According to September MSCI flat rolled data, service centers shipped at a 101.2k short tons/day daily shipment rate (DSR), in line with August and up 2.6% YoY.  The actual shipments of 2.02m short tons (st) was down almost 300k MoM, but there was only 20 shipping days in September versus 23 in August.  Inventory increased 164k st in September to 4.92m.  Months-on-hand (MOH) rose to 2.43 from 2.05 in August and 2.36 in September, 2016. MOH DSR adjusted rose to 2.21 from 2.14 in August and was down from 2.26 a year ago.

Flat rolled shipments were down 2.26% or 46k st YoY. 

The flat rolled DSR was up marginally MoM and YoY.

Flat rolled inventory saw a big gain MoM, but was only up 0.5% YoY.  Flat rolled inventory hasn’t been above 4.9m st since September, 2016.

MOH continues to trend higher, but is down slightly YoY.

YTD shipments are up slightly.

As horrible and tragic as the hurricanes of 2017 were, their destruction has to created a significant boost 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. 

The jump in both September ISM survey’s are the first indication of a potential wave of demand to hit the economy over the coming months.

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 TSI Daily Midwest HRC Index has bounced off a low of $591 closing this past week down $11 to $599 continuing the recent price slide. The November CME Midwest HRC future was down $12 to $586, but may be finding support at its long term bullish trend line.

November CME HRC Futures vs. TSI Daily Midwest HRC Price

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.  September auto sales were fantastic helping alleviate recent concerns over falling auto demand seen throughout 2017.  Globally, manufacturing PMIs continue to strengthen with the US now up to 60.8. The energy industry continues to regain strength as crude prices hover around $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 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 and scrap prices had been under serious pressure until last weeks slight rebound, but remain near multi-month lows.  This has in turn pressured finished steel prices lower.  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 was in anticipation of a potentially restrictive 232 ruling.  Last, a nascent rally in the US dollar is worth watching as a stronger dollar can pressure commodity prices lower.  

Data continues to show persistently low inventory levels at OEMs, however September MSCI flat rolled inventory data indicates that dynamic might be changing for service centers.  A few months back, there was an increase in the producer inventory subindex of the ISM manufacturing report indicating a restocking of raw materials to meet a bump in expected future demand.  Is this increase at the producer level pushing through to the distribution level now indicating stocking up ahead of expected increased demand or is it the result of an inventory overhang and depressed demand?  Regardless, current conditions at the OEM level continue to indicate a restocking is long overdue.

The following are the foundation of our current constructive view:

–     A global uptrend in manufacturing purchasing managers indexes

–     A rebounding 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

–        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

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 and previously we expected US prices would move higher to converge with the other products. Instead, scrap and ore sold off sharply in past weeks, however LME scrap futures recovered nicely last week.  Asian HRC, coking coal, copper and iron ore continue to hold on to most of their gains since June, 1st with copper breaking higher.

As of Friday’s settlement, the October CME Midwest HRC future settled down $9 to $595/st.  November was down $12 to $586. The rest of the curve bounced at week’s end.  December was up $1 to $597.  Q1 2018 gained $9 to $615 and Q2 2018 gained $10 to $618. 

Flat rolled prices were mostly lower.

The TSI ASEAN HRC Index was up $1 to $518/st and the TSI North European HRC Index gained $4 to $581/st.

Imports look to have peaked and are rolling over as expected.

Flat Rolled (blue) and Tube (red) Imports

Below is October data per type, country and price.

The data from above is charted below.

Flat rolled imports looks to have peaked and are trending lower.

Tube imports have exploded this year, but may have peaked in July.

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 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 until early 2018 at the earliest.

HRC prices were mixed with Chinese domestic and UK HRC up over 3%.  Midwest HRC fell 1.7%.

CRC prices were down 3% in the US, but up 2% in China and 1.2% in North Europe.

Midwest HRC fell almost 2%.

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rate rebounded to 74.7%.

Pig iron and coking coal were under pressure, while scrap was up slightly.

The iron ore curve has shifted lower MoM with the curve flattening.

January Chinese rebar futures rebounded sharply and Turkish rebar gained almost 1.5%.  Chinese spot HRC gained almost 3%.

September headline YoY PPI and CPI were both above 2% at 2.6% and 2.2%, respectively.  The YoY PPI Ex-Food & Energy printed 2.2%, beating expectations of 2%.  The YoY CPI Ex-Food & Energy gained 1.7%, just missing expectations of 1.8%. The September NFIB Small Business Optimism Index slipped to 103, missing expectations of 1.05.  September retail sales and the preliminary October U of M Consumer Sentiment Index improved and mostly beat expectations.

The S&P 500 made another new all-time high closing the week at 2552.8.  The Chinese CSI 300 and the Nikkei gained over 2%.

S&P 500

Steel stocks were mostly much higher on the week.


Ore stocks gained.

LME nickel jumped 10% while copper gained over 3%.

CME December Copper Future

LME 3 Month Rolling Nickel Future

The US Dollar Index retreated to 93.09 with the euro and yen gaining just above 0.7%.  The British pound, Australian dollar, Russian ruble, Korean won and Chinese yuan gained over 1%.  The Mexican peso dropped 2.1%.

US Dollar Index

British Pound

Mexican Peso

The November WTI crude oil future rebounded 4.4% to $51.45/bbl.  Crude oil inventory was down another 0.6% and the aggregate inventory level fell 0.2%.  The US rig count fell 8 rigs.  Crude oil production fell almost 1%.  Natural gas prices also rebounded by gaining back almost 5% while natural gas inventory gained 2.5%.

November WTI Crude Oil Futures and November 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 closed the week down nine basis points to 2.27%.  Rates were mostly under pressure except in Asia.  

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

–        Chronicly low inventory levels/domestic or global restocking

–        Post hurricane development and production

–        China pumping up its “old economy”

–        Energy industry rebound

–        Graphite Electrode Shortage

–        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