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, the Midwest HRC price has moved higher at a slow and steady pace with the index gaining $10 to $627.25/st last week. This is the highest level for the index since September 14th. The December CME Midwest HRC future price remains range bound between $620 and $630/st.
December CME HRC Futures (white) vs. Platts TSI Daily Midwest HRC Index (orange)
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 a forecast of 873k flat rolled vs. 986k in October and a high of 1.25m in June.
Tube products look to be down 109k st MoM. Flat rolled plus tube import licenses are down a combined 220k 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
– Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma
November CME HRC futures settled for the month up $17 to $610/st vs. October. The December future fell $8 to $620. The first half of 2018 traded down a few dollars to the $636-$639 range. The second half of 2018 was down $10 – $12 to $626.
Most of the HRC indexes were up WoW.
TSI North European HRC Index gained almost 1% while the ASEAN HRC Index was flat.
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. Midwest HRC prices have started to rally with the HRC and CRC differentials rebounding noticeably.
Platts TSI Daily HRC Price
SBB Platts US Midwest HRC gained 1.5% to $627. South European HRC gained almost 3% and Chinese domestic HRC gained 1.6%.
CRC prices were mostly up on the week with European prices gaining almost 1%.
South European HDG rebounded from the previous week’s 2% drop.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate rose to 74.9%.
Iron ore prices gained over 9%. Australian coking coal also gained nicely.
The December SGX iron ore future was up 8.9% or $5.47/t to $67.18 WoW. The December LME Turkish scrap future gained $1/t to $329.
The rally in the SGX iron ore futures has backwardated the curve after a couple weeks of a flattened curve.
January Chinese rebar futures gained 3.3% while Black Sea billet gained 2%.
October existing home sales were up to a 5.48m SAAR. The October preliminary Durable Good Report missed expectations, but September was revised higher. October preliminary capital goods orders were also weaker than expected with September being revised higher.
Unadjusted YTD durable goods orders showed a gain of 5%. YTD durable goods orders exluding transportion are up 5.8% and orders excluding defense gained 4.9%. Orders for primary metals are up almost 11% YTD and orders for fabricated metals are up 9.4% YTD.
This table shows the seasonally adjusted MoM change. Previous months upwardly revised are filled in green and downwardly revised are filled in with red. If the cell has a red fill with yellow font, that indicates a downwardly revised MoM contraction.
This table shows the MoM inventory in nominal dollars. Green/red fills are MoM increases/decreases.
Stocks continued to gain on tax reform optimism with the S&P setting another new record. Europe and Japan gained as well.
S&P 500
The steel complex was up across the board with the BOFs up big most likely due to gains in iron ore.
US Steel
Iron ore miners were all up with ore.
Base metals rebounded with the strength out of Asia.
LME 3 Month Rolling Nickel Future
CME March 2018 Copper Future
The nascent US dollar index rally failed reversing course and closing below 93 at 92.78, down almost 1% on the week. The euro gained over 1% now above 1.19. The Mexican peso gained almost 2% while the Turkish lira continued to lose ground, now at all-time lows.
US Dollar Index
Turkish Lira
Oil prices continue to rally closing the week up 4.25% or $2.40 to $58.95/bbl. The US rig count gained 8 rigs to 923 while crude inventory fell 0.4% and the aggregate inventory fell to the lowest level since the fall of 2015. Crude production continued higher. Natural gas fell over 9% to $2.81/mbtu. OCTG prices were unchanged.
December WTI Crude Oil Futures and December Crude 15 Delta Put Volatility
This is a very interesting chart showing the steep decline in inventory and the rally in crude. Considering production is at highs for the year, one could assume strong energy demand is underpinning these metrics.
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 was unchanged at 2.34%.
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