Week Over Week - November 16, 2018

Domestic physical flat rolled prices continued to be under pressure last week from the Midwest to the Southeast to Houston. Two weeks ago, FGM shifted from a bullish viewpoint to a cautious one based on the following issues:

– Declining rates of growth in manufacturing and tariff induced demand destruction

– Weakening global economics

– Crude oil price falling sharply

– Higher interest rates

– Strengthening U.S. dollar

– Falling global flat rolled prices

– Tariff resolution potential

– Increased domestic production capacity

There have been a number of unintended consequences from President Trump’s steel tariffs and trade policy. A sharp drop in steel exports is one that is adding additional domestic supply and weighing on prices. September export data shown below is down significantly across multiple product categories. Annualizing the decrease in just HRC, CRC, HDG and AZ/AL totals 99k tons, which equates to almost 1.2m tons on an annualized basis. All carbon is down 255k YoY, which equates to over 3m tons.

This chart shows monthly combined HRC, CRC, HDG and AZ/AL exports trending lower.

The December CME Midwest HRC future settled at $781 last Friday, which was the first close below $785 since May. During that time, HRC futures had been trading in a range and with the December future breaking below the bottom end of the range, it likely means prices will have to trade much lower before finding a support level that entices buyers to step in. The next support level for December HRC futures looks to be the longterm up trend line at $760.

December CME HRC Futures

The rolling 2^nd month HRC futures are clearly in a downtrend after peaking at $910 in July. Support looks to be around the $715 level.

Rolling 2^nd Month CME HRC Futures

Upside Risks:

– Sharp drop in steel imports

– Increased risk of domestic supply disruption

– Further section 232 tariffs and quotas restricting supply

– Chronically low inventory levels

– Chinese economic stimulus measures

– U.S. Infrastructure bill

Downside Risks:

– Declining rates of growth in manufacturing/demand destruction

– Weakening global economics/PMIs

– Crude oil prices falling sharply

– Higher interest rates

– Strengthening U.S. dollar

– Falling global flat rolled prices

– Tariff resolution and/or 232 exclusions, especially Turkey reverting to original 25%

– Increased domestic production capacity

– Trade War Fallout

– Turkey/emerging market contagion

– Political & geopolitical uncertainty

– Stock Market Crash

The December CME HRC future decreased by $21.50/st to $800 while the Platt’s TSI Daily Midwest HRC Index fell $31.00 to $781/st, the lowest weekly close since March.

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

The CME Midwest HRC futures curve is below with last Friday’s settlements in orange. The front of the curve was sold more aggressively than the back with December falling $23 and January $21. The front of the curve is at its lowest price since May and continues to flatten.

December ferrous futures are listed below. The December Chinese rebar and HRC future were down by 8% and 10.4%, respectively.

Flat rolled indexes were mostly lower led by China and the U.S.

The AISI Capacity Utilization Rate was unchanged at 81.7%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

Last week’s latest November flat rolled import license data is forecasting a MoM increase of 35k tons, which was down dramatically from the previous week’s forecast.

Last week’s November tube import license data is forecasting a MoM increase of 40k tons.

November’s combined flat rolled and tube import license data is forecasting a 75k ton MoM increase.

Flat Rolled (blue) and Tube (red) Imports

November AZ/AL import licenses are projecting an increase of 25k tons MoM to 106k.

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

Below are HRC and CRC Midwest vs. each country’s export price differentials using pricing from SBB Platts. HRC and CRC differentials continued to shrink.

SBB Platt’s HRC, CRC and HDG WoW pricing is below. US Midwest HRC was down 2.6% while East Asia Import HRC price fell the most by 3.7%. US Midwest CRC was down 2.8% while Chinese Domestic and Export prices were down 4.0% and 2.7%, respectively. US Midwest HDG prices were down 1.4%.

Listed below are ferrous raw materials WoW price changes. The IODEX lost 2.8%. The Baltic Dry Index continued to fall another 16.3% WoW, now down $450 over the last two weeks!

Baltic Dry Index

The December SGX iron ore future rose $0.38 to $73.02, while the December Turkish scrap future fell $2.00 to $328.

December SGX Iron Ore Future (Left) & December LME Turkish Scrap Future (Right)

The SGX iron ore futures curve has rallied over the last month with the front of the curve steepening and the back of the curve falling suggesting some kind of short term supply constraint that market participants don’t believe will last.

The chart below shows the SGX 2^nd month iron ore future breaking above its long term down trend. The rally looks to have stalled falling to make a new high.

SGX 2^nd Month Ore Future

Ex-flat rolled prices were mixed with TSI Midwest plate up 1.9%, while the January Chinese rebar future falling 1.1% on the week.

Below is last week’s economic data. The November Philadelphia Fed Business Outlook Survey fell sharply to 12.9 from 22.2 to its lowest point since January 2017. The Empire Manufacutring Report gained 2.2 points to 23.3 and beat expectations. The October CPI Ex-Food & Energy rose 2.1% YoY, down MoM and missing expectations by ten basis points. The October NFIB Small Business Optimism Index fell slightly to 107.4.

Philadelphia Fed Business Outlook

Empire Manufacturing Report

The S&P 500 fell 1.3% WoW. The Shanghai Property Index and the China CSI 300 were both up 6.7% and 2.9%, respectively.

S&P 500

Steel mill stocks were mixed with AK Steel up 2.5%, while ArcelorMittal fell 2.2%.

Service center’s stocks are below. N.W. Pipe was up 2.7%, while Friedman and Olympic Steel decreased by 8.3% and 4.6%, respectively.

Olympic Steel

Minings stocks gained with Cleveland Cliffs adding 4.8% WoW.

Cleveland Cliffs

LME base metal prices are below. The CME March copper future gained 4.1% and the LME zinc 3m futures was up 3.3%.

March CME Copper Future

LME 3-Month Rolling Zinc Future

The U.S. dollar was down $0.44 to $96.47, while the Russian Ruble and Turkish Lira each gained over 2%.

US Dollar Index

Russian Ruble

Turkish Lira

The December WTI crude oil future fell $3.73 to $56.46/bbl trading as low as $54.75/bbl last Tuesday. Crude oil inventory added 2.4%, while distillate inventory fell by 2.9% and gasoline inventory fell by 0.6%. The aggregate inventory level gained 0.7%. Crude oil production continued on to a new high of 11.7m bbl/day. The US rig count and the North American rig count increased by one and two rigs, respectively.

Dec. WTI Crude Oil Future (orange) and Dec. Crude 15 Delta Put Volatility (white)

Aggregate Energy Inventory (white) vs. Dec. WTI Crude Oil Futures (orange)

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 fell by twelve basis points closing the week at 3.06%, while the Italian ten-year yield rose by another nine basis points closing the week at 3.49%. The Barclays U.S. High Yield – U.S. 10-yr Treasury spread rose to 4.13%, the highest level since late 2016 and another indication of fear and risk aversion in financial markets.

Barclays Coporate High Yield YTW – 10-Yr Treasury Spread

U.S. Ten-Year Bond Yield

Italian Ten-Year Bond Yield

The list below details some upside and downside risks relevant to the steel industry. The bolded ones are occurring or highly likely.

Upside Risks:

– Sharp drop in steel imports

– Increased risk of domestic supply disruption

– Further section 232 tariffs and quotas restricting supply

– Chronically low inventory levels

– Chinese economic stimulus measures

– U.S. Infrastructure Bill

– Potential Russian sanctions cutting off Russian steel

– 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