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 in early June, rallying to $630 in early September and then falling to a low of $583.75 last Wednesday.  ArcelorMittal announced a price increase late Tuesday night, which was followed by price increase announcements from a number of other domestic mills including AK Steel and Nucor.  The November CME Midwest HRC future bounced off its multi-year uptrend (red line) as Midwest prices look to have found support for the time being.   The WoW report will closely follow developments in reaction to this most recent price increase, but the strong fundamentals discussed herein point to higher flat rolled prices in the coming months.

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.  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. 

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 ISM PMI 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 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 and scrap prices have been under serious pressure and 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 centersIt will be interesting to see the October MSCI data to evaluate if the gain in service center flat rolled inventory is maintained or was a result of there being only 20 shipping days in September vs. 23 in August.  September tons shipped per day was actually slightly higher MoM at 101.2 st/d.  There are 22 shipping days in October. 

The following issues 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

–        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

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 in past weeks.  Asian HRC, coking coal, copper and iron ore continue to hold on to most of their gains since June, 1st.

The futures curve jumped.  As of Friday’s settlement, November was up $15 to $601 and December gained $27 to $624!  Q1 2018 gained $12 to $627 and Q2 2018 gained $10 to $628. 

Flat rolled index prices were mixed.

The TSI North European HRC Index shed $4 to $577/st and the TSI ASEAN HRC Index was down $2 to $516/st.

Imports continue to trend lower.

Flat Rolled (blue) and Tube (red) Imports

Flat rolled imports continue to tank.

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 next 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

HRC prices were relatively unchanged WoW.  The Chinese domestic HRC price fell 1.7% while the Midwest HRC price fell 1.2%.

CRC prices were also quiet.  The Chinese domestic CRC price was up 2.7% while the US Midwest CRC price gained 1.2%.

North European HDG fell 2.1%. 

AISI Steel Capacity Utilization Rate and TSI Daily HRC Price

The AISI capacity utilization rate inched higher to 74.8%.

East coast shred prices fell almost 6% last week, the IODEX fell 3.6% and Black Sea pig dropped 2.2%.  Turkish and Rotterdam scrap prices fell almost 2%.

November SGX iron ore futures were flat WoW, while LME Turkish Scrap fell $6.5 to $310.50.

A very interesting thing happened in the iron ore market last week.  The front of the curve flattened out for the first time in years.  This is most likely in response to China’s winter production curtailment.

January Chinese rebar futures fell 3.4%, US Plate prices were down 2.3% and Chinese physical rebar prices were down almost 2%. 

The October Empire Manufacturing Index jumped to 30.2 from 24.4 and beat expectations of 20.4. The October Philadelphia Fed Index also jumped to 27.9 from 23.8 and beat expectations of 22.  September industrial production gained 0.3% MoM and August data was revised higher to a smaller loss of 0.7%.  September capacity utilization of 76% was up from a revised 75.8% in August, but missed expectations of 76.2%.

September housing starts fell 4.7% MoM to 1.13m annualized starts, missing expectations.  September building permits fell 4.5% to 1.22m anualized permits.  August building permits were revised lower to a 1.27m rate from 1.3. September existing home sales gained 0.7% to 5.39m annualized sales. 

The Federal Reserve Beige Book reported a positive outlook for manufacturing with most firms reporting higher sales in line with expectations.  A number of firm’s saw business disrupted by the hurricanes.  The report indicated steady activity in commercial real estate.  Residential real estate contacts maintained a positive outlook for substantial demand, especially for fully renovated houses and homes on the lower end of the price spectrum.  It was also noted that most areas are suffering from inventory shortages. 

The S&P 500 made another new all-time high closing the week up 0.83% to 2574.

S&P 500

Steel producers were up across the board while service centers were mixed.

AK Steel

Ore stocks fell.

Copper shot up to $3.239/lb on Monday before ending the week at $3.166/lb with a gain of 1%, while LME zinc fell 4.20%. 

CME December Copper Future

LME 3 Month Rolling Zinc Future

The US Dollar Index continues to bang around the 93 – 94 level closing the week at 93.7.  The Japanese yen fell 1.5%.  The Canadian dollar and Brazilian real fell over 1%. The Turkish lira continued to slide falling another 1%.

US Dollar Index

Japanese Yen

Turkish Lira

The December WTI crude oil future gained 0.76% to $51.84/bbl.  Crude oil inventory fell 1.2% and the aggregate inventory level fell 0.5%.  The US rig count fell 15 rigs while production dropped 11% on hurricane disruptions.  The November natural gas future fell almost 3% to $2.92/mbtu with inventory increasing 1.4%.

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 gained eleven basis points as it approaches the 2.4% level.  German and Japanese 10 year yields gained as well. 

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

–        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