Domestic physical flat rolled prices continued to be under pressure last week. In the steel market, downside risks outweigh upside risks warranting a prudent and risk-averse purchasing and inventory management strategy. The following issues provide the foundation of our view:
– Declining rates of growth in manufacturing and tariff induced demand destruction
– Increased domestic production capacity
– Weakening global economics
– Crude oil price falling sharply
– Higher interest rates
– Strengthening U.S. dollar
– Falling global flat rolled prices
– Tariff resolution potential
Last week brought another round of disappointing residential construction data. Federal Reserve Chairman Jerome Powell invigorated the stock market after giving a dovish speech about the Fed’s rate hike path, but this change in stance can also be viewed as an acknowledgement of slowing economic growth. Flat rolled futures and indexes continue to fall sharply, especially in China. Oil prices continue to stay near recent lows in the low $50/bbl range. If oil fails to rally back into the upper $60/bbl, a sharp drop in the rig count could follow. The U.S. dollar continues to rally further pressuring commodities and making the U.S. an increasingly attractive destination for imports.
Early this week, a better than expected ISM Manufacturing PMI report was released maintaining its multi-year uptrend, however, the report might not be as clear cut as it seems; more on that below. Global PMIs continued to weaken with the PMIs of five countries falling below 50 and China’s official PMI falling to 50. U.S. auto sales were better than expected, but the 3-month U.S. auto sale NSA moving average continues to trend lower. Seasonally adjusted October U.S. construction spending data fell 0.1% MoM, missing expectations of a 0.4% increase, while the YoY gains in residential spending fell sharply.
Economic data released throughout November showed mixed results. This mixed data leaves us perplexed as to whether the economy is shifting toward declining growth and perhaps recession or if the economy is simply catching its breath. Sharp moves lower in the price of WTI crude oil, interest rates and the stock market as well as increased volatility indicate a collective reassessment of assumptions and expectations. Until more clarity is provided, we expect markets and businesses to be more risk averse perhaps compounding the softening in demand we have seen since the summer.
ISM Manufacturing PMI (white) and Platts TSI Daily Midwest HRC Index (orange)
The ISM Manufacturing PMI six-month moving average posted 59.30, remaining relatively flat since April.
ISM Manufacturing PMI Six Month Moving Average (white) & Platts TSI Midwest HRC Index
The November ISM Manufacturing PMI printed higher at 59.3 and held its uptrend. This was a critical month for the index as signs of slowing growth continue to emerge. However, after closer examination of the subindexes, it becomes apparent that new orders are out there, but at lower prices. Only two subindexes moved significantly. The new orders subindex gained 4.7 points to 62.1, which looks to be the main driver of the increase in the PMI, however, the prices subindex fell 10.9 points to 60.7.
November ISM Manufacturing PMI
The ISM Manufacturing PMI printed at the highest level of the last five Novembers.
ISM Manufacturing PMI Seasonal Chart
The next two charts compare the ISM new orders subindex and ISM prices subindex with the Platts TSI Daily Midwest HRC Index. Both ISM subindexes move with and lead the direction ofHRC Index. This month’s ISM sends us a mixed signal in this regard due to the jump in the new orders index. However, the new orders index looks to be in a downtrend since peaking at the turn of 2018. The move lower in the prices paid subindex is indicating the HRC Index is heading to $700. Play close attention to next month’s ISM new orders subindex to see if it breaks higher out of its downtrend or moves lower continuing its downtrend.
Platts TSI Daily Midwest HRC Index (orange) & ISM Manufacturing PMI New Orders Subindexes (white)
Platts TSI Daily Midwest HRC Index (orange) & ISM Manufacturing PMI Prices Subindex (white)
The November ISM new orders subindex rose 4.7 points to 62.1. The new orders subindex bounced back from last month’s lowest level since April 2017. The backlog subindex increased 0.6 points to 56.4.
ISM Manufacturing PMI New Orders (white) and Backlog (orange) Subindexes
This chart adds the new orders and backlog subindexes, which bounced back from its lowest level since January 2017.
ISM Manufacturing PMI New Orders Plus Backlog
The chart below shows the producer inventory subindex gaining, while the customer inventory subindex fell back to 41.5, remaining at ultra-low levels since September 2016. The customer inventory subindex at such ultra-low levels indicates significant upside risk of a sharp restocking rally, however, October’s durable goods report showed weak shipments levels. Lower shipments results in a lower months-on-hand and dampens the need to aggressively restock. This data point has been difficult to gain any reliable insight from. While it indicates significant risk of a sharp increase in demand and/or prices for OEMs, it might also be suggesting weaker growth or at least expectations of weaker growth to follow.
ISM Manufacturing PMI Inventory (white) & Customers’ Inventory (orange)
This table shows the monthly ISM PMI and subindexes back to November 2017. The PMI is up MoM and YoY. The new orders subindex is down YoY, while the backlog subindex is up YoY. Supplier deliveries are up, but customer inventory is down, which should indicate a strong manufacturing economy. Another important note is the drop in the exports subindex.
The table below shows the monthly ISM and regional PMIs back to November 2017. The Chicago PMI, Empire, and Kansas City Fed indexes all gained, while the Philadelphia, Dallas, and Richmond Fed Index, are down MoM. These reports provide another example of the mixed signals seen in recent economic data. The Dallas Fed fell sharply to the lowest level since August 2017, which was logical with the fall in oil. However, the also oil and gas rich K.C. Fed’s increase of seven points to 15 contradicts this logic. The Chicago Fed’s PMI rose 8 points to 66.4, the highest level since December 2017.
November US light vehicle sales dipped slightly to a 17.4m seasonally adjusted annualized rate (S.A.A.R.), but beat expectations of a 17.2m rate.
November US Auto Sales (S.A.A.R.)
The labor market continues to strengthen to historic levels, while auto sales remain flat.
November US Auto Sales (white) and the Inverted Unemployment Rate (orange)
November monthly NSA auto sales totaled 1.38m units. While November’s sales saw a slight uptick, it remains near the bottom of monthly sales figures over the last few years.
US Monthly Auto Sales
The seasonality chart below shows November auto sales nearly in line with 2016 and 2017.
US Monthly NSA Auto Sales Seasonality Chart
This chart shows a three-month moving average of monthly U.S. auto sales continuing to trend lower.
U.S. Monthly Auto Sales Three Month Moving Average
The three-month U.S. auto sales moving average decreased MoM and to the lowest November level of the last four years.
US 3-Month Moving Average NSA Auto Sales Seasonality Chart
Seasonally adjusted October U.S. construction spending fell by 0.1% MoM missing expectations of a 0.4% increase.
October US Construction Spending
Unadjusted October total construction spending was 4.5% higher YoY while YTD spending gained 5.1% YoY.
Unadjusted October total private construction spending was 3% higher YoY while YTD spending has gained 4.4% YoY.
Unadjusted October private residential construction spending was 0.3% higher YoY while YTD spending gained 5% YoY.
Unadjusted October private nonresidential construction spending was 6.4% higher YoY while YTD spending gained 3.7%.
These next two charts show monthly US construction spending back to 2013. Nonresidential remains the highest of the past 5 years, while residential spending growth slowed significantly. With higher mortgage rates clearly slowing homebuyers confirmed by anecdotal evidence, such as Toll Brothers announcing their new orders are the lowest of four years, this is another data point confirming slowing growth in the U.S. economy.
US Nonresidential Construction Spending
US Residential Construction Spending
Globally, November purchasing manager indexes were mixed with 11 countries seeing declines and 12 seeing gains. The JP Morgan Global Manufacturing PMI was unchanged at 52.1. However, a closer look at the data paints a picture of continued weakening global growth with the PMI of five countries now in contraction (sub 50) and those countries are dispersed across the globe including Mexico, Italy, Turkey, South Korea and Taiwan. China’s official PMI fell 0.2 to 50 and Australia’s PMI dropped 7 points or 12% to 51.3.
The downtrend in European PMIs continued in November. Italy fell 0.6 points for its second month below 50. The PMIs of the Eurozone, Germany and France were lower, while the PMIs of Spain and the U.K. gained.
Eurozone (white), German (blue), Italian (green), Spanish (red), and French (yellow) Manufacturing PMIs
The chart below shows the Eurozone PMI and TSI North European HRC price both continuing lower.
Eurozone (white) and Platts TSI North European HRC Index USD (orange)
The PMIs of Japan, Europe, and China were all lower, while the U.S. saw its PMI gain.
US (white), Euro (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
China’s official PMI continued lower, while the Caixan Manufacturing PMI saw a slight increase.
China Official (white) and Caixan (red) Manufacturing PMIs
China’s official PMI continues to decline and remains at the lower end of its five-year range.
China Official Manufacturing PMI (SEAG)
The table below breaks down China’s official manufacturing PMI subindexes. Half of the subindexes are mired in contraction, while the fall in the new orders, employment and business expectations are concerning.
The Chinese PMI new orders subindex has been trending sharply lower since peaking in May. November’s new orders print is the lowest since February 2016. Last Friday, the January Chinese HRC future settled at $495 and the Chinese HRC spot price at $518/mt. This equates to around a $453/st price. While tariffs on direct Chinese imports are prohibitive, the price can be used as a proxy for Asian HRC. Adding a 25% tariff to $453 equates to about $570. Adding $100 to this indicates an import delivered price of $670. Earlier this week, Platts reported deals for $680 steel imported from Korea. Pay close attention to China’s PMI and HRC price as it will play a large roll in dictating the U.S. price.
China New Orders (white), Chinese Rolling 2nd Month HRC futures mt (red) & Chinese Spot HRC mt (Blue)
The two inventory subindexes continued to contract in November.
China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)
- 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
- 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 $5/st to $771 while the Platt’s TSI Daily Midwest HRC Index fell $5.75 to $773/st, the lowest weekly close since February for the index.
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 curve moved slightly lower through the first half of 2019.
2nd month (Dec.) ferrous futures are listed below. The complex was mostly lower with scrap and Chinese futures leading the move lower.
Flat rolled indexes were mostly lower led by China and the U.S.
The AISI Capacity Utilization Rate fell to 81.3%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Last week’s latest November flat rolled import license data is forecasting a MoM decrease of 150k tons to 858k. Official October import data showed 1.01m flat rolled and 514k tube tons were imported. Flat rolled was up 83k tons MoM and tubular imports increased 73k tons MoM. HDG and AZ/AL products were up 15k and 17k tons MoM, respectively.
Last week’s November tube import license data is forecasting no change MoM.
November’s combined flat rolled and tube import license data is forecasting a 150k ton MoM decrease.
Flat Rolled (blue) and Tube (red) Imports
November AZ/AL import licenses are projecting an increase of 10k 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 0.7% while the Chinese Domestic HRC price fell by the most (3.6%). US Midwest CRC was down 1% while Chinese Domestic and Export prices were down 6.9% and 2.2%, respectively.
Listed below are ferrous raw materials WoW price changes. The IODEX and SGX 2-month Ore futures lost 5% and 4.5%, respectively. Scrap prices fell 2% – 4% in kind.
The December SGX iron ore future dropped $3 to $64.09 while the December Turkish scrap future fell $8.50 to $302.50.
The SGX iron ore futures curve has dropped between $6-8 over the last month mostly maintaining its shape.
Ex-flat rolled prices were mostly lower with the January Chinese rebar future falling 2.9% WoW.
Last week’s economic data is below. The regional manufacturing indexes were discussed above. The September Case Shiller 20-City Home Price Index saw YoY gains of 5.15%, down from August and missing expectations. October New Home Sales fell to a 544k annualized rate and missed expecataions of a 575k annualized rate. However, September sales were revised to a 597k annualized rate from a 553k rate. October Pending Home Sales also disappointed falling 2.6% vs. expectations of a 0.5% increase. The October Core PCE increased 1.8% YoY, missing expectaions of a 1.9% increase while September was revised lower to 1.9% from 2.0%.
The S&P 500 rose 4.9% after a dovish speech by Federal Reserve Chariman Jerome Powell.
Steel mill stocks saw mixed action with Gerdau up 3.1%, while Steel Dynamics, AK Steel and U.S. Steel were down 6%, 9.7% and 10.3%, respectively.
Service center’s stocks are listed below. Schnitzer and Olympic Steel were up 5% and 4.5%, respectively, while Ryerson was down 2.3%.
Mining’s stocks saw mixed results with Cleveland Cliffs adding 5.7% WoW.
LME base metal prices were mostly unchanged. The LME 3-month nickel future gained 2.6% WoW
LME 3-Month Rolling Nickel Future
The U.S. dollar continued to rally up $0.36 to $97.27 WoW. The Turkish lira continues to regain ground increasing by 1.8% to 5.22.
US Dollar Index
The December WTI crude oil future added $0.51 or 1% to $50.93/bbl. Crude oil inventory added 0.8% and distillate inventory grew by 2.19%, while gasoline inventory fell by 0.3%. The aggregate inventory level gained 0.7%. Crude oil production remained at 11.7m bbl/day. The US rig count and the North American rig count decreased by three and four rigs, respectively. The December natural gas future gained $0.30 or 7.1% to $4.61/mmbtu. Natural gas inventory fell 1.9%.
Jan. WTI Crude Oil Future (orange) and Jan. Crude 15 Delta Put Volatility (white)
Aggregate Energy Inventory (white) vs. Jan. 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)
January CME Natural Gas Future
The US ten-year Treasury yield fell five basis points closing the week at 2.99% while the Italian ten-year bond yield fell by nineteen basis points to 3.21% WoW.
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.
– 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
– 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
– Crashing iron ore, scrap and finished steel prices
– Domestic automotive industry under pressure
– Sharp and persistent drop in oil and/or iron ore prices
– 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