Last week was pretty amazing for steel.  The US dollar made a new low.  HRC prices in Europe and Asia continue to rally to new highs while iron ore and scrap are also making or near their current highs.  Base metals are ripping higher.  Crude oil and the stock market have rebounded regaining some of what was lost in their recent corrections.  And then on Friday the 232 Investigation reports and recommendations were released.  The following is copied directly from Department of Commerce’s website:

Since their release, the 232 recommendations have been the only issue that matters for the steel industry, which is in utter chaos.  Analysis, opinions and predicitions of President Trump’s action from industry rags and Wall Street reports are inundating the industry.  To be clear, there are three specific recommendations each seperated by the key word “or” in addition to language stating the President has the freedom to implement one of these recommendations or he is free to basically do whatever he chooses.

Attempting to predict the actions President Trump takes is a fools errand, but analyzing the communication from the D.O.C. is worthwhile.  While the recommendations have received the most attention, the key findings should not be overlooked:

The D.O.C.’s key findings communicates the message that over the past two decades, the U.S. steel producing industry has been slowly decimated and without government intervention and protection, the industry will continue to contract.  This further contraction is what will threaten national security.  The D.O.C.’s message is clear that this decimation is largely a result of China’s steel capacity explosion.    

Regardless of my, FGM’s or your political stance on the subject, these recommendations and communication from the D.O.C. fits very well into President Trump’s nativist political platform.  Further, the goal of the recommendation to increase capacity utilization to 80% not only seems rational on the surface, but may be an easy sell to the American public.  Especially when it is under the veil of protecting national security.

Perhaps in the coming days President Trump enacts one of these recommendations and later in the day US Steel announces it is reopening Granite City and AK Steel announces it will reopen Ashland.  President Trump’s victory tweet about job creation to follow. 

The Chinese government puts in place multiyear plans for its economic, industrial and military complexes, just to name a few.  Similar to China’s methodology, this plan seems to also have a longterm focus and the upfront costs are clear; the manufacturing industry will pay more for steel, but then the price should settle as this shock is cleared by the system.  Another important piece of the recommendation is this exemption:

The political implications are vast and gives the D.O.C. serious power to pick winners and losers in the manufacturing industry.  In the long run, if some of the smaller manufacturing companies consolidate into larger organizations garnering government subsidies via exemptions, perhaps those companies will support those providing them with assistance.  Its so crazy it just might work. 

In the press conference following the announcement, Secretary Ross  said:

We believe, and our counsel believes, that this is a perfectly valid interpretation of national securty.  As to whether there will be a challenge, it wouldn’t surprise us if there were. Anytime you do something that affects a number of countries, the likelihood is that they will bring a WTO action or take other measures.”

In other words, we’re prepared for a fight.

The politics behind this are interesting.  First, the timing.  President Trump has until April 11th to decide what action to take.  It took almost a year to produce the recommendation so perhaps President Trump will take his time evaluating the political consequences and reaction of his base to the annoucement.  One interesting point was that Senate Minority Leader Chuck Shumer said he hoped the recommendations “are the beginning of efforts by this administration to finally get tough on China.”  So it would seem this is a very unique issue democratic leadership agrees with the President on. 

On the flip side, there are far more voters employed by the manufacturing industry than the steel industry.  Any of these recommendations will cut the profits and perhaps endager the survival of a large swath of manufacturing companies, perhaps driving the industry into consolidation.  Last, the response by our trade partners will be weighed.  Is this a genuine attempt to save the US steel industry or a shadowy move to acquire a bargaining chip for larger negotiations to come?

The main short term issues to be focused on are:

1) When will the president announce his decision?

2) What will that decision be? 

Again, prediciting these uncertainties is a fool’s errand, but what can be examined is the reality of the situation. 

First, these recommendations should be taken very seriously.  Ross works hand in hand with President Trump and it would be naïve to believe all of this was orchestrated without Trump’s knowledge and input.  If Trump does nothing after all of this, it would not only be embarassing for Secretary Ross and the D.O.C.,  but would be a vote of no confidence that would reflect poorly on the rest of President’s Trump’s cabinet members. 

Second, industries tied to steel are taking immediate action.  They have already been affected by this investigation going back to last April. Now that these recommendations have been announced, the intensity has been amplified.  Major actions have and continue to be taken by importers, mills, service centers and OEMs in the wake of Friday’s announcement.  February import licenses had already been forecast to drop sharply.  The 232 is having dramatic effects on incoming imports and future import orders.  This week, importers are canceling orders and closing offerings for new spot orders.  It can be expected that service centers and OEMs are reevaluating their inventory levels and business strategies in the wake of this announcement.  There are now holes in order books (that were to be filled with imports) and there will definitely be problems with availability.  If implemented, this policy is likely to cause a steel shortage. 

The CME Midwest HRC futures curve were the first to reflect this jumping significantly Friday and again this week.  Below is a best guess estimate at where the curve should be settled as of EOD Tuesday, February 20th.  The $40 – $65 WoW change is versus Friday, February 9th.  March futures have rallied $85 in three weeks.

The 232 is going to dominate the news cycle and minds of steel market participants.  The importance of fundamentals, which remain very strong, have thus been minimized.   However, the MSCI announced January flat rolled shipments and inventory levels Friday hours before the 232 announcement.  January shipments look to have been hampered by freezing temperatures and logisitical challenges, but were still solid. The January statistics are below. 

January shipments of 2.3m short tons was up 556k MoM.  Keep in mind the seasonal adjustment from December to January.

Flat rolled inventory fell 1.1% or 54k tons MoM to 4.94m, which was up 6.7% YoY.

The flat rolled daily shipment rate (D.S.R.) rose to 105.1k short tons per day, up from 87.8 in Dec., but down from 108.25 in January, 2017.

When adjusting for the D.S.R., flat rolled months-on-hand (M.O.H.) fell to 2.13 from 2.58 in December, but was up from 1.94 in January, 2017.

The unadjusted M.O.H. fell to 2.13 from 2.84 in December, but was up from 2.03 a year ago.

Year to date shipments is just January at this point and increased 1.7% YoY.

The chart below is of the rolling 2nd month CME Midwest HRC future.  The March future (HRC2) was up $36 to $776/st for the week and traded above $800 on Monday, February 19th.

Rolling 2nd Month CME Midwest HRC Futures

The Midwest HRC price continues the rally that began more than two years ago in December, 2015 at $365/st with the Platts TSI Midwest HRC Index closing the week up $2.75 to $748.25 and the March CME Midwest HRC future settling up $36 to $776/st. 

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


The Section 232 Investigation recommendations, collapsing flat rolled imports and production cuts in China point to a further tightening domestic supply.  January flat rolled import licenses now stand at 913k, up 122k MoM, but February flat rolled is forecast to plummet to 663k tons.

Tube import licenses are showing a big MoM gain of 248k short tons in January to 773k and then a massive drop to 356k in February.

As it stands, flat rolled plus tube licenses fall from 1.69m in January to 1.02m in February. 

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

–     Rallying raw material prices

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

Downside Risks:

–        Political & geopolitical uncertainty

–        Stock Market Crash

CME Midwest HRC futures settled Friday, February 16th with another week of strong gains. The February future was up $9 to $751 and the March future gained $36 to $776.  April was up $34 to $764, May added $29 to $750 and June increased $36 to $745.  July was up $33 to $725, August added $30 to $722 and September gained $27 to $719.  Q4 was up $32 to $712.

The Platts TSI Daily Midwest HRC Index gained $3 to $748 continuing to lead domestic indexes higher.  European HRC prices gained over 3%.  China was quiet as the Chinese New Year began.

The TSI North Europe HRC Index jumped last week while the TSI ASEAN Index was flat at new highs.  It bears taking notice that prices are also rallying globally.

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.  The rally that started in March, 2016 gained $231 or 58% from low to high.  The rally that started in October, 2016 gained $192 or 41% from low to high. 

As of last Friday, the rally that started in October, 2017 has rallied $164.5 or 28% from low to high.  If the current rally gains 41%, as it did in the rally started in October 2016, then the index will peak at be $823/st.  If the current rally gains 58%, as it did in the rally started in March, 2016, then the index will peak at be $922/st.  

Platts TSI Daily HRC Price

SBB Platts’ US Midwest HRC price added 0.4% to $748.  European HRC prices were up.

The US Midwest CRC price gained 0.5% and the North European CRC price gained 2.7%.

The US Midwest HDG price gained 0.5% with European HDG prices up over 1%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization dropped slightly to 74.5%.

Raw materials put in another strong week with iron ore leading the charge.  Australian coking coal was up over 2% and East Coast shred gained almost 2%. 

The March SGX iron ore future reached to new recent highs while the March LME Turkish scrap consolidated at its new highs.

The backwardated SGX iron ore futures curve has seen little change over the past month.

The chart below shows the 2nd month SGX iron ore just breaking above a long-term down trend.

2nd Month SGX Ore Future

The chart below shows a cup and handle pattern in the rolling second month iron ore futures.  In the last report, it was show that the price had broken above the downtrend of the handle. This week, the price broke through the top of the cup and could break out in the coming weeks.

2nd Month SGX Ore Future

Black Sea billet gained 3% and US plate and rebar prices both gained 2.5% reflecting domestic mill price increases.

The February Empire Manufacturing Index was down 4.6 points to 13.1, missing expectations of 18.  The Philadelphia Fed Business Outlook gained 3.6 points to 25.8, beating expectations of 21.8.  January industrial production fell 0.1% MoM, missing expectations of a 0.2% gain.  January capacity utilization fell to 77.5%.

January US housing starts rose to 1,326k annualized starts up from 1,209k in December and beating expectations of 1,234k starts.

US Housing Starts

January US building permits jumped to 1,396k annualized permits from 1,300k in December and beat expectations of 1,234k. 

US Building Permits

Last week, the January Consumer Prices Index (CPI) Ex-Food and Energy gained 1.8% YoY, in line with December, but slighlty beating expectations.  The chart below compares the CPI with the N.Y. Fed’s Underlying Inflation Gauge (UIG) and the Personal Consumption Expenditures Index (PCE).  The three measures are in very different territories as each uses a different basket of goods, but they are all trending higher indicating increasing inflation. 

CPI Less Food & Energy (white), NY Fed UIG (orange) & PCE Index (red)

The rest of last week’s economic releases are shown below.

The S&P 500 regained some of what it lost in previous weeks and global stock markets followed. 

S&P 500

Steel mills stocks went parabolic last week in response to the 232 announcement.

Below is the chart for US Steel.  Buy em and bid em!

US Steel

Service centers also ripped higher with Ryerson leading the charge. 

Ryerson Holding Corp.

Iron ore miners were all higher with iron ore prices.

Base metals rallied sharply.

CME March Copper Future

LME 3 Month Rolling Nickel Future

LME 3 Month Rolling Zinc Future

LME 3 Month Rolling Aluminum Future

The US dollar made a new multi-year low at 88.59 during the week closing down 1.5% at 89.10.  The euro gained 1.25% and the Japanese yen gained 2.2%.  The Russian ruble, Korean won, Turkish lira and Brazilian real each gained at least 2% on the week. 

US Dollar Index


Japanese Yen

Russian Ruble

Turkish Lira

Brazilian Real

The March WTI crude oil future rallied back $2.48 or 4.2% to $61.68/bbl.  Crude oil inventory rose 0.44% and gasoline inventory gained 1.5%, but distillate inventory fell 0.3%.  The aggregate inventory statistic was up 0.6%.  Crude oil production rose 0.2% to a new all-time high of 10.27m bbl/day.  The US rig count was flat and the North American rig count added cut 7 rigs to 1,293.  The March natural gas future was down 1% even though natural gas inventory fell 9.3%.  

March WTI Crude Oil Futures and April Crude 15 Delta Put Volatility (white)

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

Baker Hughes North American Rig Count

D.O.E. Crude Oil Production

D.O.E. Crude Oil Production Perspective (1983 – Present)

The US 10 year Treasury yield peeked above 2.9% before settling the week at 2.87%.

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 (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

–        Energy industry rebound

–        Graphite Electrode Shortage

–        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

–        Stock Market Crash

–        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