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


     -May flat rolled and tube import license data is down significantly MoM 

     -The April MSCI flat rolled daily shipment rate of 117.8 st/day was the highest since 2014 and the second highest since 2008

     -Steel Dynamics agreed to buy CSN’s Terre Haute, IN cold mill and galvanizing line, which will shift the balance in the spot market

     -Crude oil prices remain above $70/bbl while production continues to make new highs and the rig count steadily increases

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

           -25% tariffs on steel

           -Steel tonnage 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:

        –        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

        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 (US Government shutdown)

        –        Stock market crash

        April MSCI flat rolled shipments were down 4k short tons MoM, but with only 20 shipping days in April, the daily shipment rate (D.S.R) vaulted to 117.8 st/d, the highest since April, 2014 and the second highest level since June, 2008. Inventory gained 14k short tons MoM and months-on-hand (M.O.H) was flat at 2.11, however, when adjusted using the D.S.R., M.O.H. fell to 1.92.

        April flat rolled shipments of 2.36m st was down 0.2% MoM, but up 11.6% YoY.

        April flat rolled inventory gained 0.5% MoM and 12.1% YoY.

        April’s D.S.R. of 117.8 st/d was up 9.8% MoM and 6.1% YoY.

        The D.S.R. adjusted M.O.H. fell to 1.92 months, down 8.7% MoM, but up 5.7% YoY.

        April flat rolled M.O.H. was 2.11 vs. 2.1 in March and 2.1 in April, 2017.

        YTD flat rolled shipments of 9.2m st are up 3.1% YoY through April.

        Taking the MSCI flat rolled inventory and shipment data and flat rolled import data, I created the “Mill Fill” Index, which is the plug number for the following equation:

                                                            (April MSCI Inventory – March Inventory)

                                         – April Shipments

            + April Flat rolled Imports

        service center’s domestic purchases

                                                            14,000  i.e. (4,970,300 – 4,956,100)

                                         – 2,356,800

            + 1,284,175__________________         

               1,058,425 = service center’s domestic flat rolled purchases

        The white line is this figure for each month back to January 2014 and the red line is its three month moving average.  The first take away is that there is a decent correlation between the “Mill Fill” and the Midwest HRC Index price.  Second, it provides some another point of view on why there seemed to be a slight softening in mill lead times in April, i.e. increased imports.  When looking at the three month moving average, the increased import levels in March and April look to have weakened demand for steel from domestic mills.  Service centers held their own with flat inventory despite increased imports and flat nominal shipments.  Going forward, decreased imports in May and decreased imports expected throughout Q3 should result in a higher “mill fill” or increased orders for domestic steel mills.

        Mill Fill Index (white) with 3m Moving Average (red) and Platts TSI Midwest Daily HRC Index (green)

        The charts below indexes monthly percentage changes in new orders and inventory (from the Durable Goods Reports) in dollar terms starting at 100 in March, 2017 and then compounding through March, 2018. The charts show that growth in new orders has outpaced growth in inventory in all nine categories.  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.  Those that expect prices to fall in the coming months could be in for a rude awakening as lagged effects of the 232 chaos and frictions and unintended consequences from quotas take hold.

        The May CME HRC future closed the week up $8 to $870/st and the Platts TSI Daily Midwest HRC Index was unchanged at $882/st.

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

        Midwest HRC futures were mixed.  May was up $8 to $872 and June gained $5 to $840.  July was down $7 to $815, while August added $1 to $801 and September added $2 to $790.  Q4 was up $1 to $765 and Q1 2019 was flat at $743. 

        2nd month ferrous futures were mixed WoW with busheling up over 1%, while Turkish scrap was down 1.7% and Aussie coking coal down 2%.

        Domestic flat rolled indices continued to move higher last week, except for the TSI Daily Midwest CRC Index.  Asian indices cooled.  

        The TSI North European HRC Index was flat at $618 and the TSI ASEAN HRC Index dropped $1 to $551/st.

        The AISI capacity utilization rose to 75.9%, but still remains 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 200k short tons to 1.28m. However, May’s forecast is pointing to a sharp drop off of over 500k short tons to 675k.  The May forecast is using data through May 8th and is therefore extremely unreliable*, but the data looks to indicate the sharp increase in imports has ended.

        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 a 280k ton decrease to 523k*.  

        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 890k* short tons to 1.2m*. 

        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 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 $297.75 or 51% 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).  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 one country included in the differentials but not included in the adjusted differentials above is Brazil.  Prior to May 1st, Brazil was exempted from the tariffs and while this issue is still up in the air, Brazilian HRC and CRC still remain under prohibitive anti-dumping and countervailing duties.  The red line adjusts the Brazilian flat rolled price only for the AD/CD duties.  The chart below is somewhat controversial as the duties were enacted before the first date on the chart so adjusting prices might not be accurate.   Currently, the Brazilian export price adjusted for AD/CD duties subtracted from the Platts TSI Midwest HRC price is nonthreatening and there hasn’t been a big jump in Brazilian imports so far this year.

        The SBB Platts’ US Midwest HRC price inched 0.3% higher.  The Russian export HRC price dropped almost 7%.  HRC prices in Brazil and South Europe were also under pressure.

        The US Midwest CRC price was down 0.7% to $1,012.  Russian CRC was down 4.5%.  HRC prices in South Europe and China were down over 1%.

        The US Midwest HDG price was unchanged at $1,114/st.  HDG prices in South Europe and the Middle East were down over 1%.  

        The Baltic Dry Index continued higher gaining 6.4%.  Iron ore and coking coal also saw gains on the week.   Scrap prices were mostly higher.

        The June SGX iron ore future gained $0.21 or 0.3% to $67.21, while the June LME Turkish scrap future fell $6 or 1.7% to $350.

        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 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 October Chinese rebar futures gained 1.1%.

         The April Producer Price Index Ex-Food and Energy increased 2/3% YoY, missing expectations of a 2.4% increase. The April Consumer Price Index Ex-Food and Energy rose 2.1% YoY, missing expectations of a 2.2% gain.

        The April NFIB Small Business Optimism Index rose to 104.8 and beat expectations.  The preliminary May University of Michigan Sentiment Index was flat at 98.8, but beat expectations.

        The S&P 500 gained 2.5% last week to 2,729.  The China CSI 300 gained 3%.  The Nikkei and Euronext gained about 1%.

        S&P 500

        Steel mills were mostly higher.

        Steel Dynamics

        Service centers were mostly higher. 

        Worthington Industries

        Iron ore miners were higher.

        The base metals market calmed down with zinc gaining over 1% and nickel falling 1%.

        LME 3 Month Rolling ZInc Future

        LME 3 Month Rolling Nickel Future

        The rally in the US dollar took a break last week with currencies relatively quiet.  Only the Turkish lira and Brazilian real, both down 2% moved more than 1%.

        US Dollar Index

        Turkish Lira

        Brazilian Real

        The June WTI crude oil future continued higher gaining another $0.98 or 1.4% to $70.70/bbl.  Crude oil inventory fell 0.5%, distillate inventory fell 3.2% and gasoline inventory fell 0.9%.  The aggregate inventory level was down 1%.  Crude oil production increased 0.8% to 10.7m bbl/day, another new all-time record high.  The US rig count added thirteen rigs and the North American rig count added six.  OCTG prices were unchanged.  The June natural gas future was up ten cents to $2.81/mbtu while inventory rose 6.6%.

        June WTI Crude Oil Futures and June 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 gained two basis points to 2.97%.  The US 5 year Treasury yield gained five basis points to 2.84%, further flattening the yield curve.  Globally, ten year rates were mostly higher.   

        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