Midwest HRC prices have settled down in the $850 to $900/st range. This week, the ISM Manufacturing Index was released falling 1.5 points, but remaining at a very healthy 59.1. Auto sales were better than expected and construction spending continues to increase YoY. The AISI Capacity Utilization Rate was down slightly to 77.4%, but remains in very strong territory. March flat rolled imports are trending to be up above 1m short tons, but much of that increase could hav e been a rush to import tons ahead of the 25% steel tariff. We expect imports to decrease significant in the coming months.
Globally, PMIs in Europe fell, but China’s official PMI improved, most notably a nice jump was seen in China’s new orders index. Raw material prices remain under pressure.
A steel shortage or tight market remains the most likely short-term outcome and the latest data confirms manufacturers and service centers continue to have inventory levels that are too low for current market conditions and lead times. Domestic mills have not pushed prices up further, which continues to keep import prices at economically attractive levels when the 25% tariff is taken into consideration. See page 21 – 22 for a detailed analysis of tariff adjusted import differentials.
Imports can act as a release valve for a supply constrained domestic market, but considering the import levels are unattractive today and that when and if they become attractive, it will still be a number of months before those tons arrive, there doesn’t look to be an relief for buyers over the next few months. In fact, supply is more likely to tighten further as the remaining inventories are depleted.
One dynamic that will be revisited is the developments in the CRC and HDG markets specifically if the conversion costs continue to expand. If they do, that could further tighten the HRC market as mills will take HRC tons off the spot market to use as substrate.
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 March ISM Manufacturing PMI fell 1.5 points to 59.3 and missed estimates of 59.6.
ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)
The ISM PMI six month moving average slipped slightly to 59.3, which are at very high historical levels.
ISM Manufacturing PMI Six Month Moving Average (white) & Platts TSI Midwest HRC Index
The new orders, employment and new export orders subindexes saw meaningful drops while the prices subindex gained almost 4 points to 78.1.
March ISM Manufacturing PMI
The new orders subindex slipped to 61.9 and the backlog subindex was flat at 59.8; both very strong levels. The relationship between the two is watched consistently in this report. The new orders subindex is now 2.1 points above the backlog subindex. Looking back at these two indexes since January, 2017 when the differential expanded to over 10 points, the consistent strength in new orders eventually pulled the backlog higher.
ISM Manufacturing PMI New Orders (white) and Backlog (orange)
The chart below adds the new orders and backlog subindexes to show the combination is at historically high levels.
ISM Manufacturing PMI New Orders Plus Backlog
March’s producer inventory subindex was down 1.2 to 55.5 while the customers’ inventory subindex was down 1.7 at 42, continuing to stay at excessively low levels. The ISM PMI, MSCI inventory data and durable goods inventory data have consistently shown OEMs and service centers have been extremely vulnerable to any shock to production lead times. As lead times exploded, steel buyers were forced to buy for both demand and restocking purposes. This month’s customers’ inventory subindex indicates there is continued restocking to go and demand will continue to remain strong.
ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)
The March ISM prices subindex rose 3.9 points to 78.1, the highest level since April, 2011.
ISM Manufacturing PMI Prices (white) & Platts TSI Daily Midwest HRC Index (orange)
The average of the ISM PMI for the first quarter was 59.73, which was the third highest behind the first and second quarter of 2004. All of the subindexes are in healthy levels without one below 55, except the customers’ inventories, which again is a bullish statistic. This from the ISM PMI report:
The regional reports below were mostly lower with the Empire Manufacturing Index the only one with a gain.
March US auto sales SAAR of 17.4m was up from 16.96m in February and beat expectations of 16.9m SAAR.
March US Auto Sales SAAR
Employment remains very strong and should pull auto sales higher in the coming months.
March US Auto Sales (white) and the Inverted Unemployment Rate (orange)
1.65m motor vehicles were sold in March, which was up 27.4% MoM and 6% YoY.
US Monthly Auto Sales
The US auto sales three month moving average rose 1.3% MoM and 1.9% YoY to 1.36m units.
US Monthly Auto Sales Three Month Moving Average
February construction seasonally adjusted spending gained 0.1% MoM, missing expectations of a 0.4% gain. Seasonally adjusted spending was up 3% YoY.
February US Construction Spending
Unadjusted February construction spending was up 0.3% MoM and 3.7% YoY. Year-to-date (YTD) spending is up 4.4% YoY.
Unadjusted February private spending was up 0.9% MoM and 3.7% YoY. Year to date (YTD) spending is up 3.7% YoY.
Unadjusted February private residential construction spending was up 0.75% MoM and 6.1% YoY. YTD spending is up 6.8% YoY.
Unadjusted February private nonresidential construction spending was up 1.0% MoM and 1.3% YoY. Year to date (YTD) spending is up 0.6% YoY.
The next two charts compare the seasonality in residential and nonresidential construction spending simply showing that spending typically ramps up and stays elevated through October.
US Nonresidential Construction Spending
US Residential Construction Spending
The majority of manufacturing PMIs moved lower globally with the JP Morgan Global Manufacturing PMI down 0.2 points to 54.2. Europe saw broad downward pressure, however the official Chinese PMI gained 1.2 points to 51.5 and Australia’s PMI jumped almost 10% to 63.1.
European manufacturing PMIs all turned lower in March, perhaps a concerning development.
Eurozone (white), German (blue), Italian (green), Spanish (red), and French (yellow) Manufacturing PMIs
The downturn in the Eurozone PMI could be a bad sign for the European HRC price.
Eurozone (white) and Platts TSI North European HRC Index (orange)
Manufacturing PMIs in the US, Germany and Japan were all lower, while China’s official PMI rose.
US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
China’s official PMI rose, but the Caixan Manufacturing PMI fell 0.6 to 51.
China Official (white) and Caixan (orange) Manufacturing PMIs
Every subindex in the official Chinese PMI was higher in February (except input prices which was flat) with the new orders subindex rising to 53.3, an indication of higher Chinese flat rolled prices to come. The new export orders and imports subindexes rose back above 50.
China New Orders (white), TSI ASEAN HRC Index (red) & Chinese Spot Price (blue)
Both inventory subindexes moved higher, although are still below fifty, indicating the rate of destocking is slowing materially.
China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)
April CME HRC futures closed the week up $28 at $859/st while the Platts TSI Daily Midwest HRC Index gained almost $17 WoW to $870/st.
April CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
Midwest HRC futures were mixed last week. March settled at $830/st for the month gaining $90 vs. February’s future settlement of $740/st. April gained $28 to $859, May gained $17 to $841 and June added $3 to $817. July dropped $5 to $795 and August lost $10 to $790, while September added $6 to $785. Q4 gained $1 to $776 and Q1 2019 shed $5 to $755.
It was another week of gains in domestic flat rolled indexes.
The ASEAN HRC Index added back the $5 it lost last week, while the North European HRC Index continues to flounder.
The AISI capacity utilization continues to be strong at 77.4%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Final February flat rolled imports shed 108k short tons MoM to 790k, while March is forecasting a large gain back above 1m short tons.
Final February tube imports fell 229 short tons to 542k while the March forecast is indicating a rebound of 176k short tons to 719k.
Combined flat rolled and tube imports are forecast to jump back up perhaps as low cost deals from months ago arrive with some beating the tariff deadline and others priced at a enough of a discount to domestic spot prices even inclusive of the tariff.
Flat Rolled (blue) and Tube (red) Imports
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 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 has rallied $286 or 49% 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
Again, differentials are making new highs in HRC pricing and reaching toward previous highs in CRC while March import licenses jumped significantly, however, this data might be misleading. First, this increase in March imports is most likely a response to have rushed tons in before the March 23rd tariff deadline. Also, imports ordered months ago are still at a good relative value even with the tariff added due to the spike in domestic HRC prices, especially considering the complications with availability and domestic mill lead times.
However, going forward, the tariff adjusted differentials are rather unattractive. The following charts compare the normal differentials from above with the tariff adjusted differentials i.e. Midwest HRC – (1.25 x China Export). Taking the current tariff adjusted differentials in red and comparing them on their historical charts, none of the current differential are at threatening levels. 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 become attractive, it is hard to see where the supply needed to drive down domestic lead times will come from. Paying close attention to the global pricing could be an indication of when prices in the US will adjust lower, but remember to add a few months. The bottom line is there doesn’t look to be any end in sight from the import front. In fact, supply looks to tighten further over the next few months.
SBB Platts’ US Midwest HRC price inched gained 2% to $870. China’s domestic HRC price gained 2.2%.
The US Midwest CRC price gained 0.6% to $997. Chinese domestic CRC fell 3.2%.
The US Midwest HDG price was up almost 1% to $1083 (including zinc extra).
Raw materials were mixed with Australian coking coal moving the most falling 3.7%.
The April SGX iron ore future settled up $1.16 or 1.82% to $64.86 while the April LME Turkish scrap future fell $10 to $352.
The backwardated SGX iron ore futures curve continues to be under pressure in the past month, but has maintained its shape.
The chart below shows the 2nd month SGX iron ore failing to break above its long-term down trend and now testing the uptrend that started in in December, 2015. 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
May Chinese rebar futures jumped last week gaining almost 8% while Turkish rebar fell 2.2% and Black Sea billet fell 2.8%.
The January Case-Shiller 20-City Home Price Index was better than expected rising 6.4% YoY. February pending home sales gained 3.1% MoM, beating expectations of a 2% gain. However, unadjusted pending home sales fell 4.4% YoY.
Fourth quarter US GDP was adjusted higher to an annualized rate of 2.9%. The February Core PCE Index rose 1.6%, in line with expectations. The March final University of Michigan Consumer Sentiment Index fell slightly to 101.4 from 102.
The S&P 500 continues to be volatile gaining 1.7% on the week. The Nikkei rose a whopping 6.5% and all the markets above saw gains.
S&P 500
Steel mills rebounded nicely.
Posco
Service centers were mixed, however the flat rolled focused service centers were all up nicely.
Worthington Industries
Iron ore miners were all higher.
Nickel, zinc and copper gained, while aluminum was down.
LME 3 Month Rolling Nickel Future
LME 3 Month Rolling Aluminum Future
The US dollar rose 0.6% while remaining in its multi-month range bound slumber. The yen fell 1.4% while the Mexican peso gained 2% and the Korean won rose 1.7%.
US Dollar Index
Japanese Yen
Mexican Peso
Korean Won
The May WTI crude oil future also continues to be range bound falling 1.4% or $0.94 to $64.94/bbl. Crude oil inventory rose 0.4%, but the distillate and gasoline inventory levels fell 1.6% and 1.4%, respectively. The aggregate inventory level fell 0.5%. Crude oil production rose 0.25% to 10.43m bbl/day; another new all-time record. The US rig count cut two rigs and the North American rig count cut 29 rigs. OCTG prices were unchanged. The May natural gas future fell rose 10 cents or 3.8% to $2.73/mbtu, while inventory fell 4.4%.
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 broke lower falling 2.7% to 2.74 and breaking below the 2.8% – 2.9% range it had maintained for the past two months. The German 10 year fell three basis points to 0.5%. The Ted Spread rose to 61.17, its highest level since the financial crisis.
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