Below are the latest developments in the steel industry and they are all bullish:


–     May flat rolled, tube and slab import license data is forecasting a significant MoM decrease

–     NLMK PA hot-strip mill down for two weeks

–     Fire damages AK Steel Middletown temper mill; repairs estimated at four weeks

–     Crude oil prices remain above $70/bbl while production continues to make new highs and the rig count steadily increases.  2018 pipe and tube demand expected to

increase sharply.

The following issues are the foundation of our current bullish view:

–     Steel tariffs and quotas

–     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:

–        Sharp drop in steel imports

–        Increased risk of domestic supply disruption

–        Section 232 tariffs and quotas restricting supply

–        Chronically low inventory levels

–        USW September contract negotiations

Downside Risks:

–        232 exclusions

–        Higher dollar

–        Higher oil prices slowing growth

–        Higher interest rates slowing growth

–        Higher domestic prices

–        Domestic mill reopening

–        Falling iron ore and scrap prices

–        Political & geopolitical uncertainty  

–        Stock market crash

The May CME HRC future closed the week up $10 to $880/st and the Platts TSI Daily Midwest HRC Index gained $8.50 to $890/st.

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

Midwest HRC futures saw significant gains as the volatility seen in February and March returned.  May was up $10 to $880 and June gained $37 to $877.  July and August both gained $38 to $853 and $839, respectively.  September gained $31 to $821.  October gained $42 to $812, November gained $40 to $805 and December gained $52 to $800.  Q1 2019 gained $31 to $774.   

2nd month ferrous futures were mixed WoW with Midwest HRC up 4.4%, Nasdaq shred up 2.9% and no. 1 busheling gaining 2.6%.  Chinese rebar was down 4.8%, LME rebar was down 1.8% and LME Turkish scrap was down 1.7%.

Domestic HRC indices continued to move higher last week gaining almost 1%. European and Black Sea HRC prices were down around 2%.  

The TSI North European HRC Index was down $3/t to €567.50/t, but in dollar terms was down $12/st $606/st. The TSI ASEAN HRC Index was unchanged at $551/st.

The AISI capacity utilization rate fell to 74.5% remaining far below the D.O.C.’s 80% target. 

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

April’s flat rolled import licenses are forecasting another sizable increase of 230k short tons to 1.29m. However, May’s forecast is pointing to a sharp drop off of 377k short tons to 913k.   

April tube license data is indicating a sequential MoM increase of 130k short tons to 803k. However, similar to flat rolled, the May tube license forecast is pointing to an almost 130k ton decrease to 678k.  

April combined flat rolled and tube imports are forecast to reach above the highs of last summer to 2.09m short tons, but May is forecast to drop 500k short tons to 1.59m. 

Flat Rolled (blue) and Tube (red) Imports

Galvalume imports spiked in April to 132k st, but look to retreat back to 57k in May. The red line in the chart below is the three month moving average, which is heading back lower in May. 

Galvalume Imports (blue) w/ 3 Mo. Moving Average (red)

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 paragraph 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 $306.25 or 52.5% 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 print above $920/st.

Platts TSI Daily HRC Price

Tariff adjusted differentials have been and remain unattractive which should result in a sharp drop in imports throughout the third quarter.  The following charts compare the normal differentials from above with the tariff adjusted differentials i.e. Midwest HRC – (1.25 x China Export).  Applicable AD/CV duties have also been added except for Chinese HRC and CRC since they those duties are so excessive it is pointless to include them.  However, since Chinese prices dictate Asian prices, it is still a reliable proxy to better understand global pricing. 

None of the current differentials are at threatening levels when taking the current tariff adjusted differentials in red and comparing that to where it would be on their historical (blue) charts.  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 from where the supply needed to drive down domestic lead times will come from.  Pay close attention to global pricing as it could be an indication of when prices in the US will adjust lower, but remember to add a few months due to the lag effect. 

The bottom line is there doesn’t look to be a supply solution from the import front after we get past this current wave of imports from deals made in late 2017.  In fact, supply looks to tighten further over the next few months.

The SBB Platts’ US Midwest HRC price gained 1%.  European prices were under pressure with the euro weakening further.  Turkish Export HRC fell 4.5%. Brazilian domestic HRC was down 2.7%.

The US Midwest CRC price was close to unchanged.  Brazilian domestic CRC dropped 1.25%.

The US Midwest HDG price was unchanged at $1,114/st.  Brazilian and North European HDG saw prices fall over 1%.  

Brazilian and US pig iron prices rose over 1%, while Turkish and European scrap prices were down 3-4%. 

The June SGX iron ore future fell $0.35 or 0.5% to $66.86, while the June LME Turkish scrap future fell $6 or 1.7% to $344.

The backwardated SGX iron ore futures curve is up $3 MoM maintaining its shape.

The chart below shows the 2nd month SGX iron ore finding support at the uptrend that started 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

Black Sea billet gained 2% and the October Chinese rebar future gained 1.1%.

The May Empire Manufacturing Report rose to 20.1 and beat expectations.  The May Philadelphia Fed Business Outlook also rose and beat expectations at 34.4. U.S. industrial production rose 0.7% MoM in April and March was revised slightly higher. Capacity utilization rose to 78%, but missed expectations.

U.S. housing starts were down 3.7% in April from an upwardly revised March annualized rate. Building permits saw a similar result, however April permits were slighlty better than expected. The May NAHB Housing Market Index rose to 70 and beat expectations.

The S&P 500 shed 0.6% and global stock markets were mixed with relatively little movement.

S&P 500

Steel mills were mostly higher.

Steel Dynamics

Service centers saw solid gains.

Northwest Pipe & Tube

Iron ore miners were mostly higher.

In the LME base metals market 3 mo. nickel gained 6.3%, while 3 mo. aluminum fell 4.2%.

LME 3 Month Rolling Nickel Future

LME 3 Month Rolling Aluminum Future

The rally in the US dollar resumed gaining 1.2 %, while the euro and yen both fell over 1.25%. The Turkish lira is in free fall down 4.1% on the week.  The Brazilian real, Mexican peso and Indian rupee were also under pressure.  Since March, the Brazilian real and Turkish lira have seen significant depreciation versus the U.S. dollar.

US Dollar Index


Japanese Yen

Turkish Lira

Brazilian Real

The June WTI crude oil future continued gained $0.58 or 0.8% to $71.28/bbl.  Crude oil inventory fell 0.3%, distillate inventory fell 0.1% and gasoline inventory fell 1.6%.  The aggregate inventory level was down 0.7%.  Crude oil production increased 0.2% to 10.72m bbl/day, another new all-time record high.  The US rig count added one rig and the North American rig count added five.  OCTG prices were unchanged.  The June natural gas future was up four cents to $2.85/mbtu in spite of a 7.4% rise in inventory.

July WTI Crude Oil Futures and July 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 ten year Treasury yield rose above 3% to close at 3.06%.  The US five and two year Treasury yields gained also, but by less than the ten year slightly steepening the yield curve.  Globally, ten year rates were mostly higher with Spanish and Italian rates moving up sharply.   

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:

–        Potential Russian sanctions cutting off Russian steel

–        Chronically low inventory levels/domestic or global restocking

–        Increased risk of domestic supply disruption

–        Section 232 tariffs and quotas restricting supply

–        Sharp drop in steel imports

–        China strict steel capacity cuts/China getting serious about curtailing steel production

–        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:

–        232 exclusions

–        Higher domestic prices

–        Domestic mill reopening

–        Falling iron ore and scrap prices

–        Political & geopolitical uncertainty (US Government shutdown)

–        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