​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, MSCI 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 

The August CME HRC future lost $11 dropping to $895/st, while the Platts TSI Daily Midwest HRC Index dropped $4.25 to $915.25/st.

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

The CME Midwest HRC futures curve flattened last week with August and September down $10 and Q4 down $15, while January and February 2019 stayed flat and March through June 2019 gained $14-17/st.

The 2nd month LME Turkish scrap future gained 1.2%, while 2nd month futures on Chinese HRC and rebar, Australian coking coal and Midwest HRC fell.

Flat rolled indexes were relatively quiet with only the North European HRC Index moving more than 1%.

The TSI North European HRC Index was up €5 WoW to €564.5/t. The TSI ASEAN HRC Index was flat at $546/st.

The AISI capacity utilization rate slipped back to 76.1%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

June flat rolled imports forecasted at 897k look to fall by almost 105k MoM with licenses for 185k HRC, 171k CRC and 244k HDG tons.  July’s flat rolled forecast indicates a rebound of 75k tons to 972k.

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

Flat Rolled (blue) and Tube (red) Imports

June’s galvalume import licenses forecast to rise to 86k on and July’s forecast is for 87k.

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.  The charts below compare the current tariff adjusted differentials (red line) to where it would be on their historical unadjusted charts (blue line), Brazilian and Russian steel remains unattractive.  Chinese and therefore Southeast Asian HRC prices are approaching the high end of their range.  Turkish HRC has been a buy and license data is indicating an increase in HRC Turkish tons in July vs. June, but the opposite for CRC in July vs. June. 

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 down 0.5% to $915.  The Chinese domestic, Turkish Export and UK HRC prices were all down by 1.7% – 2.2%.

The US Midwest CRC price was up slightly to $1,010.  Chinese CRC prices were down more than 1%.

The US Midwest HDG price fell $1 to $1,101. 

Iron ore saw further gains while coking coal fell another 3.4%.

The August SGX iron ore future gained $0.46 or 0.7% to $64.68, while the August LME Turkish scrap future was down $0.50 to $337.50.

The front of the SGX iron ore futures curve steepened, but is still slightly below where it was last month.

The chart below shows the 2nd month SGX iron ore breaking below its longterm up trend.  This “triangle” pattern predicts a significant sell off to come in iron ore, but the sell-off failed to materialize and has rebounded back into the triangle.

2nd Month SGX Ore Future

The October Chinese rebar future and Black Sea billet price fell 1%.

The July Empire Manufacturing Index fell MoM to 22.6, but beat expectations.  The July Philadelphia Fed Index gained 5.8 points to 25.7 and beat expectations.  June U.S. industrial production rose 0.6% beating expectations, but May’s production was revised lower.  Capacity utilization was up MoM to 78%, but missed expectations, while May was revised lower.

June U.S. housing starts and building permits both fell MoM and missed expectations. The July National Association of Home Builders Housing Market Index was flat and in line with expectations at 68.

The S&P 500 was close to unchanged.

S&P 500

Steel mill’s stocks were mixed.

Nucor Corporation

Service center’s stocks were also mixed.

Worthington Steel

Iron ore miners were mostly lower, except Cleveland Cliffs, which gained almost 19% closing the week just below $10, its highest level since October, 2014.

LME base metals continued to be under pressure with nickel falling 3.2% and copper down 1.4%.

LME Three-Month Rolling Nickel Future

The US dollar fell slightly while the Japanese yen gained almost 1%.  The Brazilian real and Turkish lira gained around 2%, while the Chinese yuan and Russian ruble fell over 1%.

US Dollar Index

Japanese Yen

Brazilian Real

Turkish Lira

 The August WTI crude oil future fell $2.75 or 3.9% to $68.26/bbl.  Crude oil inventory rebounded and the aggregate energy inventory level rose 0.3%.  Crude oil production inched higher to a new record of 11m bbl/day.  The US rig count cut 8 rigs and the North American rig count added 6.  The August natural gas future was close to unchanged at $2.76/mbtu while inventory rose 2.1% to 2.25 trillion cubic feet.

September WTI Crude Oil Futures and Sept. 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 up 7 basis points to 2.89%.  The German ten year rate gained 3 basis points to 0.37%.   

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