According to October MSCI flat rolled data, service centers shipped at a 104.6k st/day daily shipment rate (DSR), up 3.4% MoM.  October shipments of 2.3m st was up 277k MoM or 13.7% with 22 shipping days in October versus 20 in September.  Inventory fell 71k st or 1.4% in October to 4.85m.  Months-on-hand (MOH) fell to 2.11 from 2.43 in September. MOH DSR adjusted fell to 2.11 from 2.21 in September.

October flat rolled shipments were up 9.61% YoY with 22 days in 2017 vs. 21 days in 2016.

The October flat rolled DSR was up 4.6% YoY.

October flat rolled inventory was up 4.16% YoY.

October flat rolled DSR adjusted MOH was down 0.4% YoY.

October flat rolled MOH of 2.11 was down 5% YoY.

Through October, YTD flat rolled shipments are up 2.63% YoY to 22.2m short tons.

The Midwest HRC price continues the rally that began in December, 2015 at $365/st.  After correcting 10% from the $660 high set on March 20th, 2017, the Platts TSI Daily Midwest HRC Index bounced off a low of $591 in early June and then rallied to $630 in early September.  Demand waned and the index fell through September and October until it reached a low of $583.75 on October 18th.  That week, domestic steel mills began announcing flat rolled price increases.  Since the announcements, HRC prices had moved higher at a slow and steady pace before retrenching a bit last week.  The TSI Midwest HRC Index fell $7 to $613/st WoW.  The November CME Midwest HRC future has bounced off its multi-year uptrend (red line) as Midwest prices look to have found support for the time being. 

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

The damage caused by the 2017 hurricane season should boost steel demand in the months ahead as totaled autos are replaced and communities are rebuilt.  As horrible and tragic as the hurricanes of 2017 were, their destruction has created a significant increase in demand across a wide array of industries including, but not limited to, steel, manufacturing, automotive, demolition, waste disposal, recycling, repair services, restoration services, residential construction, nonresidential construction, heavy machinery, architecture, engineering, legal, insurance, energy, retail, home furnishings, appliance, etc., etc. etc. etc. 

October auto sales were better than expected with sales at an 18m unit seasonally adjusted annualized rate.   Globally, manufacturing PMIs were incrementally weaker as a whole, but Europe and the US sustained their very strong PMI readings.  Further, the October ISM Services PMI gained 0.3 points to 60.1, beating expectations of 58.5.  The energy industry has taken it up a notch with the December WTI crude future trading as high as $57.92/bbl in November.   

Flat rolled import licenses continue to fall sharply, global flat rolled differentials remain unattractive and production cuts both domestically and in China point to tighter domestic supply over the short and medium term.   November license data point to a significant drop off in import licenses to 805k flat rolled vs. 986k in October and a high of 1.25m in June.

Tube products look to be down 174k st MoM.  Flat rolled plus tube import licenses are down a combined 364k tons MoM.

Flat Rolled (blue) and Tube (red) Imports

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

–     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 

–     Falling imports volumes expected for the remainder of 2017; shrinking global differentials

Upside Risks:

–        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 bump

–        Energy industry rebound

–        NAFTA related disruption/Trade War

Downside Risks:

–        Crashing iron ore, scrap and finished steel prices

–        Political & geopolitical uncertainty

–        Stronger dollar

–        Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma

November CME HRC futures added $4 to $609/st.  December, 2017 through February, 2018 fell $2 to $623, $625 and $625, respectively.  The second half of 2018 gained $7 to $628/st.

The lagging CRU played catch up while the Platts TSI Index retrenched with HRC down $7 to $613 and CRC down $9 to $797. Black Sea HRC and Platts Antwerp HRC were down 1% and 1.5%, respectively.

There was little change in the TSI North European and ASEAN indexes.

Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts.  HRC and CRC differentials remain near multi-year lows.  The lack of import deals made in the May through July period due to the Section 232 Investigation and now the closing of the import price window supports our belief that imports will decline precipitously in the near term and stay depressed into 2018 unless global price dynamics change.

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.  While not statistically significant, you might want to buckle your chinstrap.

Platts TSI Daily HRC Price

SBB Platts US Midwest HRC fell 1.1%.  Russia, Middle East and Turkish HRC were all down big.

The US Midwest CRC price fell 1.1%.  The North European and Russian Export CRC prices were down.

South European HDG prices fell 2%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rate rose fell to 73.6%.

Australian coking coal and iron ore prices moved higher, while scrap prices and Brazilian pig iron were down. 

The November SGX iron ore future was up $2.43/t to $62.09 WoW. The November LME Turkish scrap future fell $10/t to $310.

The SGX iron ore futures curve has moved from backwardation in to this strange shape of a slight short term contango and long term backwardation.

January Chinese rebar futures gained almost 6%. Black Sea billet fell another 3.2% last week.

Little happened on the economic front last week.

Chinese inflation data was up and slightly better than expected. Exports and imports were down and weaker than expected in Chinese yuan terms.  In US dollars, imports were down, but slightly better than expected.

The S&P 500 failed to make a new high for the first time since mid-September, but was essentially unchanged.  The China CSI 300 gained almost 4% on the week while the Euronext fell 2.6%.

S&P 500

The steel complex was mostly under pressure.

Worthington Industries

RIO and BHP gained with iron ore prices.

Base metals came under pressure last week.

LME 3 Month Rolling Nickel Future

LME 3 Month Rolling Aluminum Future

The US dollar index closed down 0.6% at 94.4.  Currencies were quiet with no currency moving more than 1% up or down.

US Dollar Index

Following the corruption crackdown in Saudi Arabia, the December WTI crude oil future broke to the highest level since April gaining 2% to $56.74 on the week and trading as high as $57.92.  Crude oil inventory gained 0.5%, but the aggregate inventory level fell 0.6%.  Rig counts were up along with a nice gain in production.  Natural gas gained 7.7% to $3.23/mbtu.

December WTI Crude Oil Futures and December Crude 15 Delta Put Volatility

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 (1983 – Present)

The US 10 year Treasury yield rallied back to 2.4%.  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:

–        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

–        NAFTA related disruption/Trade War

–        Sharp drop in steel imports

–        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:

–        Crashing iron ore, scrap and finished steel prices

–        Political & geopolitical uncertainty

–        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