.  Inventory fell 39k st or 0.8% in November to 4.81m st.  Months-on-hand (MOH) rose to 2.26 from 2.11 in October. D.S.R. MOH rose to 2.16 from 2.11 in October.

November flat rolled shipments were up 5.6% YoY with 21 days in both November 2016 and 2017.

November flat rolled inventory was up 8.1% YoY.

The November flat rolled D.S.R. was up 5.6% YoY.

November flat rolled D.S.R. M.O.H. of 2.16 was up 2.43% YoY.

November M.O.H. of 2.26 is up 2.43% YoY.

Year-to-date flat rolled shipments are up 2.9% YoY through November.

Collapsing flat rolled import 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 st to 943k tons.  December flat rolled license data is forecast to crater to 630k st, however early month estimates have proven to be unreliable.

The November tube license forecast points to a sharp drop of 165k st to 635k.  December’s tube license forecast is for 732k short tons.   

The estimate for Q4 sheet and tube imports is 4.6m tons, a decrease of 900k tons 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

–        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

–        NAFTA related disruption/Trade War

Downside Risks:

–        Political & geopolitical uncertainty (US Government shutdown)

The December CME Midwest HRC future added $6 to $635.  Q1 2018 added $15 to $652, Q2 2018 added $9 to $645, Q3 2018 added $11 to $645 and Q4 2018 added $13 to $645.

Midwest flat rolled indexes saw nice gains.

The TSI North European HRC Index remains range bound while the ASEAN HRC Index has started a little rally gaining another $5 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.

Platts TSI Daily HRC Price

The SBB Platts US Midwest HRC price gained 2.6%.  The Chinese export, import and the East Asia import price all gained over 1%

The US Midwest CRC price was up 3.42%. The Chinese domestic CRC price gained 2.7% while the export CRC price gained 1.3%.  The North European CRC price was down 1.25%.   

The US Midwest HDG price was up 1.3%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rate rose to 73.8%.

Coking coal continues to rally while scrap saw strong gains as well.  Iron ore was down for the week.

The December SGX iron ore future was down 1.3% or $0.88/t to $68.07 WoW. The December LME Turkish scrap future gained another 3.45% or $11.50/t to $353.

The rally in the SGX iron ore futures has moved the curve into backwardation after a couple weeks of a flattened curve.

The US Southeast plate price gained 5.25% and Black Sea billet gained 4%.

October factory orders fell 0.1%, beating expectations of a 0.4% drop, while September data was revised higher to 1.7% from 1.4%. Final October durable goods data saw a better than expected loss of 0.8% while orders ex-transportation gained 0.9% and capital goods orders gained 0.3%.

The November employment report showed a gain of 221k jobs with much better than expected gains in manufacturing jobs. 

US Employees on Nonfarm Payrolls Manufacturing Industry NSA

The unemployment rate was steady at 4.1%.  Average hourly earnings were up 0.2% MoM and 2.5% YoY missing expectations of 2.7%. The labor participation rate was flat at 62.7%.

The ISM nonmanufacturing report fell to 57.4 from 60.1 missing expectations of 59.  All of last week’s US economic data is below.

The S&P 500 continued to rally to new highs again last week.  The Euronext gained 2%.

S&P 500

Steel mills were up across the board with US Steel up 13.4%.

US Steel

Service centers were mostly higher.

Reliance Steel

Iron ore miners were down with ore.

Base metals were lower with zinc down over 5% on the week.

LME 3 Month Rolling Zinc Future

The US dollar gained 1.1%.  The Turkish lira gained 2.24%, while the Mexican peso, Canadian dollar, Australian dollar and Brazilian real were all down at least 1%.  

US Dollar Index

Turkish Lira

The January WTI crude oil future lost $1 to $57.36/bbl while natural gas fell 9.4% to $2.77/mbtu.  Crude oil inventory was down over 1%, but gains in distillate and gasoline resulted in a net gain for the aggregate inventory statistic. Production continued to inch up again last week and the US rig count added 2 rigs.

January WTI Crude Oil Futures and January 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 (Blue) 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 up one basis point to 2.38%.  There was little change on the interest rate front last week.

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