The Midwest HRC price continued the rally that began at $365/st in December, 2015 with a second round of price increase announcements starting last week with California Steel and then followed by Nucor and most other domestic mills. 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 up $7 to $616 while the August CME future settled at $645 up $25. Lead times for HRC are out to September with strong mill order books as the industry anticipates policy announcements regarding the D.O.C.’s Section 232 Investigation.
August 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. A resolution regarding the Section 232 Investigation into steel has been anxiously awaited for weeks by all those attached to the steel market. However, the investigation itself has already had a strong positive effect on pricing. 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. Nevertheless, the current uncertainty should result in a sharp drop off in imports in the coming months.
We define the price risk associated with the 232 as asymmetric. Our assessment of the 232 is that a restrictive quota and/or tariff measure would leave the industry short on steel causing prices to skyrocket to perhaps the high $700s. Availability would become the key issue, especially considering the relatively low inventory levels. While a policy that stays close to the status quo would not send prices lower at the same magnitude to say a level in the $400s as domestic fundamentals remain strong and supportive. Global raw material prices and therefore costs have risen. Global finished steel prices have been rallying of late, especially showing resilience in China. Global PMIs have been in a healthy uptrend throughout 2017. The deflationary pressures of 2016 look to have been resolved. In a number of industries, supply curtailments made during the downturn are now leading to tightening markets and even potential shortages with trucking and graphite electrodes as two examples that directly affect the steel industry.
We see the following issues as the foundation of our current view:
- Persistently low flat rolled inventory evidenced in the MSCI, ISM and Durable Goods reports
- The Section 232 Investigation
- A global uptrend in manufacturing purchasing managers indexes
- Conditions ripe for a restocking
- A rebounding US energy industry
- Relatively low HRC imports with trade restrictions
As of Friday’s settlement, July CME Midwest HRC futures fell $3 to $617/st after the third index print left the settlement for July futures anchored in the low teens. However, the rest of the curve jumped as anticipation over the Section 232 Investigation built while domestic mills announced another round of flat rolled price increases. August and September gained $25 to $645. Q4 2016 gained $24 to $644. Q1 2018 was gained $18 to $638 and Q2 2018 shed $16 to $636.
Flat rolled prices continue to rally with Europe bouncing of recent lows while prices in Asia are approaching recent highs.
Take notice! The TSI ASEAN HRC Index is right back up to the high reached last December. The TSI North European HRC Index bounced after spending most of July flat at recent lows.
- Relatively low HRC imports with trade restrictions
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 interest in import deals has been subdued on both sides 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 July. This could be an area where government policy really cracks down. We expect tube imports to reverse in the short term similar to flat rolled.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. US/China differentials have declined dramatically since May. Turkish HRC differentials fell 10% this week.
Global HRC prices continue to move higher with South European HRC up 5.5% and Turkish HRC up 4%. Chinese, Brazilian and East Asian prices saw a gain in excess of 2%.
Chinese CRC prices were up again.
Brazilian HDG gained 1.2%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
AISI capacity utilization matched the highest utilization rate of the year at 75.6%.
Coking coal has been rallying of late gaining 5.4% to $175/t this past week. Iron ore also clocked some big gains followed closely by Turkish scrap.
The iron ore curve has shifted higher vs. mid-June and the curve continues to move towards a steeper backwardation.
Chinese rebar futures fell 2.6%, while Chinese physical rebar gained 2.1%, go figure. Black Sea billet gained 2.1%
The July Empire Manufacturing Index fell to 9.8, missing expectations. The July Philadelphia Fed Business Outlook fell to 19.5, also missing expectations. June housing starts of 1.215m annualized was up from an upwardly revised May SAAR of 1.12m units. June building permits of 1.25m annualized units beat expectations while building sharply on the 1.09m annualized rate in May.
The S&P 500 closed the week at a new all-time high of 2469.4. The Euronext gave back 2%.
S&P 500 Futures
Steel stocks were mostly higher. AK Steel an Olympic Steel saw their stock prices pulled down by 4.6% and $7.8%, respectively.
AK Steel
Losses were seen across the board for iron ore miners despite iron ore prices gaining.
Base metals were pretty quiet last week.
August CME Copper Future
Most of the movement in the dollar index was versus the euro and yen, which were up 1.72% and 1.32%, respectively. The dollar index fell below 94 for the first time since June, 2016. The Korean won, Brazilian real and Australian dollar were up in excess of 1%.
US Dollar Index
Euro Spot
September CME Japanese Yen Future
- A rebounding energy industry
WTI crude oil slipped almost 2% while natural gas was close to flat. The US rig count dropped 2 rigs while production gained slightly. Crude oil inventory fell 0.95% while combined inventory fell 1.3%.
August WTI Crude Oil Futures and Aug. Crude 15 Delta Put Volatility
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 U.S. 10 year Treasury yield continued lower to 2.24%. The German 10 year yield was down 15% to 0.51%.
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:
– Section 232 Investigation
– Low inventory levels/domestic or global restocking
– Flatbed trucking availability
– China pumping up its “old economy”
– Energy industry rebound
– Weaker dollar
– Graphite Electrode Shortage
– 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
Downside Risks:
– 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
– Rebound in import volumes
– 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
– 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