The chart below is of the rolling 2nd month CME Midwest HRC future.  The now February future (HRC2) continues to make new highs closing last week up $6 to $670/st and clearly breaking above the neckline of a bullish “inverse head and shoulders” chart pattern (see past WoW reports for more on this).

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 at $656 and the front month HRC future settling at $662.  Steel economics continue to be positive both domestically and globally.  Raw material prices continue to rally.  Domestic mills continued with further price increases throughout last week.     

January 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.   December import licenses are projecting a drop of 150k short tons MoM to 751k.

December tube import licenses are projecting a drop of over 100k tons MoM to 497k.

The estimate for Q4 sheet and tube imports is 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)

For the week, the January CME Midwest HRC future was flat at $662/st, the Feb. future settled up $6 to $670 and the March future settled up $5 to $669.  Q2 2018 gained a little to $664, Q3 2018 fell $4 to $657 and Q4 2018 fell $5 to $655.

Flat rolled prices were up or unchanged in all of the markets below except the Chinese spot price which fell $3 to $595/st.

The TSI North European HRC Index gained $3 to $585/st while the ASEAN HRC Index gained $4 to $516/st.

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.  Midwest HRC prices have started to rally with the HRC and CRC differentials rebounding noticeably from their lows.

Platts TSI Daily HRC Price

Eight markets saw their hot rolled price gain at least 1% with Japanese HR gaining 4.5% and Brazilian export prices up almost 3%.  Only Mexican prices fell giving up 5.7% WoW.

Brazlilian export cold rolled gained 6.6% and East Asian import CR gained 3.4%.  European CR prices gained over 1%.  The Mexican CR price was down 5.7%.

China HDG gained over 3%,  European HDG was up over 1% and Brazilian HDG gained almost 1%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization plummeted to 70.2%.

US scrap prices gained sharply with Midwest shred up 11% and busheling gaining 5.5%.  Iron ore prices were also up gaining over 2%. 

Both scrap and ore extended their rallies last week with the January SGX iron ore future gaining $2.90/t or 4% to settle at $75.31 while the January LME Turkish scrap future gained $2.50/t or 0.7% $369.5.  

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 or future back to the peak in 2010.  2nd month iron ore is breaking through down trendlines dating back almost five years.   It is cyclone season in Australia.  A current storm on the Northwest side of Australia could strengthen into a tropical cyclone. Regardless, there is a high risk the storm’s heavy rain results in flooding in the Pilbara region as soon as Thursday night.  If flooding occurs, it will compound an already saturated area following heavy rains left by Tropical Cyclone Hilda in the final days of 2017.  This could lead to a number of issues that could constrain iron ore supply.

2nd Month SGX Ore Future

US plate prices were up 6%, but the other products were unchanged.

Last week brought us the ISM PMI, auto sales and construction spending, which were covered in last week’s report (you can access it on FGM’s site).  The end of the week was highlighted by a weaker than expected, but still strong, December employement report, weaker than expected December ISM Non-Manufacturing Report, stronger than expected November factory orders and final November durable goods orders, which are analyzed in detail below. 

December was another strong month for manufacturing employment.

US Employees on Nonfarm Payrolls Manufacturing

This is the YTD durable goods report.  As you can see, it was a very strong year vs. 2016 except in automotive.

The table below shows the month to month changes in orders.  This is a very busy chart.  Red font indicates a decrease.  If the previous month was revised higher, that month is marked green. If the month was revised downward, it is marked red and if it was a downward revision in a month that had a decrease, it is marked red with yellow writing. 

This table shows the MoM change in inventory dollars.  While another data point, it is hard to know what it all means as the price of the underlying has a big effect on the dollar amount.  

The next series of charts takes this analysis a step further indexing the changes in both new orders and inventory starting twelve months ago at 100 and then adjusting by the percentage change in both.  So if new orders move up 5% and inventory moves up 2%, the chart would show new orders at 105% and inventory at 102% and so on for each month.

Big gap in total durable goods in the last twelve months. 

The gap in total ex-transportation increased in the last twelve months, but converged toward the end of the year.  However, the gap in total ex-defense is wide and stayed there in November. 

The metal focused categories all converged in November, but show inventory still has been reduced over the past twelve months. 

The gap in capital goods orders vs. inventory is enormous.  That’s a huge gap!!  Capital goods nondefense ex-aircraft looks much better on a relative basis, but is still over 10%.

If you have been reading the WoW on a regular basis, you will have noticed a big theme has been that inventory is too low across the manufacturing industry.  This data shows 2017 has compounded the issue.  This is analagous to a drought.  The forest is bone dry and a lightning storm is rolling in.  The industry is susceptible to a massive dislocation if the conditions shift abruptly.  In other words, the collective will have to increase their purchases to meet demand while simultaneously rebuilding inventory in a shift to a higher inventory level/supply chain strategy.  If (when) this occurs, expect a spike in prices and availability to become a major factor trumping price.  Say goodbye to CRU minus deals and hello to allocations.

The S&P 500 ripped higher gaining 2.5% on the week and making another all time new high.  Stock markets in China, Europe and Japan all rallied as well.

S&P 500

Steel mills were up big.

AK Steel

Service centers were also up big with CMC up almost 17% after better than expected Q1 earnings.

Commerical Metals Co.

Iron ore miners were all up.

Base metals were mixed with zinc up, but copper, nickel and aluminum giving back some of last week’s gains.

LME 3 Month Rolling Zinc Future

The US dollar continued under pressure with the dollar index falling below 92.  The Brazilian real and Mexican peso gained 2.5% while the Turkish lira, Russian ruble and Canadian dollar each gained over 1%.    

US Dollar Index

Brazilian Real

Mexican Peso

Turkish Lira

Russian Ruble

The February WTI crude oil future closed up another 1.7% or $1.02/bbl to $61.44/bbl.  Crude oil inventory was down 1.7% but the distillate inventory jumped 6.85% and gasoline inventory was up 2%. The aggregate inventory statistic, which is has remained at its lowest level since September 2015 for the past three months, gained 0.8%.  Production inched 0.3% higher.  The US rig count dropped five rigs.  The February natural gas future was down 5.4% to $2.8/mbtu even with freezing temperatures and gas inventory down 6.2%.

February WTI Crude Oil Futures (white) and February 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 (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

D.O.E. Crude Oil Production

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

The US 10 year Treasury yield gained seven basis points as it approaches 2.5%. 

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