March’s ISM Manufacturing PMI fell 0.5 to 57.2, in line with expectations.
ISM Manufacturing PMI and TSI Daily Midwest HRC Index
Breaking the index down, you will see new orders remains rock solid at 64.5 and backlog gained 0.5 to 57.5.
ISM Manufacturing PMI New Orders (White) and Backlog (Orange)
If you have been reading the past few first reports of the month this year, the difference between new orders and backlogs being too wide was highlighted and predicted to converge. The spread gained 1.1 points to -7 with both new orders and backlogs is solid territory.
ISM Manufacturing PMI New Orders Minus ISM Backlog
Prices gained to 2.5 to 70.5, the highest level since 2011. What does that portend about inflation?
ISM Manufacturing PMI Prices Sub-index and TSI Daily Midwest HRC Index
Exports increased 4 points after the US Dollar Index fell from 102 to 100. Employment jumped 4.7 to 58.9. Production was the one area that slipped noticeably.
With demand strength across the most steel intensive industries, consistently strong economic data and a significant decrease in flat rolled imports, the manufacturing supply chain still continues to lighten up on inventory. Producer inventory slipped back below 50 into contraction along with customers’ inventories.
ISM Manufacturing PMI Business (White) and Customer Inventories (Orange)
The table below breaks down the ISM Manufacturing PMI over the past 12 months. Pay particular attention to inventories, customer inventories and backlog of orders.
Below are charts of the ISM Manufacturing and the six regional manufacturing indexes. The chart on the left normalizes each chart starting at 100 while the chart on the right shows their actual prints.
ISM Manufacturing PMI and Regional PMIs
The table below is the same data as above. What’s most interesting in the YoY percentage change.
March US Total Vehicle Sales missed badly at an annualized rate of 16.53m, down from an annualized 17.47m rate last month. This news comes shortly after a sharp drop in used car prices and increasing dealer incentives.
US Auto Sales
While this report might be a bad sign of things to come, alarm bells may need not be rung just yet, especially with conitnued strength in employment. YTD sales are only off 1.4% or 58,308 units vs. the first three months of 2016. Annualized, that is 233k units.
The daily sales rate was down 3.6% MoM and 1.6% YoY, however MoM sales were up 221k units with the caveat that March had 23 days vs. 19 in February.
Monthly US Auto Sales (NSA)
This resulted in dealer inventory falling 2 days to 72.
US Construction Spending continues on its seven year uptrend. Seasonally adjusted February spending gained 0.8% MoM, missing the 1.0% estimate while January’s data was revised 0.6% higher to -0.4% from -1.0%. YTD unadjusted data is up 3.66% with private non-residential up 7%, private residential up 5.7% and total residential up 5.53%. YTD, total non-residential is up 1.38%, still bogged down by weak government spending. Fiscal infrastructure stimulus would really boost this space.
February Construction Put In Place
Two big takeaways from the March manufacturing PMIs include strengthening European manufacturers and a broad based global uptrend in PMIs.
Eurozone (White), German (Blue), Italian (Green), French (Yellow) and Spanish (Red) Manufacturing PMIs
US (White), German (Blue), Chinese (Red) and Japanese (Green) Manufacturing PMIs
China Official (White) and Caixan (Orange) Manufacturing PMIs
China’s economic health was a major concern in early 2016. China’s economy looks to be much healthier now. While Chinese steel prices have fallen noticeable (HRC prices were down almost 12% in March), Chinese economic data has been impressive.
Five year credit default swaps on Chinese government debt have fallen 50% YoY to $81k from $120k and got as high as 150k in mid-February 2016. To be clear, the cost of insuring a default on $10m worth of Chinese government bonds has fallen to $82k per year from $120k.
Chinese Five Year Credit Default Swaps
The People’s Bank of China has pumped up their balance sheet significantly.
China Central Bank Balance Sheet Assets
Fixed asset investment has increased slightly.
China Fixed Asset Investment
Capital flowed INTO China for the first time since the middle of 2014.
China Capital Flow Tracker
China’s banking system has seen a massive amount of funds pumped into it since January 2016.
China All System Financing Aggregate
The Li Keqiang Index created by The Economist to measure China’s economy uses China’s Premier Li’s three preferred economic indicators (new yuan loans, railway volume and electricity consumption) as a better indicator than the official GDP statisticis and it is on a tear.
Li Keqiang Index
The Baltic Dry Index, a composite of freight rates for Baltic Capesize, Panamax, Handysize and Supramax just made new multi-year highs.
Baltic Dry Index
China continues to increase short term interest rates, a sign the government is not only comfortable with economic growth, but is also dovishly trying to calm heated tier 1 property markets.
Shibor (Chinese Interbank Overnight Rate) 5-Day Average
Domestic flat rolled prices continued higher while Chinese and ASEAN prices fell.
The TSI North European HRC index remains range bound while the TSI ASEAN HRC Index moved lower.
CME Midwest HRC futures got hammered last week. March futures settled at $636. April was down $15 to $630, May fell $15 to $620 and June fell $23 to $610. Q3 and Q4 were under major pressure offered as low as $580.
The TSI Daily Midwest HRC Index gained $6/st to $660, $30 above April HRC futures at $630/st.
April CME HRC Futures vs. TSI Daily Midwest HRC Price
Official February flat rolled import data fell almost 170k short tons to 829k MoM. HRC imports fell 45k tons to 112k, the lowest since at least July, 2012 (FGM’s first data point). Tube imports increased 50k tons to 533k.
The March flat rolled import license forecast continues to remain subdued.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
AISI data continued to fall again last week. There seems to be a serious standoff between the OEMs and mills.
Coking coal gained after Cyclone Debbie slammed into Northeast Australia on March 27th.
SBB Premium Hard Coking Coal Australian Export
Scrap was mixed with East Coast shred, Turkish HMS and Rotterdam HMS gaining while Midwest shred fell 6% and Turkish scrap fell 4%. Iron ore was down with the IODEX giving back 5.2% falling to $79.30. SGX 3 month iron ore futures fell 4.25% to $76.40.
The iron ore curve shifted lower remaining steeply backwardated through 2018.
Chinese, NW European and Turkish rebar prices fell 1.5-2%.
The January Case-Shiller 20 City Home Price Index increased to gain 5.7% YoY. The Architectural Billings Index moved back to growth at 50.7. Existing home sales fell to a 5.48m SAAR. The February Core PCE Price Index of 1.8% beat expectations while January’s index was revised 0.1% higher to 1.8%.
The March Conf. Board Consumer Confidence Index exploded to 125.6 while January’s index was revised higher to 116.1. The University of Michigan Consumer Sentiment Survey at 96.9 was up MoM.
The S&P was up slightly. The Euronext gained 1.7%. China’s CSI 300 fell almost 1% while the Shanghai Property Index fell 2.25%. Japan’s Nikkei index fell almost 1% as well.
Steel related stocks were mixed with Commercial Metals and Schnitzer Steel clocking big gains and Worthington’s stock slammed after they announced disappointing earnings.
Schnitzer Steel
Iron ore miners were quiet.
Nickel and aluminum gained over 1%. Aluminum has put together a very nice bull run now just below $2000/mt. Zinc fell 2%.
LME Nickel
LME Aluminum
LME Zinc
The dollar index rebounded back above 100 with the Euro giving up 1.25% as uncertainty around the French election weighs on sentiment. The Russian ruble gained 1.21%.
US Dollar Index
Euro
Crude oil prices rebounded $2.63 or 5.5% to $50.60 while natural gas added 3.71% to $3.19/mbtu. The US rig count gained 15 rigs and production increased slightly. Crude oil inventory was up slightly, but the aggregate crude oil, distillate and gasoline inventory fell almost 0.6%.
May WTI Crude Oil Futures
Aggregate Energy Inventory (Blue) 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
D.O.E. Crude Oil Production
D.O.E. Crude Oil Production Perspective (1984 – Present)
The US 10-year Treasury was quiet while German 10-year rate fell 18.5% to 0.33% in a flight to quality.
U.S. 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. Upside risks look to be in charge.
Upside Risks:
– China pumping up its “old economy”
– Energy industry rebound
– Border adjustment tax
– Big rally triggered by price increases/low inventory/restocking
– President Trump’s agenda
– Infrastructure bill/long-term solution to highway spending bill
– China getting serious about curtailing steel production
– Transportation supply constraints
– Essar labor issues
– Post-election economic pick up
– Massive restocking (domestic and/or global)
– Unplanned domestic supply side disruptions
Downside Risks:
– Political uncertainty – Reflation trade reversing
– Increasing oil and iron ore inventory levels
– Automotive industry under pressure
– 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
– Rebound in import volumes
– Increasing import differentials
– Resumption of US dollar rally/currency issues/sovereign default
– U.S. (manufacturing) recession
– Falling ferrous raw materials and global finished steel prices
– Economic downturn, especially in China or Europe reverberating to U.S.A.
– Weak demand in housing or automotive