Last week was relatively quiet in the flat rolled market. The most notable development was a slight uptick in steel mill lead times. FGM saw an increase in purchase orders and request for quotes. These two data points are considered positive developments following domestic mill price increase announcements as the deeply entrenched negative sentiment seen in the buyer’s strike begins to thaw.
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 November CME HRC future dropped $19/st to $811 while the Platts TSI Daily Midwest HRC Index gained $1 to $837.5/st.
November 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 was under pressure after a large drop in the CRU HRC index.
November ferrous futures are in the table below. Chinese Rebar & HRC futures as well as the Midwest HRC future moved sharply lower, while shred and coking coal gained.
Flat rolled indexes were mostly lower with Chinese HRC falling 2.6%.
The AISI Capacity Utilization Rate rose to 80.2% from 79% last week.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Below are HRC and CRC Midwest vs. each country’s export price differentials using pricing from SBB Platts.
SBB Platt’s HRC, CRC and HDG WoW pricing is below. Chinese Export and Domestic HRC fell 1.8% and 1.4%, respectively. East Asian Import HRC fell 2.3%, South European HRC was down 1.8% and Turkey Export HRC dropped 1.4%.
Chinese Export CRC is down 1.2% and Chinese Domestic CRC decreased 1.3% last week.
U.S. HDG gained 1.8%, while South European HDG fell 1.4% WoW.
Raw materials saw mixed price action with gains in ore and coal up over 2%, while Black Sea pig iron was down by 2.6%.
The November SGX iron ore future gained $1.68 or 2.41% to $71.53 while the November Turkish scrap future was up $0.50 or 0.16% to $316.50.
The SGX iron ore futures curve:
The chart below shows the 2nd month SGX iron ore future breaking out of a “triangle” pattern, which predicts a significant rally to come.
2nd Month SGX Ore Future
Ex-flat rolled prices are below.
The October Empire Manufacturing Index rose 2.1 points to 21.1, beating expectations. The October Philadelphia Fed Index fell slightly to 22.2, but beat expectations of a fall to 20. September capacity utilization was flat at 78.1%. September housing starts, bulding permits and existing home sales all fell MoM and missed expectations.
The S&P 500 was unchanged while China’s CSI 300 continued to move lower.
S&P 500
Steel mill stocks were mostly down, with ArcelorMittal down 5% WoW.
ArcelorMittal
Service Center’s stocks were all down on the week. Ryerson, down 7.7%, saw the steepest loss of the group.
Ryerson
Equities of iron ore miners continued to decrease despite ore prices continuing to rise.
LME base metals prices were all lower with aluminum leading the way down falling 1.9%.
LME 3-Month Rolling Aluminum Future
The U.S. dollar rallied to 95.7. The Turkish lira gained 4.2% and the Brazilian real was up 1.8%. The Mexican peso fell 2.2%.
US Dollar Index
Turkish Lira
The November WTI crude oil future dropped $2.22 or 3.1% to $69.12/bbl. Crude oil inventory added 1.6% and gasoline inventory added 0.4%, while distillate inventory fell 2%. The aggregate inventory level rose 0.6%. Crude oil production dropped to 2.7% to 10.9m bbl/day. The US rig count added four rigs, while the North American rig count saw no change. The November natural gas future added nine cents or 2.8% to $3.25/mbtu. Natural gas inventory rose 2.7% to 3.04 trillion cubic feet.
December 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 rose 0.03% this week to close the week at 3.19%.
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 automotiv