The first two WoW reports this month focused on economic data demonstrating continued strength in the economy and manufacturing industry. The over ten week steel market buyers strike was put to the test last week as Nucor announced flat rolled price increases, which was followed by similar announcements from U.S. Steel and California Steel Industries. The announcement coincided with the Metalcon Conference in Charlotte. A number of F.G.M. sales executives returned from the conference reporting anecdotal reports of strength in the metal buildings product market. Surveying FGM sales and marketing staff, RFQs and purchase orders have picked up this week, albeit certain products and regions are stronger than others.
As discussed in this report, a number of economic reports indicate lean inventory levels across the manufacturing industry. Those OEMs that have been holding back purchase orders have left themselves vulnerable to a sharp move higher in lead times. If domestic mills procure new purchase orders and this pushes lead times out, this will exacerbate the lean inventory levels. This dynamic could provide for the next leg of a rally that has lasted almost three years. It is too early to confidently know why flat rolled prices have been falling for over two months, but the fall in prices does not fit well with the strong automotive, construction and employment data as well as strong ISM PMIs and service center shipping data.
The simplest explanation points to a behavioral effect where steel buyers that have been rewarded by withholding purchase orders week after week while prices and lead times fell. During this period, the steel buyer collective has accrued a deficit leaving them in a very risky position. Assuming demand remains strong, a bottleneck of purchase orders could hit the steel industry just as a number of domestic mills take planned outages and service centers take risk off the table and draw down their inventory levels heading into year-end. However, the shift in mindset might take a few weeks to set in.
Flat rolled prices have been making higher highs and higher lows since November, 2015. . In 2016, the Platts TSI Daily Midwest HRC Price index bottomed on October 24. In 2017, the Platts TSI Daily Midwest HRC Price index bottomed on October 18. Last Tuesday (October 9), the index printed $834.75 and has since moved up to $841.75. Is there a seasonal phenomenon of weakness in the third quarter bottoming in October?
November CME HRC futures gained $10/st to $830 while the Platts TSI Daily Midwest HRC Index fell $3.50 to $836.5/st, the lowest weekly close since March.
November CME HRC Futures (orange) vs. Platts TSI Daily Midwest HRC Index (white)
The following issues are the foundation of our current bullish view:
– Domestic economic and manufacturing strength
– A rebounding and strengthening U.S. energy industry
– Persistently low OEM inventory levels evidenced in the ISM, MSCI and Durable Goods reports
– Steel tariffs and quotas
– Conditions ripe for OEM restocking
Upside Risks:
– Sharp drop in steel imports
– Increased risk of domestic supply disruption
– Section 232 tariffs and quotas restricting supply
– Chronically low inventory levels
– USW Strike at ArcelorMittal
Downside Risks:
– Trade War Fallout
– Turkey/emerging market contagion
– Reversal of Turkish steel tariffs to 25%.
– 232 exclusions
– Stock Market Crash
– Demand destruction due to higher steel prices
– Higher dollar
– Higher oil prices slowing growth
– Higher interest rates slowing growth
– Domestic mill reopening
– Falling iron ore and scrap prices
– Political & geopolitical uncertainty
The CME Midwest HRC futures curve is below with last Friday’s settlements in orange. The curve gained in response to domestic mill’s price increase announcements.
November ferrous futures are listed below.
Flat rolled indexes were mostly lower.
The AISI Capacity Utilization Rate fell to 79%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Flat rolled and tube imports updated on October 9th forecast a flat MoM change in imports for October hovering around 1m, while tube imports are forecast to gain slightly.
October combined flat rolled and tube import licenses are forecasting a second consecutive month of a slight increase.
Flat Rolled (blue) and Tube (red) Imports
AZ/AL import licenses including October’s forecast updated as of October 9 also indicate a flat MoM change in October.
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. Differentials have been decreasing in recent weeks mostly due to Midwest indexes falling.
SBB Platt’s HRC, CRC and HDG WoW pricing is below.
Raw materials were mixed with ore and East Coast scrap moving higher, while coal and pig iron lost some ground.
The SGX iron ore futures curve:
The chart below shows the 2nd month SGX iron ore future forming into a “triangle” pattern, which predicts a significant correction to result in whichever direction it breaks out. In July, the price fell below the up trendline, but failed to follow through on the down side. The future’s price then rebounded back into the triangle and has now broken above the trendline.
2nd Month SGX Ore Future
Ex-flat rolled prices are below.
Last week’s economic data is listed below. The September Consumer Price Index (CPI) Ex Food and Energy gained 2.2% YoY, just below expectations. The September Producer Price Index (PPI) Ex Food and Energy was up 2.5% YoY.
The S&P 500 fell 4.3% last week. Stock markets fell sharply across the globe with China’s market falling by the most.
S&P 500
China CSI 300
Steel mill stocks were down sharply with Steel Dynamics 6.7% drop leading the group lower.
Steel Dynamics
Service center’s stocks were also down on the week.
Ryerson
Iron ore miners were mostly lower, despite ore prices rising on the week.
LME base metals prices were mixed with aluminum down 4.2%.
LME 3-Month Rolling Aluminum Future
The U.S. dollar fell to 95.22 while the Japanese yen rallied. The Turkish lira gained 4% after an agreement was reached between the U.S. and Turkey to release Pastor Andrew Brunson. The Yuan fell to 6.92.
US Dollar Index
Japanese Yen
Turkish Lira
Brazilian Real
Chinese Yuan
The November WTI crude oil future dropped $3 or 4% to $71.34/bbl. Crude oil inventory added 1.5%, gasoline inventory added 0.4%, while distillate inventory fell 2%. The aggregate inventory level rose 0.6%. Crude oil production increased to a new high of 11.2m bbl/day. The US rig count added eleven rigs and the North American rig count added 24 rigs. The November natural gas future added two cents or 0.6% to $3.16/mbtu. Natural gas inventory rose 3.1% to 2.96 trillion cubic feet.
October WTI Crude Oil Future (orange) and Nov. Crude 15 Delta Put Volatility (white)
Aggregate Energy Inventory (white) vs. 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 took a breather after breaking above 3.2% to close the week down seven basis points at 3.16%. Yields were lower in the bonds of the U.S., Germany and Japan as investors fled to safety in treasury bonds as global stock markets abruptly moved lower.
U.S. Ten-Year Bond Yield
German Ten-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:
– Sharp drop in steel imports
– Increased risk of domestic supply disruption
– Section 232 tariffs and quotas restricting supply
– Chronically low inventory levels
– USW Strike at ArcelorMittal
– Chinese economic stimulus measures
– 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
Downside Risks:
– Trade War Fallout
– Turkey/emerging market contagion
– Reversal of Turkish steel tariffs to 25%.
– 232 exclusions
– Stock Market Crash
– Demand destruction due to higher steel prices
– Higher dollar
– Higher oil prices slowing growth
– Higher interest rates slowing growth
– Domestic mill reopening
– Falling iron ore and scrap prices
– Political & geopolitical uncertainty
– Crashing iron ore, scrap and finished steel prices
– 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