Since its release on Friday, February 16th, the 232 recommendations have been the only issue that matters to the steel industry, which is in utter chaos. Analysis, opinions and predictions of President Trump’s action from industry rags and Wall Street reports have been inundating inboxes.
The main short term issues to be focused on are:
1) When will the president announce his decision?
2) What will that decision be?
President Trump announced last Thursday that he will will announce the details of across the board 25% tariffs sometime this week.
Of course, these tariffs are outrageously controversial with the most significant pushback coming from Republican senators and representatives, U.S. allies and trade partners and lobbyists of those businesses most negatively affected by the tariffs. Considering Trump’s track record of controversial policies that fail to materialize and what seems to be a very large and motivated group of constituents whose pocket books are getting hit hard, it will be interesting to see if these tariffs come to fruition or are watered down with exclusions.
Regardless, the announcement has had an explosive short term affect on an already rock solid domestic steel market. Discussed ad nauseum and evidenced again in the ISM and economic reports section below, collectively OEMs have been running their supply chains with inventory levels too low and now that lead times have pushed out, OEMs are in a precarious position. Availability trumps price (no pun intended). Credit and pay terms become more restrictive and with import deals being cancelled, the short term supply constraint is unconvertible.
Welcome to the steel shortage of 2018.
The chart below is of the rolling 2nd month CME Midwest HRC future. The April future (HRC2) was up $69 to $871/st for the week.
Rolling 2nd Month CME Midwest HRC Futures
The February ISM Manufacturing PMI gained 1.7 points to 60.8 beating expectations of 58.7. This is the 7th straight month the PMI has been above 58! The Platts TSI Daily Midwest HRC Index increased $46.75 to $800 on the week.
ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)
The chart below shows a six month moving average of the ISM Manufacturing PMI peaking at 59.55 and taking the Platts TSI HRC Index up with it.
ISM Manufacturing PMI Six Month Moving Average (white) & Platts TSI Midwest HRC Index
In fact, the current six month moving average of 59.55 is the second highest average of the past thirty years.
ISM Manufacturing PMI Six Month Moving Average
The table below shows the ISM PMI’s subindexes. New orders and production moved lower, while employment, deliveries, producer inventory and backlog of orders were all up. New exports and imports moved higher as well, but it will be interesting to see how those develop in the coming months. Customer inventories contracted to an ultra-low 43.7.
February ISM Manufacturing PMI
The new orders subindex fell for the second straight month while backlogs are up for the fourth straight month at their highest level since April, 2011.
ISM Manufacturing PMI New Orders (white) and Backlog (orange)
The chart below shows the producer inventory jumped 4.4 points to 56.7 as it looks like producers and distributors stock up in anticipation of a spike in demand. The customers’ inventory subindex slipped to 43.7, has been in contraction for seventeen straight months and has a six month average of 44.13.
ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)
The ISM prices subindex gained 1.5 points to 74.2, the highest since 2003.
ISM Manufacturing PMI Prices (white) & Platts TSI Daily Midwest HRC Index (orange)
Looking at the monthly subindexes back to January, 2017 the major standouts this month is the backlog gaining to 59.8, while customer inventories fall to 43.7 and are red across the board.
The regional reports were mixed again this month with the Richmond Index doubling.
The colors in the table above correspond with the appropriate PMI index below. The chart on the right indexes the data starting at 100. The data shows the broad based uptrend continuing.
February’s US auto sales of 16.96m SAAR (seasonally adjusted annualized rate) was down 2.1% YoY and missed expectations.
February US Auto Sales SAAR
Unemployment continues to be at multi-year lows and should pull auto sales higher in the coming months.
February US Auto Sales (white) and the Inverted Unemployment Rate (orange)
February monthly auto sales of 1.29m units were down 2.3% YoY.
US Monthly Auto Sales
The US monthly auto sales three month moving average continues to move lower.
US Monthly Auto Sales 3-Month Moving Average
January seasonally adjusted US Construction Spending was unchanged MoM missing expectations of 0.3% growth. Seasonally adjusted construction spending was 3.2% higher YoY.
January US Construction Spending
YTD total construction spending gained 3.7% YoY/YTD.
YTD private residential spending gained 4.25% YOY/YTD.
YTD private spending gained 1.9% YOY/YTD.
YTD private nonresidential spending was down 0.5% YoY/YTD, the first drop since 2013.
The next two charts show monthly construction spending over the past five years displaying the seasonality in construction spending and that spending will be picking up.
US Nonresidential Construction Spending
US Residential Construction Spending
The tables below show the global manufacturing PMIs with the one on the right sorted from highest to lowest. The US and Brazilian PMIs saw nice gains while Indonesia pulled itself out of contraction. All of the PMIs were above 50. However, most of the PMIs were lower. The Eurozone PMI fell one point.
The manufacturing PMIs of the Eurozone, Germany, Italy and France all fell while Spain’s PMI rose to 56. European PMIs continue to be at strong levels; all at or above 55.9.
Eurozone (white), German (blue), Italian (green), Spanish (red), and French (yellow) Manufacturing PMIs
Eurozone (white) and Platts TSI North European HRC Index (orange)
The US PMI continues to climb while the German, Japanese and Chinese PMIs all moved lower.
US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
China’s official PMI moved lower while the Caixan PMI gained slightly.
China Official (white) and Caixan (orange) Manufacturing PMIs
The table below shows China’s PMI and subindexes back to February, 2017. The drop in the PMI and new orders subindex was relatively large. The backlog subindex, producer and customers’ inventory subindexes all remain mired in contraction. The producer inventory subindex increased to a smaller contraction at 49.3 vs. 48.8. Despite the weakness, the business expectations subindex rose to 58.2 from 56.8. One caveat to this report is that the Chinese Lunar New Year can lead to unreliable data.
The fall in the new orders subindex doesn’t bode well for Chinese and ASEAN HRC prices.
China New Orders (white), TSI ASEAN HRC Index (red) & Chinese Spot Price (blue)
Inventory subindexes diverged with the producer inventory subindex gaining while the customers’ inventory subindex fell, similar to what those subindexes in the ISM PMI did.
China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)
The Midwest HRC price continues the rally that began more than two years ago in December, 2015 at $365/st with the Platts TSI Midwest HRC Index closing the week up $46.75 to $800/st.
March CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
February flat rolled imports are forecast to fall 135k short tons MoM to 763k and expectations that imports will continue to decline dramatically in response to the threatened 25% tariff on steel.
February tube imports are forecast to fall almost 220k short tons MoM with expectations that imports will continue to decline dramatically in response to the threatened 25% tariff on steel.
February flat and tube imports look to decline 353k short tons or 21% to 1.316m.
Flat Rolled (blue) and Tube (red) Imports
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:
– 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
Downside Risks:
– Political & geopolitical uncertainty (US Government shutdown)
– Stock Market Crash
Midwest HRC futures went vertical last week gaining $45 – $101 depending on the month. March gained $45 to $836, April gained $69 to $871, May gained $73 to $864 and June gained $81 to $858. July gained $98 to $855, August gained $96 to $846 and September gained $103 to $846. Q4 gained $85 to $825 and Q1 2019 gained $95 to $800.
There were huge gains in domestic steel prices, but Asian prices also were up nicely on the week. In fact, every item on the board was higher.
The ASEAN HRC Index jumped nicely last week while the North European HRC Index consolidated its gains.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. Differentials are expanding quickly with the rally in Midwest HRC prices outpacing global prices.
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 $216 or 37% from low to high. If the current rally gains 41%, as it did in the rally started in October 2016, then the index will peak at be $823/st. 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 jumped 6.2% to $800. There were a number of large gains in China, Brazil, East Asia and Mexico.
The US Midwest CRC price gained 4.8% with CRC prices in Brazil up almost 16% and Mexico up 6.7%.
The US Midwest HDG price was up 3.3%. Chinese export HDG gained 3.4% on the week.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate rose to 76.5%, the highest level since 2008.
Raw materials were mostly higher with NOLA pig iron up 24%. Iron ore was down 2-3%.
The April SGX iron ore future settled down $1.67 or 2.2% to $75.65, while the March LME Turkish scrap future gained $4.70 to $382.50.
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 struggling to break above its long-term down trend.
2nd Month SGX Ore Future
Black Sea billet jumped almost 3% and Chinese rebar gained 1.5%. Northwest European rebar fell 2.6%.
In addition to the economic data discussed above was a trio of disappointing residential construction reports. January new home sales at a 593k annualized rate fell from an upwardly revised December of a 643k annualized pace and badly missed expectations of a 647k annualized pace. January pending home sales fell 4.7% MoM and 1.7% YoY. The December Case-Shiller 20 City Home Price Index gained 6.3% YoY, missing expectations of 6.35%.
The January Durable Goods Report saw a worse than expected 3.7% contraction and orders ex-transportation fell 0.3% vs. expectations of a 0.4% gain. Orders for capital goods were also disappointing. See below.
Annualized fourth quarter QoQ GDP of 2.5% was in line with expecataions as was the Core PCE YoY increase of 1.7%.
January’s Durable Goods Orders were up strongly when comparing YoY unadjusted dollar amounts. Primary metals gained 13.35% and fabricated metals gained 11.65%, however some of this gain is due to higher commodity prices.
Inventory in dollar terms was higher across the board both MoM and YoY.
The charts below indexes monthly percentage changes in new orders and inventory (from the Durable Goods Reports) in dollar terms starting at 100 in January, 2017 and then compounding through January, 2018. The charts show that for every category except transportation, growth in new orders has outpaced growth in inventory. This is further confirmation that OEMs have been running their inventory levels at too low too long and are drastically underprepared for the sharp increase in mill lead times that has taken place this year. Further, much of the spike in demand is due to restocking in addition to incrementally improved demand. This has caused a bottleneck resulting in prices becoming secondary to availability.
The S&P 500 sold off 2% last week after President Trump’s announcement of 25% tariffs on steel and 10% on aluminum drove stock market particpants to fear this action could lead to a trade war.
S&P 500
Steel mills were surprisingly mixed with US Steel up 4.3%, but ArcelorMittal down 5%.
US Steel
Service centers were mixed as well.
Olympic Steel
Iron ore miners were mostly lower.
Zinc fell 4.2%, copper was down 3.4% and nickel fell 2.3%.
LME 3 Month Rolling Zinc Future
The US dollar was close to unchanged. The Japanese yen gained 1%, while the Canadian dollar and Mexican peso fell, most likely driven by hawkish trade rhetoric from the president. The British pound and Russian ruble were also down over 1%.
US Dollar Index
Japanese Yen
Mexican Peso
Canadian Dollar
The March WTI crude oil future closed down 3.6% or $2.3/bbl to $61.25/bbl. Crude oil inventory rose 0.7%, but the gasoline inventory level gained 1%, while distillate inventory fell 0.7%. The aggregate inventory statistic gained 0.6%. Crude oil production rose slightly to 10.3m bbl/day. The US rig count added three rigs, but the North American rig count cut one rig. OCTG prices were up 1.5% – 4.7%. The March natural gas future was up 7 cents or 2.7% to $2.70/mbtu, while inventory fell 4.4%.
April WTI Crude Oil Futures and April 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 has been very quiet in recent weeks stuck in the 2.8% – 2.9% range. Rates have been relatively quiet globally.
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
– Post hurricane development and production
– Energy industry rebound
– Graphite Electrode Shortage
– Unexpected inflation
– Weaker dollar
– Flatbed trucking availability/transportation supply constraints
– Section 232 Investigation
– President Trump’s agenda
– Infrastructure bill/long-term solution to highway spending bill
– Unplanned domestic supply side disruptions
Downside Risks:
– 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