The Midwest HRC price continued the rally that began at $365/st in December, 2015. After correcting 10% from the $660 high set on March 20th, 2017, the TSI Daily Midwest HRC Index has bounced off a low of $591 closing this past week down $2 to $609 while the August CME future price settled at $620. Lead times look to have continued to increase as the industry anticipates policy announcements regarding the D.O.C.’s Section 232 investigation.
Aug CME HRC Futures vs. TSI Daily Midwest HRC Price
Grounded in the conclusion that Midwest HRC prices have been in a multi-year bull market, the “buy the dip” theme discussed since January remains intact as fundamental data continues to be constructive. An announcement regarding the Section 232 Investigation into steel is anxiously expected by all those attached to the steel market. However, the investigation itself has already had a strong effect. Concerns over the outcome have led steel buyers to shift to a more domestic focused purchasing strategy while importers are faced with having to evaluate their willingness to share or take on policy risk. June and July import licenses are indicating a surge in imported tons, perhaps in an attempt to get tons into the country ahead of a punitive policy. However, the current uncertainty should result in a sharp drop off in imports in the coming months.
Further, the asymmetric upside risk posed by a policy that would include a restrictive quota and/or tariff system seems to have left the industry complacent, flat footed and underprepared, especially considering the relatively low inventory levels. Our assessment of the 232 is that a restrictive measure would leave the industry short on steel with prices skyrocketing to the high $700s and availability would become the key issue, while a policy that stays close to the status quo would not send prices into an equivalent level in the $400s as current domestic fundamentals remain strong and supportive. Also, global raw material and finished steel prices have been rallying of late, especially showing resilience in China.
We see the following issues as the foundation of our current view:
June MSCI data showed little change and remains bullish.
Flat rolled shipments decreased 0.82% (19k st) MoM and 1.22% (28k st) YoY. The daily shipment rate (DSR) of 104.52 st/day was down 0.82% MoM and 1.22% YoY. Inventory rose 9.7k tons while months-on-hand (MOH) inched up to 1.94.
Flat rolled inventory was up 9,700 tons to just below 4.47m short tons. June inventory is at the lowest level since June, 2009. Inventory has been at or below 4.65m short tons for nine consecutive months.
June’s daily shipment rate of 104.52 st/d was a little light compared to recent years.
May and June both had 22 days so the D.S.R. adjusted MOH and unadjusted MOH were both 1.94, which is the lowest for the D.S.R. adjusted since 2006.
Shipments are healthy and inventory is too low. Every day that goes by, draws the industry closer to the point in the business cycle that demands a restocking. If the Trump Administration implements restrictive import policy under the Section 232 Investigation, flat rolled prices are sure to skyrocket!
YTD flat rolled shipments through June are up 3% YoY.
As of Friday’s settlement, July CME Midwest HRC futures fell $5 to $620/st following, August was down $12 to $620 and September fell $10 to $620. Q4 2016 slipped $15 to $620. Q1 2018 was down $10 to $620 and Q2 2018 shed $7 to $620.
Asian HRC prices continue to rally sharply. European prices were up slightly.
The TSI ASEAN price has quietly rallied within spitting distance of highs seen last December. It’s been quite a stealth rally and US buyers should pay attention. The TSI North Europe flattened last week.
This weekend’s slew of June Chinese economic data, which included better than expected GDP, industrial production, fixed asset investment and retail sales, sent steel and iron ore prices higher.
June import licenses are forecasting a huge MoM gain again in July, most likely in anticipation of tariffs to be applied by the Trump administration. We are expecting a sharp drop off in flat rolled imports in the short-term as import deals have been readily declined due to the complications surrounding the uncertainty of the 232 Investigation.
Tube imports have exploded this year and look to continue to reach news highs in June. This could be an area where the government policy cracks down. We expect tube imports to reverse in the short term as well.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. US/China differentials have declined dramatically since May.
Global HRC prices are moving higher with a 6% gain in Russian and Middle Eastern HRC. China HRC had another very strong week. HRC prices in East Asia, South Europe and Brazil were also up nicely.
Chinese, South European and Russian CRC was higher.
European HDG prices moved sharply lower while Middle Eastern HDG gained 4.5%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
AISI capacity utilization inched up to 74.3%.
Coking coal saw an 8.5% increase while iron ore prices continued higher.
The iron ore curve has shifted higher vs. mid-June and the curve continues to move towards a steeper backwardation.
Chinese and N.W. European rebar gained.
June industrial production was better than expected, but the rest of last week’s economic data was mostly lower or in line with expectations.
The S&P 500 closed the week at a new all-time high of 2456. The Euronext gained almost 2%, China’s CSI 300 was up 1.65% and the Shanghai Property Index gained 4.7%.
S&P 500 Futures
Shanghai Property Index
Steel stocks were mostly higher with BOF mills leading the sector.
Gains were across the board for iron ore miners as iron ore prices continued to rally.
Base metals were mostly higher with nickel gaining 7.3%.
LME Nickel 3 Month Rolling Forward
Currencies awoke with the dollar slipping to a new short-term low of 95.11 as all of the currencies below gained against the dollar.
US Dollar Index
WTI crude oil rebounded sharply gaining 5.5% while natural gas gained almost 4%. The US rig count was flat while production gained slightly. Crude oil inventory fell 1.5% while the total inventory fell 0.7%.
August WTI Crude Oil Futures
Aggregate Energy Inventory (Blue) 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 rally in the U.S. 10 year Treasury yield failed at 2.4% closing the week at 2.33%. The German 10 year yield pushed higher to 0.6%.
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.
– Section 232 Investigation
– Low inventory levels/domestic or global restocking
– Flatbed trucking availability
– China pumping up its “old economy”
– Energy industry rebound
– Weaker dollar
– Border adjustment tax
– Big rally triggered by price increases/low inventory/restocking
– President Trump’s agenda
– Infrastructure bill/long-term solution to highway spending bill
– China getting serious about curtailing steel production
– Transportation supply constraints
– Post-election economic pick up
– Unplanned domestic supply side disruptions
– Political uncertainty – Reflation trade reversing
– Increasing oil and iron ore inventory levels
– Sharp and persistent drop in oil and iron ore prices
– Automotive industry under pressure
– 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
– Rebound in import volumes
– Increasing import differentials
– US dollar rally/currency issues/sovereign default
– Falling ferrous raw materials and global finished steel prices
– Economic downturn, especially in China or Europe reverberating to U.S.A.
– Weak demand in housing or automotive