The following issues are the foundation of our current bullish view:

–          Steel tariffs and quotas

–          Domestic economic and manufacturing strength

–          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 

–          Global economic strength

Upside Risks:

–          Sharp drop in steel imports

–          Increased risk of domestic supply disruption

–          Section 232 tariffs and quotas restricting supply

–          Chronically low inventory levels

–          USW September contract negotiations

–          Chinese economic stimulus measures

Downside Risks:

–          232 exclusions

–          Demand destruction due to higher steel prices

–          Higher dollar

–          Higher oil prices slowing growth

–          Higher interest rates slowing growth

–          Domestic mill reopening

–          Falling iron ore and scrap prices

–          Political & geopolitical uncertainty 

June MSCI flat rolled shipments fell 71k short tons (tons) MoM, but the daily shipment rate (D.S.R.) rose to 111.3st/d with 21 shipment days in June vs. 22 days in May.  The flat rolled inventory level fell 165k tons to 4.76m MoM and months-on-hand (M.O.H) fell to 2.04 from 2.05 in May.  M.O.H. adjusted for the D.S.R. fell to 1.94 from 2.05 last month.

June flat rolled shipments of 2.34m tons were down 3% MoM and up 1.65% YoY.

June flat rolled inventory decreased by 165k tons or 3.3% MoM, but was up 6.6% YoY.

June’s D.S.R. of 111.3 st/d was up 1.7% MoM and up 6.5% YoY.

The D.S.R. adjusted M.O.H. fell to 1.94 vs. 2.05 in May, but was up from 1.81 in May, 2017.

June’s flat rolled M.O.H. ticked lower to 2.04 vs. 2.05 in May, but rose from 1.94 in June, 2017.

YTD cumulative flat rolled shipments of 14m tons are up 3% YoY.

The July CME HRC future gained $5 to $917/st, while the Platts TSI Daily Midwest HRC Index dropped $0.5 to $919.50/st.

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

Midwest HRC futures rebounded after the industry returned from the 4th of July holiday to find the curve had dropped by about $50 since peaking in early June.

2nd month ferrous futures were mixed with Chinese finished and Midwest HRC prices trading up and Australian coking coal falling.  

Flat rolled indexes were relatively quiet with Black Sea HRC up and HRC down in Antwerp.

The TSI North European HRC Index was down €1 WoW at €559.5/t. The TSI ASEAN HRC Index fell $5 to $602/st.

The AISI capacity utilization rate gained again up 0.4 to 76.4%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

June flat rolled imports look to fall almost 110k MoM forecasted at 894k with 185k HRC, 171k CRC and 243k HDG.  July’s flat rolled forecast indicates a rebound of 44k tons to 937.5k.

June’s tube import forecast also indicates a fall with a sharp rebound forecast in July.

Flat Rolled (blue) and Tube (red) Imports

June galvalume import licenses were at 85.6k on July 10th. July’s forecast was for a drop to 77k.

Galvalume Imports (blue) w/ 3 Mo. Moving Average (red)

Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts.  Differentials have made new highs in HRC pricing and approaching previous highs in CRC.   

Prices adjusted for tariffs paint a much different picture however.  The following charts compare the normal differentials from above with the tariff adjusted differentials i.e. Midwest HRC – (1.25 x China Export) plus any AD/CD duties from recent trade cases except China’s 250% tariffs were not included in the math as they prohibit any imports, but the Chinese export price can still be used as a proxy for the rest of Asia.  When taking the current tariff adjusted differentials in red and comparing that to where it would be on their historical unadjusted charts (blue line), Brazilian and Russian steel remains unattractive, Turkish HRC is a buy and Chinese and therefore Southeast Asian HRC prices are close to the high end of their range. 

How flat rolled imports play for the rest of 2018 will be interesting to see.  Issues related to year-end taxes and to a smaller extent the risk of additional tariffs or other defensive measures that could be taken by the Trump administration and D.O.C. are the primary considerations when purchasing imported tons. The window for year-end delivery is closing fast; however some are expecting imports will have a significant effect on Q1 2019 purchases with Q1 HRC futures trading at $790-$800, $120 below spot. 

The SBB Platts Midwest HRC price was unchanged at $919.50.  Russian HRC gained 2.8%.

The US Midwest CRC price was unchanged at $1,008. Russian CRC was up 1.3%.

The US Midwest HDG price gained 0.3% to $1,102.  Middle East Import HDG gained 3.2%.

Coking coal fell 8.3% and scrap prices fell between 3% and 4.5%

The July SGX iron ore future gained $0.27 or 0.4% to $63.20 while the July LME Turkish scrap future was flat at $346.

The backwardated SGX iron ore futures curve is down $2.50 MoM maintaining its shape.

The chart below shows the 2nd month SGX iron ore finally breaking below its longterm up trend.  This “triangle” pattern predicts a significant sell off to come in iron ore, but so far no fireworks.

2nd Month SGX Ore Future

October Chinese rebar futures gained 4.6% last week with physical rebar up in Europe and China.

Last week’s U.S. economic data is listed below.

The S&P 500 added 1.5% for the second straight and markets in Asia rebounded nicely.

S&P 500

Steel mills were mostly higher except ArcelorMittal, which fell 1.5%.

U.S. Steel

Service centers were mixed.

Olympic Steel

Iron ore miners were mostly lower.

LME base metals continued to be under pressure with zinc falling 5.7% and aluminum down 2.4%.

LME Three-Month Rolling Zinc Future

LME Three-Month Rolling Aluminum Future

The US dollar rebounded with the Japanese yen falling 1.7%.  The Turkish lira took another beating.

US Dollar Index

Japanese Yen

Turkish Lira

The July WTI crude oil future fell $2.79 or 3.8% to $71.01/bbl despite crude inventory falling by almost 12.6 million barrels.  Crude oil production was flat at 10.9m bbl/day.  The US rig count added 2 rigs and the North American rig count added 17.  The July natural gas future fell 3.7% to $2.75/mbtu while inventory rose 2.4% to 2.2 trillion cubic feet.

July WTI Crude Oil Futures and July 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 ten year Treasury yield settled the week down up 1 basis point to 2.83%.  The German ten year rate rose 5 basis points to 0.34%, while Spanish and Italian rates fell.   

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:

–          Sharp drop in steel imports

–          Increased risk of domestic supply disruption

–          Section 232 tariffs and quotas restricting supply

–          Chronically low inventory levels

–          USW September contract negotiations

–          China comes alive

–          Potential Russian sanctions cutting off Russian steel

–          China strict steel capacity cuts/China getting serious about curtailing steel production

–          Energy industry rebound

–          Graphite Electrode Shortage

–          Unexpected inflation

–          Weaker dollar

–          Flatbed trucking availability/transportation supply constraints

–          Infrastructure bill/long-term solution to highway spending bill

Downside Risks:

–          232 exclusions

–          Higher dollar

–          Higher oil prices slowing growth

–          Higher interest rates slowing growth

–          Higher domestic steel prices

–          Domestic mill reopening

–          Falling iron ore and scrap prices

–          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