​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 

The June ISM Manufacturing PMI gained 1.5 points to 60.2 beating expectations of a slight point drop to 58.5. The Platts TSI Daily Midwest HRC Index gained $1.50/st to close the week at 920/st, the highest level since 2008.

ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)

The ISM Manufacturing PMI six-month moving average inched higher to 59.23.

ISM Manufacturing PMI Six-Month Moving Average (white) & Platts TSI Midwest HRC Index

The June ISM PMI subindexes saw a sharp increase in supplier deliveries and imports and a large decrease in backlogs and prices.  The customers’ inventory subindex was close to unchanged at an extremely low 39.7 indicating reluctance to restock with the price subindex at 76.8.  The subindexes paint an interesting picture with suppliers looking to be in a strong position with strong demand, little indication this strength will wane in coming months and customers short on inventory.

June ISM Manufacturing PMI

The new orders and backlog subindexes fell, but both remained above 60.

ISM Manufacturing PMI New Orders (white) and Backlog (orange)

This chart adds the new order and backlog subindexes.  This month’s sum fell 3.6 points to 123.6, which is historically a very strong number.  

ISM Manufacturing PMI New Orders Plus Backlog

Both the producer and customers’ inventory inched higher, with the customers’ inventory subindex below 40 for the second consecutive month and below 50 for the 21st consecutive month.

ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)

ISM Manufacturing PMI Customers’ Inventory Subindex

The prices subindex fell 2.7 points to 76.8.

ISM Manufacturing PMI Prices (white) & Platts TSI Daily Midwest HRC Index (orange)

This table shows the past year’s ISM PMI and subindexes.  June’s reading of 60.2 is the second highest PMI over the past 13 months and is up 4.5 points YoY.  The customers’ inventory subindex continues to indicate OEM’s are and have been practicing a lean inventory management strategy for almost two years.  While it worked in their favor in 2017, it has been a disaster in 2018.

In an attempt to get the information in this report out faster, we set up a twitter account @TheFeldstein. 

The table below shows the monthly ISM and regional PMIs back to June, 2017.  Only the Philly Fed missed expectations with strong reading in the other five regional PMIs, especially the energy focused K.C. and Dallas Fed districts.

The colors in the table above correspond with the appropriate PMI index below.  The data continues to show a broad based uptrend.

June U.S. auto sales of 17.4m S.A.A.R. beat expectations of a 17m S.A.A.R.

June US Auto Sales SAAR

According to the June employment report, 213k jobs were added, beating expectations of 195k new jobs while May’s nonfarm payroll gains were revised higher to 244k from 223k. The unemployment rate rose slightly to 4.0% due to an increase in the labor force participation rate to 62.9%, a positive sign for the economy. Manufacturing payrolls added 36k jobs in June beating expectations of a gain of 15k new jobs.  Wages rose 2.7% YoY, just missing expectations of a 2.8% gain.

June US Auto Sales (white) and the Inverted Unemployment Rate (orange)

U.S. unadjusted June auto sales were estimated at 1.54m.

US Monthly NSA Auto Sales

This seasonality chart compares monthly auto sales back to 2014.  June’s sales were the best of the past five years.

US Monthly NSA Auto Sales Seasonality Chart

The unadjusted three month auto sales average fell slightly from the highest level since 2015.

US Monthly Auto Sales 3-Month Moving Average

US 3-Month Moving Average NSA Auto Sales Seasonality Chart

Seasonally adjusted May U.S. construction spending increased 0.4% MoM missing expectations of a 0.5% gain and April construction spending was adjusted lower to a 0.9% gain from a 1.8% gain.

May US Construction Spending

Unadjusted May total construction spending was 4.5% higher YoY while YTD spending gained 4.3% YoY.

Unadjusted May total private construction spending was 4.3% higher YoY while YTD spending gained 4.2% YoY.

Unadjusted May private residential construction spending was 6.1% higher YoY while YTD spending gained 6.5% YoY.

Unadjusted May private nonresidential construction spending was 2.2% higher YoY while YTD spending gained 1.7% YoY.

These next two chart show monthly US construction spending back to 2011.

US Nonresidential Construction Spending

US Residential Construction Spending

The JP Morgan Global Manufacturing Index fell 0.1 points to 53 while the US PMI climbs to the second highest on the list.  Both Chinese PMIs fell while the Turkish, Russian, South Korean and Brazilian PMIs were all below 50 indicating contraction. 

The Eurozone’s PMI dropped 0.6 points to 54.9 with France’s PMI falling 1.9 points to 52.5 and Germany’s PMI down 1 point to 55.9.  Italy’s PMI rose 0.6 points to 53.3, while the PMIs in Spain and the U.K. were flat.  Europe’s PMIs have moved in to a clearly defined downtrend, most likely a lagging result of the appreciation of the euro to 1.25 in the first quarter. 

Eurozone (white), German (blue), Italian (green), Spanish (red), French (yellow) and U.K (light blue) Manufacturing PMIs

While the Eurozone’s PMI has steadily fallen from its high in December, the Platts TSI North European HRC Index has remained flat.

Eurozone PMI (white) and Platts TSI North European HRC Index €/t (orange)

Eurozone PMI (white) Platts TSI North European HRC Index $/t (orange) and Euro Currency

However, the euro has fallen sharply since peaking at 1.251 on February 1st closing last week at 1.1746.  When adjusted into US dollars, the Platts TSI North European HRC Index has fallen 8.3% from $712/t to $658/t. 

The PMIs of the U.S. and Japan gained, while Germany and China’s fell.

US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs

China’s official manufacturing PMI (focused on state owned enterprises S.O.E.) fell 0.4 point to 51 and China’s Caixan PMI (focused on non-S.O.E.s) inched lower MoM to 51.

China Official (white) and Caixan (orange) Manufacturing PMIs

China’s official PMI at 51.5 is the second best June PMI since 2011.

China Official Manufacturing PMIs

Breaking down China’s subindexes, the new orders subindex remains in decent shape, while inventory levels at both the producer and customer level have been and continue to be in a state of contraction, along with the employment subindex, as the country grapples with a massive overcapacity problem.  The imports and export subindexes fell with exports falling below 50.  Nevertheless, the production and business expectations index remains strong at 57.9, but down MoM.

The Chinese spot HRC price and the Platts TSI ASEAN have lost some ground over the past couple weeks, but remain near recent highs.

China New Orders (white), Platts TSI ASEAN HRC Index (red) & Chinese Spot Price (blue)

Except for the quick (somewhat unreliable Lunar New Year) spike in January, 2017, both inventory subindexes have remained in contraction since 2013.  This phenomenon is similar to what happened in the US in 2015 and 2016 and clearly due to China’s chronic overcapacity problem.  If Chinese steel buyers become complacent in an under-inventoried position, then a demand or supply shock that drives lead times abruptly higher occurs, it would catch the Chinese manufacturing community exposed to the same risk and consequences seen in the US in recent months, but at a much higher magnitude.  This is the black swan of the global steel industry.   

China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)

The June CME HRC future settled the month up $24 to $904/st, while the July CME HRC future gained $2 to $912/st.  The Platts TSI Daily Midwest HRC Index gained $1.5 to $920/st.

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

Midwest HRC futures saw significant pressure in November through February in quiet summer markets with what seemed to be anemic buying interest.  November trading more than $100 below Midwest HRC indexes with the backwardation steeper the farther out the curve you go.  At what price does locking in tons start to make sense?  We will see how the market reacts as the industry returns from the 4th of July holiday.    

2nd month ferrous futures were mostly lower WoW with scrap and Chinese futures leading the sell off.

After peaking in mid-June, Chinese HRC and rebar futures have traded steadily lower with Chinese HRC closing the week on its lows at $578.50/t.

October (active) Chinese HRC and Rebar Futures

Flat rolled indexes were relatively quiet with Chinese prices falling around 1-2%.

The TSI North European HRC Index was flat WoW at €560.5/t. The TSI ASEAN HRC Index fell $7 to $607/st.

The AISI capacity utilization rate gained again up 0.4 to 76%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

Final May D.O.C. data showed imports of 1.04m flat rolled short tons; 228k HRC, 179k CRC and 256k HDG.  June’s flat rolled forecast is for a sequential MoM drop of 13% or 134k st to 870k.   

Final May D.O.C. tube import data showed a 239k ton drop to 610k.  June’s tube license forecast indicates a sequential drop of 65k tons to 545k.  

Final May D.O.C. data showed May’s combined flat rolled and tube forecast indicates a massive drop of 464k short tons to 1.61m. 

Flat Rolled (blue) and Tube (red) Imports

Final May D.O.C. data showed 69k st of imported galvalume, down from 98k in April.  June galvalume imports are forecast to rebound to 86k. The red line in the chart below is the three month moving average. 

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

The table below gives you a look at flat rolled and tube imports back to June, 2017. 

Below is June import license data through July 3rd.

The data from above is charted below.

Below is June import license data through July 3rd.

The data from above is charted below.

Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts.  Differentials are making new highs in HRC pricing and reaching toward previous highs in CRC.   

(This paragraph has not changed in months) 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.  The rally that started in March, 2016 gained $231 or 58% from low to high.  The rally that started in October, 2016 gained $192 or 41% from low to high. 

As of last Friday, the rally that started in October, 2017 at 583.75 has rallied $336.25 or 57.6% matching the 57.9% gain of the rally that started in October, 2016. HRC is now in (recent) uncharted territory.  Stay tuned.

Platts TSI Daily HRC Price

Tariff adjusted differentials have been remain mixed.  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 out of bounds, Turkish HRC is a buy and Chinese 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; however some are expecting imports will have a significant effect on Q1 2019 purchases with a futures curve trading Q1 at $770, $150 below spot. 

The SBB Platts US Midwest HRC price gained 0.2% to $920.  Brazilian export HRC gained 7.8% while Europe saw smaller gains.  Asian prices were under pressure.    

US CRC gained 0.4% to $1,009/st. Brazilian CRC and North European CRC increased last week.

The US Midwest HDG price fell 0.3% to $1,099.  Brazilian HDG rebounded sharply, while Chinese HDG was down.

Raw materials were mostly lower. 

The July SGX iron ore future fell $1.75 or 2.7% to $62.92 while the July LME Turkish scrap future lost $7 or 2% to $345.5.

The backwardated SGX iron ore futures curve is down $2 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.

2nd Month SGX Ore Future

Physical rebar was under pressure in China and Turkey.

The only economic data not discussed thus far was the better than expected May factory orders ex-transportation of a gain of 0.7% MoM on top of an upwardly revised April to a 0.9% gain vs. an initial 0.4% gain and final May durable goods orders which were slightly better than the preliminary report. 

Also, the June ISM Non-Manufacturing Index also beat expectations of a fall to 58.3 instead gaining 0.5 points MoM to 59.1. The sum of the ISM Manufacturing plus Non-Manufacturing Indexes rebounded to 119.3, one of the highest levels in the past 30 years.

ISM Manufacturing Plus Non-Manufacturing Indexes

The S&P 500 added 1.5% and the Euronext added 1.4% while stock markets in Asia saw sizeable losses.

S&P 500

Steel mills were mostly higher.

AK Steel

Service centers saw solid gains.

Ryerson Holding Corp.

Iron ore miners were mixed.

LME base metals sold off sharply with copper falling to the lowest level in almost 18 months.

LME Three-Month Rolling Nickel Future

CME September Copper Future

LME Three-Month Rolling Zinc Future

LME Three-Month Rolling Aluminum Future

The US dollar fell 0.5% last week to $93.96. The Mexican peso rallied 4.4% following the election of leftist candidate Andrés Manuel López Obrador.

US Dollar Index

Mexican Peso

The July WTI crude oil future fell $0.35 or 0.5% to $73.8/bbl.  Inventory changes were negligible.  Crude oil production was flat at 10.9m bbl/day, another new all-time record high.  The US rig count added 5 rigs and the North American rig count added 15.  The July natural gas future fell 2.3% to $2.86/mbtu while inventory rose 3.8% to 2.15 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 4 basis points at 2.82%.  Interest rate markets were quiet in the first week of the new quarter.   

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