February MSCI flat rolled data was released last week showing the highest February daily shipment rate (D.S.R.) since 2014. Inventory decreased by 7k tons to 4.93m resulting in a daily shipment rate adjusted months on hand (MoH) of 2.04 months. In a “normal” market, 2.04 MoH is a relatively low inventory level, but in a market where lead times for HRC are at nine weeks, it is critically low.
Again, welcome to the steel shortage of 2018.
February flat rolled shipments of 2.2m short tons were down 5.2% MoM, but up 4.2% YoY.
February flat rolled inventory fell 7,100 short tons MoM, but was up 314k YoY.
The February flat rolled D.S.R. of 109.6 st/day was up 4.2% MoM and YoY.
February D.S.R. adjusted MoH fell to 2.04 months from 2.13 in January, but was up from 1.99 YoY.
February flat rolled MoH rose to 2.25 from 2.13 in January and 2.19 YoY.
Year to date flat rolled shipments of 4.5m short tons is up 2.9% YoY.
The following issues are the foundation of our current constructive view:
– 25% tariffs on steel
– A global uptrend in manufacturing purchasing managers indexes
– 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
Upside Risks:
– Chronically low inventory levels/domestic or global restocking
– Increased risk of domestic supply disruption
– Increased trade policy risks (Section 232, NAFTA)
– Sharp drop in steel imports
– China strict steel capacity cuts/China getting serious about curtailing steel production
Downside Risks:
– 232 exclusions
– Higher domestic prices
– Domestic mill reopening
– Falling iron ore and scrap prices
– Political & geopolitical uncertainty (US Government shutdown)
– Stock market crash
The AISI capacity utilization rate fell back to 77.8%. A domestic supply disruption was added to the list of upside risks this week because the harder domestics steel mills run, the higher the probability of a breakdown. In this atmosphere of curtailed supply, a disruption would exacerbate the tightness sending prices skyrocketing higher. It is important to keep this risk in mind.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
CRC and HDG prices and indexes are starting to outgain HRC prices and indexes. The table (cumulative imported short tons from July, 2017 – January 2018) and charts below show more CRC and much more HDG imported versus HRC from July, 2017 through January, 2018 and this trend looks to continue in February and March.
Monthly Imports (st) per Product (left) and 6 Month Moving Average (right)
However, as the stocks of CRC and HDG are used, new HRC substrate is needed to produce CRC and HDG products. Considering HRC is in tight supply, conversion charges could expand back to recent highs in the $200s and if that happens, mills will prefer to produce those products due to higher profitability. These higher relative profits for these products over HRC could exacerbate the shortage of HRC as mills and converters will increase their demand for HR substrate. A positive feedback loop could occur indeed.
Again, welcome to the steel shortage of 2018.
While some believe prices will quickly turn around as they have in the past, the import valve has been distorted by the tariffs. Surely the only solution is for prices to rise higher to the point where imports make economic sense. However, there are no solutions in the short term. Imports are not attractive at these levels. If and when they become attractive, there will be a multiple month lag until they start to arrive. OEM and service center inventory levels are drastically too low with flat rolled lead times exceeding eight weeks.
Availability is now the primary concern.
The chart below is of the rolling 2nd month CME Midwest HRC future. The April future (HRC2) was down $28 to $847/st for the week.
Rolling 2nd Month CME Midwest HRC Futures
Domestic flat rolled prices continue to rally with the Platts TSI Midwest HRC Index closing the week up $2.50 to $852/st.
April CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
February flat rolled imports are forecast to fall 75k short tons to 823k while March is forecasting a sequential drop of 120k short tons to 703k.
February tube imports are forecast to fall almost 228k short tons to 544k while the March forecast shows a sequential drop of 45k short tons to 499k.
Combined flat rolled and tube imports are forecast to fall from 1.69m in January to 1.37m in February to 1.2m in March.
Flat Rolled (blue) and Tube (red) Imports
Midwest HRC futures fell sharply last week as buyers stepped away and sellers chased prices lower. March gained $2 to $822, April dropped $28 to $847, May lost $25 to $840 and June shed $32 to $828. July dropped $33 to $827, August lost $45 to $810 and September shed $46 to $804. Q4 lost $45 to $800 and Q1 2019 shed $50 to $840.
It was another week of strong gains in domestic flat rolled indexes while Asian HRC prices fell.
The ASEAN HRC Index was down $5 while the North European HRC Index was down $1.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. Differentials are expanding quickly approaching previous highs with the rally in Midwest HRC prices leaving global prices in the dust.
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 has rallied $266.50 or 45.65% from low to high. The current rally has exceeded the gain of 41% that was seen in the rally starting in October 2016. If the current rally gains 58%, as it did in the rally started in March, 2016, then the index will peak at be $922/st.
Platts TSI Daily HRC Price
SBB Platts’ US Midwest HRC price inched up $2 to $850. China’s export HRC price fell 2.6%.
The US Midwest CRC price gained 3.5%.
The US Midwest HDG price was up 2.7% while HDG prices in Europe fell 1.2%.
Raw materials were mostly lower except for Black Sea pig iron which gained almost 7%.
The April SGX iron ore future settled down $6.70 or 8.8% to $69.20 while the March LME Turkish scrap future fell $14.5 to $379.5.
The backwardated SGX iron ore futures curve has seen some pressure in the past month.
The chart below shows the 2nd month SGX iron ore failing to break above its long-term down trend.
2nd Month SGX Ore Future
Black Sea billet gained almost 3% and US plate gained 2%.
The March Empire Manufacturing Index rose to 22.5 from 13.1 in February and beat expectations of 15. The March Philadelphia Fed Business Outlook Index fell to 22.3 from 25.8 and missed expectations of 23. February industrial production increased 1.1% MoM and beat expectations of a 0.4% gain. February capacity utilization rose to 78.1% from 77.4% and beat expectations of 77.7%.
February housing starts fell 7% MoM to an annualized rate of 1.236m starts and missed expectations of a 1.29m start rate. February building permits fell 5.7% MoM to an annualized rate of 1.3m permits and missed expectations of a 1.32m annualized rate. The March National Association of Home Builders Housing Market Index fell to 70 from 71 in February and missed expectations of 72.
The February CPI Ex-Food and Energy increased 1.8% YoY in line with estimates. The February PPI Ex-Food and Energy was up 2.5% YoY, but missed expectations of 2.6%.
The February NFIB Small Business Optimism Index rose to 107.6 from 106.9 in January, which was the highest level the index has printed since 1983. The preliminary March University of Michigan Consumer Sentiment Index rose to 102 from 99.7 in February and beat expectations of 99.3.
The S&P 500 shed 1% last week while the VIX Index rose to 15.8%. The Korean KOSPI Index gained 1.4%, while stock indexes in Japan, China and Europe all fell 1-2%.
S&P 500
Steel mills were lower despite higher index prices.
US Steel
Service centers were mostly lower.
Ryerson
Iron ore miners were mixed.
Base metals were down with nickel leading the pack lower falling 1.7%.
LME 3 Month Rolling Nickel Future
LME 3 Month Rolling Aluminum Future
The US dollar was close to unchanged. The Canadian dollar fell almost 3% while the Turkish lira shed 2.2%. The Australian dollar and Russian ruble were down over 1.5%.
US Dollar Index
Turkish Lira
Canadian Dollar
The April WTI crude oil future gained 0.5% or $0.30 to $62.34/bbl. Crude oil inventory rose 1.18%, but the distillate and gasoline inventory levels fell 3.2% and 2.5%, respectively. The aggregate inventory level fell 0.7%. Crude oil production rose 0.1% to 10.38m bbl/day. The US rig count added six rigs, but the North American rig count cut 48 rigs. OCTG prices were unchanged. The April natural gas future fell 4 cents or 1.6% to $2.69/mbtu, while inventory fell 5.7%.
May WTI Crude Oil Futures and May 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 10 year Treasury yield continues to be range bound in the 2.8% – 2.9% range. The German 10 year fell eight basis points to 0.57%.
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:
– Increased trade policy risks (Section 232, NAFTA)
– Sharp drop in steel imports
– China strict steel capacity cuts/China getting serious about curtailing steel production
– Chronically low inventory levels/domestic or global restocking
– Increased risk of domestic supply disruption
– 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:
– Political & geopolitical uncertainty
– Stock market crash
– Falling iron ore and scrap prices
– 232 exclusions
– Higher domestic prices
– Domestic mill reopening
– 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