Since its release on Friday, February 16th, 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 have been inundating inboxes.
The main short term issues to be focused on are:
1) When will the president announce his decision?
2) What will that decision be?
In regards to the first question, there has been no official announcement of when a decision will be made. So far, rumors vary from this week to just prior to the Pennsylvania special election on March 13th. The deadline for a decision is April 11th, but the President can “kick the can” down the road if he chooses. A decision must be made by Aprill 11th, but one option President Trump has is to reject the recommendations of the 232 and instead attempt to negotiate a new trade deal. He then has 180 days to report to congress. At 180 days, he can continue to negotiate or implement tariffs/quotas at that point. 180 days from April 11th is Monday, October 8th, which is 29 days before the midterm elections on Tuesday, November 6th.
One interesting difference between tariffs and quotas is that the US Federal Government collects the revenue from the tariffs while importers capture most of the benefit of higher prices in the market in response to quotas.
In regards to the second question, last Friday news surfaced that President Trump was leaning toward D.O.C.’s recommendation for an across the board 24% tarriff. This could be the case or it could be that the President wants to see the response to what is considered to be the harshest of the three options.
Since the news of last Friday, CME Midwest HRC futures have jumped as much as $50 galvanized by this weeks’s $120/st price hike announcement from California Steel Industries.
CME Midwest HRC Futures 2/23 (orange) vs. 2/27 (green)
The chart below is of the rolling 2nd month CME Midwest HRC future. The March future (HRC2) was up $15 to $791/st for the week.
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 $5 to $753.25.
March CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
Steel imports have been falling and look to be down in February with flat rolled forecast to drop almost 100k tons to 814k tons.
February tube import licenses are showing a MoM drop of almost 220k short tons to 555k.
As it stands, flat rolled plus tube licenses look to fall from 1.69m in January to 1.37m 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
– 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
– Weaker dollar
Downside Risks:
– Political & geopolitical uncertainty
– Stock Market Crash
CME Midwest HRC futures settled Friday, February 23th with another week of strong gains. The February future was down $6 to $745 and the March future gained $15 to $791. April was up $38 to $802, May added $41 to $791 and June increased $32 to $777. July was up $32 to $757, August added $28 to $750 and September gained $24 to $743. Q4 was up $28 to $740.
It was another week of big gains in domestic flat rolled prices. The TSI North European HRC Index was down almost 1.5%.
Both the North European and ASEAN HRC indexes continue to be in rally mode.
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 0.7% to $753. European HRC prices were down while prices in the UK gained 4%.
The US Midwest CRC price gained 2.26%, but the North European CRC price gained fell 1.2%.
The US Midwest HDG price gained 1.3% to $938.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization added 0.6 to 75.1%.
In ferrous raw materials, East Cost shred gained 3.6% with nice gains in Turkish scrap, Black Sea pig and iron ore.
The March SGX iron ore future at $78 and March LME Turkish scrap future at $380.50 reached to new recent highs.
The backwardated SGX iron ore futures curve has rallied $4-$7 in the past month with the front of the curve steepening.
The chart below shows the 2nd month SGX iron ore 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
US plate gained almost 4.7% while Turkish rebar was up 1.75%.
The February Kansas City Fed Manufacturing Index gained one point MoM to 17, but missed forecasts of 18. January existing home sales fell 3.2% MoM, but December data was revised to a smaller MoM decrease of -2.8% from -3.6%.
Volatility in the S&P 500 calmed with the S&P 500 index gaining 0.5% on the week. China saw some nice gains while the VIX continued to recede.
S&P 500
Steel mills stocks gave up some of the previous week’s massive gains.
AK Steel
Service centers saw similar performance to the mills.
Ryerson Holding Corp.
Iron ore miners were mixed to lower.
Base metals also gave up some of the previous week’s gains.
LME 3 Month Rolling Zinc Future
LME 3 Month Rolling Aluminum Future
The US dollar rebounded gaining almost 1% while the euro and yen gave back some of their recent gains. The Korean won and Turkish lira fell over 1%.
US Dollar Index
Turkish Lira
The March WTI crude oil future rallied back $1.87 or 3% to $63.55/bbl. Crude oil inventory fell 0.4% and distillate inventory fell 1.7%, while gasoline inventory was about unchanged. The aggregate inventory statistic was down 0.5%. Crude oil production was unchanged at 10.27m bbl/day. The US rig count was added 3 rigs and the North American rig count cut 9 rigs. The March natural gas future was up 2.6% with natural gas inventory down 6.6%.
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 was about unchanged at 2.87% while European rates were mixed and active.
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
– Weaker dollar
– Energy industry rebound
– Graphite Electrode Shortage
– Unexpected inflation
– Flatbed trucking availability/transportation supply constraints
– 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