This report mostly discusses week to week changes, but notice what has happened across the commodities space over a longer period of time.
The December CME WTI crude oil future traded as high as $57.50 with aggregate energy inventory levels (oil, gasoline & distillates) continuing a sharp eight month destocking. WTI is in a five month bull market.
Aggregate Energy Inventory (white) vs. WTI Crude Oil Futures (orange)
Zinc prices keep heading higher in an almost two year bull market.
LME 3 Month Rolling Zinc Future
The same is occurring in aluminum.
LME 3 Month Rolling Aluminum Future
Copper broke out of its range last October and has been in a bull market since.
CME December Copper Future
Nickel has ripped sharply higher over the past few weeks.
LME 3 Month Rolling Nickel Future
The strength in these five commodities is informative about general commodity inflation and the underlying strength in the global industrial sector.
Steel isn’t much different. 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, prices have moved higher and lead times have moved out at a slow and steady pace. Last week, the TSI Midwest HRC Index gained $6 to $619.50/st. 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 WTI crude trading as high as $57.50/bbl.
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.
While global and domestic steel industry fundamentals remain strong, some cracks to the bull case have emerged. Iron ore prices have been under serious pressure and remain near multi-month lows. Turkish scrap was under pressure, but has retraced half of its recent selloff closing last week trading around $325/t. The domestic market has been sluggish not only due to falling raw materials, but also what looks to be an overhang of imported tons delivered in Q2 and Q3, most of which were a defensive measure in response to concerns over a potentially restrictive 232 ruling. Last, a nascent rally in the US dollar is worth watching as a stronger dollar has caused downward pressure on commodity prices historically.
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:
– 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
– China pumping up its “old economy”
– Energy industry rebound
– Graphite Electrode Shortage
– 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
The table below compares the percentage changes of a cross section of steel related raw materials and finished products since June 1st. Midwest HRC continues to be at the bottom of the list, but has moved up slightly since the recent price increase. ASEAN HRC, Australian coking coal and copper prices have held on to their 20% gain since June, 1st.
There was no change in the November, 2017 through June, 2018 CME HRC futures price. 2H 2018 fell $7/st to $621.
Midwest HRC and CRC gained while HRC in Shanghai and Black Sea were under a little pressure.
There was little change in the TSI North European and ASEAN indexes.
Imports continue to trend lower.
Flat Rolled (blue) and Tube (red) Imports
Flat rolled imports continue to drop.
Tube imports are coming off hard, but are still up big YoY.
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
US Midwest HRC gained 1% and Chinese Domestic HRC added 1.3%. Prices moved lower in most other places.
The US Midwest CRC prices gained 0.7%. Almost every other CRC price was down.
US Midwest HDG fell 1.1%. Southern and Northern European HDG prices fell over 1%. There was a little bit of strength in Brazilian and Chinese domestic prices.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate rose slightly to 74.6%.
November domestic scrap looks to settle lower this week. Coking coal fell almost 1%, while the rest of the board was up.
The November SGX iron ore future was up $1.26/t to $59.66 WoW. The November LME Turkish Scrap future gained $5 to $320/t.
The SGX iron ore futures curve has moved from backwardation in to this strange shape of short term contango and long term backwardation.
Black Sea billet fell 3.6%.
Last week’s report covered most of the early month economic releases including the ISM PMI, auto sales, construction and durable goods. September factory orders gained 1.4% and orders excluding transportation gained 0.7%.
The Case-Schiller 20 city Index gained 5.92% YoY, the highest since mid 2014.
The ISM Non-Manufacturing PMI rose to 60.1 from 59.8 and beat expectations.
October nonfarm payrolls added 252k jobs, missing expectations of 302k new jobs. September data was revised higher to a gain of 18k jobs vs. a loss of 33k. The unemployment rate ticked lower to 4.1%. The labor participation rate slipped to 62.7%. Manufacturing payrolls were much better than expected. Average hourly earnings were up 2.4% YoY, but missed expectations of a 2.7% move higher.
The September Core PCE was up 1.3% YoY, in line with expectations and unchanged MoM.
The FOMC concluded its September monetary policy meeting last week where it followed the market’s expectations by not changing the current Fed Funds rate and signaling plans for a rate hike at their December meeting. The future market-based probability of a rate hike in December is currently above 90%.
Additionally, Jerome Powell, a current member of the Board of Governors, will be the next Chairman of the Board, assuming the Senate’s likely confirmation. While Powell already votes at each policy meeting, his additional responsibility, as chairman, will be deciding topics for debate and vote. The most notable change from this action will be a reduced regulatory burden on the banking sector from the Federal Reserve compared to what it would be under the Fed’s current structure. Little will change regarding the path of the Fed Funds rate and the gradual balance sheet reduction.
The S&P 500 made yet another new all-time high closing the week at 2582.7. The Nikkei rose 2.4%.
S&P 500
AK Steel’s stock was crushed falling 30% after missing earnings expectations. The rest of the space was down along with AK.
AK Steel
RIO and BHP gained almost 4% each, but CLF fell 3.5%.
LME nickel added almost 10% on the week. All of the base metals rose.
The US dollar index closed just below 95. There was pressure on the Turkish lira, Brazilian real and Russian ruble while the Korean won gained 1.5%.
US Dollar Index
Brazilian Real
Turkish Lira
The December WTI crude oil future broke to the highest level since April last week gaining 3.2% to $55.64. Crude oil inventory fell 0.5% and the aggregate inventory fell 0.8%. The US rig count fell 11 rigs while production moved up 0.5%. The November natural gas future gained 0.7% to $2.98/mbtu with inventory increasing 1.75%.
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 retreated seven basis points to 2.33% a week after breaking above 2.4%. Yields were mostly lower.
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
– China pumping up its “old economy”
– 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