Last Thursday, President Trump officially announced 25% tariffs on steel imports and 10% on aluminum imports effective March 23, 2018.  Canada and Mexico were exempted from the tariffs.  Still, there is significant uncertainty in the market as the tariffs include a process for countries to appeal for exemption.  While unofficial, tweets by President Trump and Australian Prime Minister Turnbull indicate Australia will be granted an exemption.  Also adding to the uncertainty will be the effect of legal disputes from the World Trade Organization and retaliation by other countries imposing tariffs on US exports.

What we do know is exempting Canada, Mexico and Australia brings back over 55% of last years HR imports, 31% of CR imports and 27% of HDG imports for a total of 3.4m tons.  That leaves a hole in the supply of these three products of approximately 7.2m tons.

The table on the left breaks down 2017 imports from Australia, Canada and Mexico.  The table on the right looks at the 2017 import tonnage of key US allies Korea, Japan and Taiwan, which accounted for 19%, 9% and 25% of 2017 HR, CR and HDG imports, respectively.

If these three allies were also given full exemptions, these six countries would account for 74% of HR, 40% of CR and 52.5% of HDG.  If all of this were to happen,  the shortfall based on 2017 import data would be a combined 4.8m HR,CR and HDG short tons.

Last Wednesday, U.S. Steel announced it would restart two blast furnaces at Granite City Works later this year. Granite City Work’s capacity is 2.8 million short tons, which will help to mitigate the shortage.  Assuming no more exclusions are granted, the current short fall (based on 2017 imports) is approximately 4.4m HR,CR and HDG short tons.  If Korea, Japan and Taiwan happen to be excluded from the tariffs, now the shortfall slips to 2.4m.   

Exemptions and additional mill restarts, with AK Steel Ashland the most likely, will lessen the blow to domestic steel consumers.  Restarting Ashland could take the import shortfall down to two million tons or zero if the three Asian countries above are excluded.

However, in the short term, the OEM collective has been caught totally offguard with inventory levels too low according to multiple economic reports.   Availability has become critical as the threat of running out of steel and having to shutdown has become a reality for some. The tariffs have created a shock to the system; driving demand even higher as buyers have to not only replenish tons, but also have to build inventory to adapt to extended lead times causing a positive feedback loop.

Last Tuesday night, Gary Cohn’s resignation signaled that the tariffs were a reality.   Futures rallied sharply overnight with the April future trading as high as $905 and May as high as $898.  On Wednesday morning, US Steel’s announcement to reopen Granite City Works combined with a weaker than expected CRU index print squashed the rally with prices trading back down $30-$40/st.  It will be interesting to see if this was the top of the futures market as intraday reversals such as this one sometimes indicate rally exhaustion.  There’s no doubt the market will adjust and adapt and the more time that goes by, the more likely the supply issues will be resolved and prices will normalize.  However, in the short term, the market is in very treacherous  territory indeed.  Prices could be at $750 or $1,050 in a very short period. 

The chart below is of the rolling 2nd month CME Midwest HRC future.  The April future (HRC2) was up $4 to $875/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 $49.50 to $849.50/st.

April CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)


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

–        Falling iron ore prices

–        232 exclusions

–        Higher domestic prices

–        Domestic mill reopening

February flat rolled imports are forecast to fall 108k short tons to 790k while the first forecast for March shows a sequential drop of 228k short tons to 562k.  Keep in mind the early forecasts are unreliable and tend to rise as the month goes on.

February tube imports are forecast to fall almost 229k short tons to 543k while the first forecast for March shows a sequential drop of 146k short tons to 397k.   

Combined flat rolled and tube imports are forecast to fall from 1.67m in January to 1.3m in February to 959k in March.

Flat Rolled (blue) and Tube (red) Imports

Midwest HRC futures were tame following the previous week’s massive rally.  March fell $16 to $820, April gained $4 to $875, May gained $1 to $865 and June gained $2 to $860.  July gained $5 to $860, August gained $9 to $855 and September gained $4 to $850.  Q4 gained $20 to $845 and Q1 2019 gained $40 to $840.

It was another week of strong gains in domestic flat rolled indexes.

The ASEAN HRC Index came off recent highs while the North European HRC Index remains flat.

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 $265.75 or 45.5% 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 jumped 6.2% to $850.  European HRC prices saw gains along with Middle East import, while Chinese domestic HRC was down 5%.

The US Midwest CRC price gained 2%. Cold rolled prices were up in North and South Europe as well as Chinese and Russian tons for export.  Chinese domestic cold rolled fell 1.2%.

The US Midwest HDG price was up 4% breaking above $1000/st.  South European HDG gained 1.8% while Middle East Import gained 3.25%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rate continues to power higher now at 78.7%.

Raw materials were mixed with scrap mostly higher and iron ore down 8.5% – 9.5% on the week.

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

US plate jumped 4.6% while the May Chinese rebar future fell 6.2%.

January U.S. factory orders were down 1.4% MoM, in line with expectations.  When removing transportation orders, factory orders rose 0.4%, which means transportation orders were down 1.8% MoM.    

US Monthly Auto Sales 3-Month Moving Average

Weakness in automotive demand bears paying attention to, but these next two charts may temper concerns. 

First, employment remains strong.  The February U.S. Employment Report saw a gain of 313k jobs, crushing expectations of 205k with January payrolls revised higher by 39k jobs.  Manufacturing payrolls also beat expectations gaining 31k jobs and January was revised higher to 25k from 15k.  The unemployment rate was 4.1%.  This chart of the inverted unemployment rate and auto sales SAAR shows the two are well correlated through time, but are currently diverging.  If employment stays strong, auto sales should improve.

February US Auto Sales (white) and the Inverted Unemployment Rate (orange)

This next chart shows the seasonality of monthly US auto sales.  The first takeaway is that 2018 auto sales aren’t that far below those seen in 2016 and 2017.  Also, January and February sales are the lowest months of the year.

US Monthly Auto Sales

The February employment report also showed wage growth slowing, but an uptick in the labor participation rate. 

The February ISM Non-Manufacturing Index was down 0.4 to a very strong 59.5 and beat expectations of 59. The chart below adds the ISM Manufacturing Index to the ISM Non-Manufacturing Index.  The sum of the two indexes is at the second highest level since the inception of the Non-Manufacturing index in 1997.

The S&P 500 gained 3.5% last week with stock markets in China, Europe and Japan also posting solid gains.

S&P 500

Steel mills were lower despite higher index prices and the official tariff announcement.

AK Steel

Service centers were mixed.

Olympic Steel

Iron ore miners were mixed.

Base metals were mixed with nickel gaining 3%, while zinc fell 2.3%.

LME 3 Month Rolling Nickel Future

LME 3 Month Rolling Zinc Future

The US dollar was close to unchanged.  The Japanese yen fell 1%, while the Mexican peso gained 1.1%.  The Korean won and Australian dollar both gained almost 1%.  

US Dollar Index

Japanese Yen

Mexican Peso

The April WTI crude oil future gained 1.3% or $0.8 to $62.04/bbl.  Crude oil inventory rose 0.6%, but the distillate and gasoline inventory levels fell marginally.  The aggregate inventory level was close to unchanged.  Crude oil production rose 0.8% to 10.37m bbl/day.  The US rig count added three rigs, but the North American rig count cut twenty six rigs.  OCTG prices were unchanged.  The April natural gas future was up four cents or 1.4% to $2.73/mbtu, while inventory fell 3.4%.

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

–        Falling iron ore 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