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  

May MSCI flat rolled shipments increased 52k short tons (tons), but the daily shipment rate (D.S.R.) fell from 117.8kst/d to 109.5k st/day mostly due to 22 shipment days in May vs. 20 days in April.  The flat rolled inventory level fell 43k tons to 4.93m and months-on-hand (M.O.H) fell to 2.05 from 2.11 in April.  M.O.H. adjusted for the D.S.R. was also at 2.05, up from 1.92 in April.

May flat rolled shipments of 2.41m tons were up 2.2% MoM and 3.9% YoY.

May flat rolled inventory decreased by 43k tons or 0.9% MoM, but was up 10.5% YoY.

May’s D.S.R. was 109.5 st/d falling 7.1% MoM, but up 3.9% YoY.

The D.S.R. adjusted M.O.H. rose to 2.05 vs. 1.92 in April and 1.9 in April, 2017.

May’s flat rolled M.O.H. fell to 2.05 vs. 2.11 in April, but rose from 1.92 in May, 2017.

YTD cumulative flat rolled shipments of 11.6m tons are up 3.3% YoY.

The “Mill Fill” Index is an estimate for domestic steel mill shipments to service centers.  The white line is this figure for each month back to January 2014 and the red line is its three-month moving average.   May’s mill fill of 1.397m was at the highest level since December 2014.

Mill Fill Index (white) with 3m Moving Average (red) and Platts TSI Midwest Daily HRC Index (green)

The July CME HRC future was flat at $929/st. The Platts TSI Daily Midwest HRC Index was also flat at $900/st.

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

The August CME Midwest HRC future dropped $4 to $918, while the September future gained $4 to $894.  October gained $1 to $878, November gained $5 to $868 and December added $3 to $848. Q1 2019 fell $2 to $812 and Q2 2019 fell $1 to $775.   

2nd month ferrous futures were mixed with Chinese HRC and rebar up 3.9% and 2.9%, respectively, while busheling and shred were down 1.7% and 4.9%, respectively.

Chinese HRC and rebar futures continue to rally.

October (active) Chinese HRC and Rebar Futures

Flat rolled indexes were relatively quiet last week with Black Sea HRC up 1.4%, while the North Europe HRC Index fell over 1%.

The TSI North European HRC Index was down $10 WoW to $591/st. The TSI ASEAN HRC Index was up $2 to $560/st.

The AISI capacity utilization rate continues lower dropping 10 basis points to 74.8%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

May’s flat rolled import license forecast continues to point to a sharp drop of 260k short tons to 972k, while the first forecast for June flat rolled licenses is 989k.   

May’s tube license forecast is also pointing to a sharp 225k short ton MoM decrease to 625k while June’s forecast is for a sequential significant drop to 403k tons.  

May’s combined flat rolled and tube forecast indicates a massive drop of 485k short tons to 1.59m and June’s combined forecast is 1.39m. 

Flat Rolled (blue) and Tube (red) Imports

May’s galvalume import forecast indicates a MoM drop of 34k st to 63k while June’s initial forecast is for only 29k licenses.  The red line in the chart below is the three month moving average. 

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

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.   

Tariff adjusted differentials have been and remain unattractive, which should result in a sharp drop in imports throughout the third quarter.  The following charts compare the normal differentials from above with the tariff adjusted differentials i.e. Midwest HRC – (1.25 + AD/CD duties times country ABC’s export price). However, China’s price was only adjusted by the 25% tariff since the 250% AD/CD duties against China prohibit any imports, but the Chinese export price is a good proxy for the rest of Asia.  

Comparing the current adjusted differentials in red to where it would be on their historical unadjusted charts (blue line), Brazilian and Russian differentials are not at threatening levels.  However, the Turkish HRC export price including AD/CD duties and the 25% tariff is $221 below the US Midwest HRC price at levels indicating a surge of imports.  The Chinese HRC differentials of $228 is nearing threatening levels, however last week a number of domestic steel mills filed circumvention allegations that cold rolled and corrosion resistant (CORE) products from imported from Vietnamese mills  have been produced using Korean hot rolled or cold rolled substrate, which could limit purchases of imports from Vietnamese mills.

Considering the big themes discussed in this report of low inventory levels at OEMs and service centers, unattractive import levels and the multiple months lag once import orders do become attractive, it is hard to see from where the supply needed to drive down domestic lead times will come from even with the latest developments from Turkey.  Pay close attention to global pricing as it could be an indication of when prices in the US will adjust lower, but remember to add a few months due to the lag effect. 

Another important consideration is the following condition at the end of the 232 Investigation recommendation memo:

Any exclusions granted (to other countries) could result in changed tariffs or quotas for the remaining products to maintain the overall effect”

That is, the administration and D.O.C. can raise tariffs for other countries or products if they choose at any time. 

The bottom line is there doesn’t look to be a supply solution from the import front in the near term.  In fact, supply looks to tighten further over the next few months. 

Midwest HRC was unchanged at $900.  Brazilian HRC rose 1.5%, while Russian Export fell 3.1% and North European HRC was down 1.2%.

The US Midwest CRC price fell 0.2% to $1,013. China’s domestic CRC price gained 2.1%, while Brazilian domestic CRC fell 1.3%.

The US Midwest HDG price fell 0.6% to $1,097.  North and South European HDG fell 1.1$ and 1.7%, respecitvely.

Raw materials were mostly higher with scrap leading the rally.

The July SGX iron ore future gained $0.38 or 0.6% to $65.97 while the July LME Turkish scrap future added $8 or 2.3% to $355.

The backwardated SGX iron ore futures curve is close to unchanged MoM, but has flattened.

The chart below shows the 2nd month SGX iron ore still holding above its longterm up trend.  This “triangle” pattern predicts a large move to come in the direction the price breaks out of the apex of the triangle.

2nd Month SGX Ore Future

Spot Chinese rebar gained $2.4%, October Chinese rebar future gained 1.6% WoW and Black Sea billet added 1.4%.

Last week, the Federal Reserve, European Central Bank and Bank of Japan each had meetings and announced their policy decisions. 

US Federal Reserve

The Federal Open Market Committee raised its key policy rate, the Fed Funds rate, by 0.25% at its June monetary policy meeting last week. The committee members also updated their future economic and policy rate projections. The median policy rate expected at the end of 2018 includes 4 total rate hikes this year, up from 3 hikes projected after the March policy meeting. As of the June meeting, the committee has raised the Fed Funds rate twice already this year.

European Central Bank

At the European Central Bank’s meeting that concluded last Thursday, the council announced that they will begin tapering their bond purchases this fall, ending its €2.4 trillion bond-buying program by the end of this year. However, the ECB also signaled that they plan to keep their policy rate unchanged until next summer, keeping in place loose monetary policy in order to accommodate the economies of the European Union for the foreseeable future.

Bank of Japan

At the June monetary policy meeting for the Bank of Japan, the central bank left its current interest rate and quantitative easing policy unchanged as it continues to try to boost inflation in Japan’s economy. The bank will has set the short term policy rate at -0.10%, the 10 Year Japanese government bond yield near 0.00%, and will purchase Japanese government bonds at its current pace, increasing holdings by ¥80 trillion annually.

The June Empire Manufacturing Index rose to 25.0 from 20.1 in May and beat expectations.  May industrial production missed expectations contracting by 0.1% MoM, however April production data was revised higher to 0.9% from 0.7%.  May capacity utilization at 77.9% was down MoM and missed expectations.

The May NFIB Small Business Optimism Index rose to 107.8 from 104.8 and beat expectations.  The May CPI Ex-Food and Energy rose 2.2% YoY in line with expectations.  The May PPI Ex-Food and Energy rose 2.4%, beating expectations of 2.3%.

The S&P 500 was quiet while the Euronext Index gained 1.8%, China was mixed and Korea was down almost 2%.

S&P 500

Steel mills were down on the week along with the industrial sector’s beat down in response to President Trump’s announcement of tariffs on Chinese goods and fears that a trade war that could slow growth.

Steel Dynamics

Service centers were mixed.

Schnitzer Steel Industries

Iron ore miners were mostly lower.

In the base metals market, copper was down 4.7%, aluminum was down 4.1% and zinc was down 3.8%.

CME Copper Future

LME Three-Month Rolling Aluminum Future

LME Three-Month Rolling Zinc Future

The US dollar rallied 1.3% while the euro and yen were both down over one percent.  The Turkish lira had another rough week falling 5.8% and reaching new lows.  The Canadian and Australian dollar along with the Korean won fell over 2%.  The Mexican peso and Russian ruble were down over 1%. 

US Dollar Index


Japanese Yen

Turkish Lira

The July WTI crude oil future was down 1% in spite of crude, distillate and gasoline inventory all falling by at least 1% each.  The aggregated inventory level fell 1.1%.  Domestic crude oil production continues to ramp up with 24 new rigs added to the North American rig count, while 3 rigs dropped out of the U.S. rig count.  The July Natural gas future increased 4.6% or $0.13 to $3.02/mbtu.  Natural gas inventory rose 5.3%.

July WTI Crude Oil Futures and July Crude 15 Delta Put Volatility (orange)

Aggregate Energy Inventory (orange) 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)

Ten year treasury yields were lower with the Italian yield falling significantly as their politics settled down somewhat. 

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

–          Demand destruction

–          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