On Saturday, a fire at AK Steel’s Middletown Works steel mill threw a major question mark into domestic supply dynamics. The official announcement is below:
AK Steel Announces Update on Middletown Works
West Chester, OH, January 22, 2018 – AK Steel (NYSE: AKS) said today that on Saturday morning, January 20, a ladle at the caster at its Middletown Works facility malfunctioned, releasing liquid steel. No employees were injured and repairs are underway.
We currently estimate that the melt shop will re-commence operations in approximately 8-10 days. During that time, we will utilize production from the melt shops at our Dearborn Works and Butler Works facilities to support our customers’ needs.
We do not currently expect any material impact on shipments to our contract customers, including our automotive customers, however we anticipate that the outage will reduce our sales to the commodity carbon spot market.
The chart below is of the rolling 2nd month CME Midwest HRC future. The February future (HRC2) rocketed higher closing last week up $35 to $715/st on 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 $14.50 to $693.50 and the front month HRC future settling up $6 to $675/st.
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. January flat rolled import licenses look to rebound to 816k while December import licenses are still forecasted at 759k.

January tube import licenses are forecasting a massive rebound to 790k short tons, up 271k over December’s 519k forecast.

Q4 sheet and tube imports are forecast to be 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
– 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)
Futures continued to gain last week with the January CME Midwest HRC future up $6 to $675/st, the Feb. future up $35 to $715 and the March future up $35 to $715. As the futures rally, the curve has sharply steepened its backwardation (downward sloping). April gained $11 to $689, May gained $12 to $687 and June gained $14 to $682. July gained $11 to $674 while August and September both gained $4 to $666 and $664, respectively. Q4 gained $7 to $662.

Flat rolled indexes saw continued gains in the US and Europe, but were down in Asia.

The TSI North European HRC Index added $6 to $611/st while the ASEAN HRC Index lost $5 to $519/st.

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 $112 or 19% 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

Platts TSI Daily HRC Price

SBB Platts’ US Midwest HRC price jumped 2.1%. HRC prices in Europe and Turkey saw gains as well.

The US Midwest CRC price gained 0.7% with South and North European CRC gaining 2.2 and 3.5%, respectively.

US Midwest HDG was up 0.3%. North and South European HDG prices were up over 2% each.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rate rebounded sharply to 73.2%.

Raw materials were under pressure last week with coking coal leading the way falling 10.6%. Scrap was down 3.5 – 4%.

Both scrap and ore were down on the week with February iron ore down $0.79 or 1% to $74.85 and February LME Turkish scrap down $4 or 1% to $363/t.

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

The chart below shows the 2nd month SGX iron struggling to break above its long-term down trend.
2nd Month SGX Ore Future

May Chinese rebar futures gained 4.6%. US rebar and plate prices gained nicely.

The January Empire Manufacturing Index missed expectations falling 1.9 points to 17.7 from an upwardly revised 19.6 in December. The same dynamic occurred in the Philadelphia Fed Index, which missed expectations falling to 22.2 from an upwardly revised 27.9 in December. December Industrial Production rose 0.9% beating expectations of a 0.5% gain, but November was revised lower. December Capacity Utilization beat expectations rising to 77.9% up 0.7% from an upwardly revised 77.2% in November.
December Housing Starts fell 8.2%, significantly more than expected. November was revised lower. December Building Permits were down a less than expected 0.1% while November’s permits were revised to a smaller contraction.

The S&P 500 continues to rally to new highs gaining 0.8% to 2811. China saw nice gains while the Euronext added 1.1%.

S&P 500

Steel mills were all lower except from AK Steel which gained 4%.

AK Steel

Service centers were mixed with Olympic up 2.3%.

Olympic Steel

Iron ore miners were all lower.

Base metals were quiet and mixed.

LME 3 Month Rolling Zinc Future

The US dollar continued under pressure making new multi-year lows to 90.57. The Mexican peso rose 2.3%, the Australian dollar added 1.2% and the British pound added 1.1%. The Turkish lira fell 1.8%.

US Dollar Index

Mexican Peso

Turkish Lira

The February WTI crude oil future closed down 1.45% or $0.93/bbl to $63.37/bbl as oil continues its impressive rally. Crude oil inventory was down 1.6% and the distillate inventory fell 2.72%. Gasoline inventory was up 1.5%. The aggregate inventory statistic fell 0.9%. Crude oil production rose 2.72%. The US rig shed 3 rigs, but the North American rig count ballooned 14.9% to 1261 rigs. The February natural gas future was down $0.02 to $3.19/mbtu while inventory fell 6.6%.

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 jumped eleven basis points breaking above 2.6% to close the week at 2.66%. Globally, rates were mixed. Inflation expectations rose nicely with five-year inflation expectations at 2%.

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
– 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