Last week was the first week where mill lead times materially pushed out. Most mills have already sold out their March capacity and are withholding selling April tons for now. The couple mini-mills that still have March capacity are taking orders one week at a time quoting late March on a deal by deal basis.
While there has been a flurry of RFQs and purchase orders that came across FGM’s “desk” last week, skepticism that this rally has further to go remains. Let’s assume the relatively low inventory levels held by OEMs indicated by the ISM Manufacturing PMI and US Durable Goods Reports and discussed ad nauseam in this report for months is correct. A restocking push by the collective on top of strong Q1 demand could turn this explosive rally into a buying frenzy over the next few months. The realization that lead times have jumped dramatically is making its way into the market and it will be interesting to see how buyers react.
There is potential for a positive feedback loop to develop where OEMs trying to increase inventory on hand to compensate for longer mill lead times further push out mill lead times resulting in the need for even more inventory only to push lead times out further, etc. etc. Words like reassessment, bottleneck, availability, allocation and crazy were used an abnormally high number of times last week in conversations I had with my colleagues and contacts. These terms look to take a bigger part in our industry lexicon starting right now.
The chart below is of the rolling 2nd month CME Midwest HRC future. The March future (HRC2) was up $1 to $716/st for the week.
Rolling 2nd Month CME Midwest HRC Futures
The January ISM Manufacturing PMI fell 0.2 points to 59.1, but beat expectations of 58.6. This is the eighth straight month the PMI has been above 56. The Platts TSI Daily Midwest HRC Index increased $17.75 to $717.25 on the week.
ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)
The chart below shows a six month moving average of the ISM Manufacturing PMI peaking at 59.21 and taking the Platts TSI HRC Index up with it.
ISM Manufacturing PMI Six Month Moving Average & Platts TSI Midwest HRC Index
In fact, the current six month moving average is one of the highest of the past thirty years. The red dashed line is at 59.21.
ISM Manufacturing PMI Six Month Moving Average
The table below shows the ISM PMI’s subindexes. The employment subindex dropped sharply while the inventory subindexes improved. Prices jumped above 70 and backlog increased.
January ISM Manufacturing PMI
The new orders subindex fell to 65.4, but is still super strong and the highest in five years. Backlog improved gaining 1.3 points to 56.2.
ISM Manufacturing PMI New Orders (white) and Backlog (orange)
The chart below shows the inventory subindexes gaining; the first indication the industry (producers, distributors and OEMs) could be starting a restocking push. A collective restocking could have serious implications as increased demand plus restocking demand will cause a positive feedback loop where longer lead times force OEMS to increase their inventory levels with buying forcing more buying. It could be a good old fashioned short squeeze.
ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)
The ISM prices subindex gained 4.4 points to 72.7, the highest since June, 2011.
ISM Manufacturing PMI Prices (white) & Platts TSI Daily Midwest HRC Index (orange)
Looking at the monthly subindexes back to January, 2017 the major standouts this month is the gains in the supplier deliveries, inventory, customer inventory and price indexes. The narrative could go that prices are moving higher so buyers are taking in shipments faster as even though they are still destocking, it is at a slower pace. While producers are seeing their future order book being filled are increasing inventory levels in anticipation of these increased purchases. The backlog gain is indicative of capacity pressure and corresponds well with the increased lead times were seeing from the steel mills.
The regional reports were mixed with Dallas and KC, heavily leveraged on the oil and gas industry continue to improve with oil production at record highs.
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.
January’s US auto sales of 17.07m SAAR (seasonally adjusted annualized rate) was down 1.6% YoY and missed expectations.
January US Auto Sales SAAR
Unemployment continues to be at multi-year lows and if it remains at these levels should pull auto sales higher in the coming months.
January US Auto Sales (white) and the Inverted Unemployment Rate (orange)
January monthly auto sales of 1.15m units gained 1% YoY.
US Monthly Auto Sales
US Monthly Auto Sales 3-Month Moving Average
December US Construction Spending gained 0.7% MoM, beating expectations, but November’s spending was revised lower to 0.6% from 0.8%. Seasonally adjusted construction spending was 2.6% higher YoY and continues to trend higher on a year over year basis.
December US Construction Spending
YTD total construction spending gained 3.8% in 2017.
YTD private residential spending gained 10.6% for the year.
YTD private spending gained 5.8% YoY in 2017.
YTD private nonresidential spending gained 0.6% for the year.
2017 annual total, total private and private nonresidential construction spending was the highest spending on record.
The next two charts show monthly construction spending over the past five years displaying the seasonality in construction spending.
US Nonresidential Construction Spending
US Residential Construction Spending
The tables below show the global manufacturing PMIs with the one on the right sorted from highest to lowest. Canada and Mexico both gained around one point. China remains in the low 50s. Germany fell 2.5%, but remains at a super high 61.1. Australia gained 2.5 points to 58.7, which could be a sign that Chinese demand is quietly strengthening.
The manufacturing PMIs of the Eurozone, Germany, Spain and France all fell while Italy’s gained. European PMIs continue to be very strong.
Eurozone (white), German (blue), Italian (green), Spanish (red), and French (yellow) Manufacturing PMIs
Eurozone (white) and Platts TSI North European HRC Index (orange)
Germany and the US continue to remain at super strong levels while Japan has been building a nice uptrend over the past few months.
US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
China’s manufacturing PMIs continue to stagnate.
China Official (white) and Caixan (orange) Manufacturing PMIs
The table below shows China’s PMI and subindexes back to January, 2017. There was little change MoM and the change was mostly lower. The inventory subindexes contracted at a slower rate while new export orders fell below 50.
The new orders subindex fell, but the Chinese spot HRC price and the Platts TSI ASEAN HRC Index gained. The Chinese New Year is on Friday, February 16th and the economic data is always messy in the first couple month of the year as a result.
China New Orders (white), TSI ASEAN HRC Index (red) & Chinese Spot Price (blue)
Inventory subindexes improved in January, similar to what was seen in the US ISM PMI.
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 with the Platts TSI Midwest HRC Index closing the week up $717.50 and the January CME Midwest HRC future settled up $48 to $677/st vs. December.
February 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. 791k short tons of flat rolled steel were imported in December. January flat rolled licenses are forecast to gain 56k short tons to 847k.
516k short tons of tubular steel were imported in December. January license data indicates a 250k st increase to 766k.
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 (US Government shutdown)
– Stock Market Crash
After prices ripping higher in the previous two weeks, futures were down for the first time in 2017 with the Feb. future down $8 to $722 and the March future down $6 to $716. April lost $14 to $700, May shed $4 to $699 and June fell $4 to $682. July lost $2 to $683, August was flat at $682 and September dropped $1 to $679. Q4 was unchanged at $674.
OCTG prices jumped while flat rolled prices were higher across the board.
The TSI North European HRC Index and the ASEAN HRC Index both continue to rally.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. Differentials are expanding quickly with the rally in Midwest HRC prices.
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 $134 or 23% 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 jumped 2.5% to $717.75. HRC prices were up across the board with Mexico and Brazil seeing gains of 9.9% and 7.8%, respectively.
The US Midwest CRC price gained 0.35% with CRC prices in Mexico and Brazil up significantly.
The US Midwest HDG price was up 0.8%. Brazilian HDG was up 12.7%. The South European HDG price gained 2.2%. Chinese HDG prices were mixed.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate continues to increase now up to 73.8%.
Raw materials were mixed with coking coal rebounding, scrap down 2% and iron ore down 1%.
Both scrap and ore were down on the week with February iron ore down $0.33 or 0.45% to $72.87 and February LME Turkish scrap down $10 or 2.8% to $347/t.
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 struggling to break above its long-term down trend.
2nd Month SGX Ore Future
US plate prices gained 2.3% while Black Sea billet fell 2.5%.
Final December durable goods orders rose 2.8% with orders ex-transportation up 0.7%. Capital goods orders nondefense ex aircrafts were down 0.6% while shipments were up 0.4%. December factory orders rose 1.7%, beating expecations of 1.5%. November orders were revised higher to 1.7% growth from 1.3%.
December pending home sales were up 0.5% MoM. The Case-Shiller 20 City Home Price Index rose 6.41% YoY.
The Federal Reserve announced it was leaving its benchmark interest rate unchanged in a range of 1.25 to 1.5 percent. This was Janet Yellen’s last meeting. She has been succeeded by Jerome Powell.
January U.S. nonfarm payrolls added 200k jobs while December payrolls were revised higher to 160k from 148k. Wages rose 2.9% YoY beating expectations of 2.6% while December YoY wages were revised 0.2% higher to 2.7%. The unemployment rate and labor force participation rate were unchanged MoM at 4.1% and 62.7%, respectively. December core PCE rose 1.5%, in line with expectations.
The charts below using data from the December Durable Goods Report index monthly percentage changes in new orders and inventory in dollar terms starting in December, 2016 through December, 2017 showing further inventory destocking as discussed above.
The S&P 500 sold off sharply after the employment report’s increased wage data spooked the market. The VIX screamed higher. Stock markets sold off globally.
S&P 500
Steel mills were all lower with US Steel and AK Steel getting walloped.
US Steel
Service centers were also all lower.
Ryerson Holding
Iron ore miners were all lower.
Aluminum fell 2.1% and nickel fell 1.6%.
LME 3 Month Rolling Aluminum Future
The US dollar was close to unchanged. The Japanese yen fell 1.4%. The Brazilian real and Australian dollar both fell over 2% while the Korean won fell 1.5%.
US Dollar Index
Japanese Yen
Brazilian Real
Australian Dollar
The February WTI crude oil future closed down 1% or $0.69/bbl to $65.45/bbl as oil continues to rally. Crude oil inventory rose 1.7%, but the distillate and gasoline inventory levels were down 1.4% and 0.8%, respectively. The aggregate inventory statistic rose slightly. Crude oil production rose 0.4% to a new all-time high of 9.92m bbl/day. The US rig count shed 1 rig, but the North American rig count added 3 to 1,288 rigs to its highest level since March, 2015. The March natural gas future was down $0.66 almost 20% to $2.85/mbtu while inventory fell 4.3%. OCTG prices gained nicely.
March WTI Crude Oil Futures and April Crude 15 Delta Put Volatility (white)
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
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 broke through resistance adding 18 basis points to 2.84%, its highest level since January, 2014. Rates rose sharply in Germany and England as well.
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