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
– 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
The June CME HRC future dropped $15 to $909/st, while the Platts TSI Daily Midwest HRC Index gained $6 to $900/st.
July CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
Midwest HRC futures volatility calmed down a bit last week with July gaining $9 to $929, August gaining $16 to $922 and September falling $1 to $890. October gained $6 to $877, November gained $3 to $863 and December dropped $7 to $845. Q1 2019 fell $8 to $814 and Q2 2019 fell $17 to $776.
2nd month ferrous futures were mostly higher WoW again with LME rebar up 5.7%, Aussie coking coal up 5%, Turkish scrap up 3.9% and Chinese rebar up 2.5%.
Chinese HRC and rebar futures continue to rally.
October (active) Chinese HRC and Rebar Futures
The Platts TSI Daily HRC Index gained $7 to $900, the first time at $900 since 2008. Asian hot rolled gained.
The TSI North European HRC Index was up $4 WoW to $600/t. The TSI ASEAN HRC Index was flat at $558/st.
The AISI capacity utilization rate dropped 140 basis points to 74.9%.
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 285k short tons to 940k.
May’s tube license forecast is also pointing to a sharp 225k short ton MoM decrease to 625k.
May’s combined flat rolled and tube forecast indicates a massive drop of over 500k short tons to 1.56m.
Flat Rolled (blue) and Tube (red) Imports
May’s galvalume import forecast indicates a MoM drop of 45k st to 63k. 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% tariffs prohibit any imports, but the Chinese export price is a good proxy for the rest of Asia. None of the current differentials are at threatening levels when comparingthe current adjusted differentials in red to where it would be on their historical unadjusted charts (blue line), except for Turkey. The Turkish HRC export price including AD/CD duties and the 25% tariff is close to $250 below the US Midwest HRC price.
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, they 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.
The SBB Platts’ US Midwest HRC price gained 0.7%. HRC prices were mostly higher with prices in Brazil rebounding 5.6%.
The US Midwest CRC price fell 0.3% to $1,013. China’s domestic CRC price gained 2.1%, while Brazilian domestic CRC fell 1.3%.
The US Midwest HDG price fell 0.8% to $1,104. Brazil was down 1.3% and North Europe was up 1.3%
Raw materials were mostly higher with scrap and coal up nicely. Brazilian pig iron fell 5.6%.
The July SGX iron ore future gained $0.54 or 0.8% to $64.97 while the July LME Turkish scrap future added $13 or 3.9% to $350.
The backwardated SGX iron ore futures curve is flattening with the front end down MoM and the back end up MoM.
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
October Chinese rebar gained another 1.9% WoW.
April factory orders fell a worse than expected 0.8% while factory orders ex-transportation rose 0.4%. April final durable goods ex-transportation rose 0.9%. The May ISM Non-Manufacturing Index rose 1.8 points to 58.6 beating expectations of 57.7.
The S&P 500 gained 1.7%.
S&P 500
Steel mills were mixed.
AK Steel
Service centers were also mixed.
Ryerson Holding Corp.
Iron ore miners were mixed as well.
In the base metals market, copper jumped over 6% and zinc gained 3.3%.
CME Copper Future
LME Three-Month Rolling Zinc Future
The US dollar fell 0.7% while the euro gained almost 1%. The Turkish lira continued to rebound from all-time lows and the Brazilian added back 1.5%. The Mexican peso fell 1.8%.
US Dollar Index
Euro
Turkish Lira
Mexican Peso
The July WTI crude oil future was close to unchanged in spite of inventory rising in all three categories. The aggregate inventory level rose 1.1%. Domestic production continued to increase while more rigs came on line. Natural gas fell 2.4% with inventory increasing 5.3%.
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 30 year mortgage rate gained 5 basis points to 4.46% rising 60 basis points since January. The US ten year Treasury yield settled the week up 4 basis points to 2.94%. Italian yields continue to rip higher gaining 44 basis points to 3.13%. Yields on German and British ten year Treasuries rose noticeably.
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