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 Platts TSI Daily Midwest HRC Index bounced off a low of $591 in early June and then rallied to $630 in early September. Demand waned and the index fell through September and October until it reaflched a low of $583.75 on October 18th. That week, domestic steel mills began announcing flat rolled price increases. Since the announcements, prices have moved higher and lead times have moved out at a slow and steady pace. Last week, the TSI Midwest HRC Index gained $22 to $613.75/st. The November CME Midwest HRC future has bounced off its multi-year uptrend (red line) as Midwest prices look to have found support for the time being.
November CME HRC Futures (white) vs. TSI Daily Midwest HRC Index (orange)
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.
Case in point, for the second straight month, auto sales were better than expected with October sales at an 18m unit seasonally adjusted annualized rate. Globally, manufacturing PMIs were incrementally weaker as a whole, but Europe and the US sustained their very strong PMI readings. The energy industry continues to regain strength as crude prices have closed in on $55/bbl, the highest level since February.
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. 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 were a defensive measure in response to concerns over 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.
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 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 October ISM Manufacturing PMI fell 2.1 points to 58.7 and missed expectations of 59.5.
ISM Manufacturing PMI (white) and TSI Daily Midwest HRC Index (orange)
The producers’ inventory subindex dropped 4.5 points to 48 falling below 50. The supplier deliveries, prices and backlog subindices all fell 3 points. However, the new orders, production, supplier deliveries and prices subindices remain above 60 with the ISM PMI still at a very strong 58.7.
ISM Manufacturing PMI
The new orders subindex remains at a strong 63.4. The backlog subinex lost 3 points, but remains at a respectable 55. Notice both remain near five year highs.
ISM Manufacturing PMI New Orders (white) and Backlog (orange)
The customer inventory subindex remains at recession levels this month at 43.5 with a three month average of 42.17 indicating major contraction.
ISM Manufacturing PMI Customers’ Inventory
The tables below takes data from the last two Durable Goods Reports examining the YoY percentage change in nominal unadjusted US dollars for inventory and then subtracting the YoY percentage change in nominal unadjusted US dollars for new orders:
(change in inventory – change in new orders)
As you can see, almost every category is in need of replacing inventory sold on new orders. In other words, while inventory has increased YoY, inventory hasn’t increased by enough to replace all of the goods sold.
For instance, taking the YoY % change in inventory (Column E) minus the YoY % change in new orders (Column D) for the “total” durable goods category in 2017 shows a draw down of 2.7% (Column C). The twenty five year average of the YoY % change in inventory minus the YoY % change in new orders for the “total” durable goods category in the month of September shows an average inventory drawdown of 1.1% (Column B). Taking Column C – Column B shows a drawdown in September of 2017 of 1.6% greater than the 25 year average.
This table is the same as above but with August data. Looking at both tables, you see drawdowns in almost every category for at least the past two months. The one industry where there was growth in inventory was the transportation motor vehicles and parts sector, but we’ve seen the drastic reduction in inventory at dealerships in the September auto inventory report. More on auto inventory later in the report.
Let’s do some math:
This combination could explain the resilience in the Midwest HRC price throughout 2017, but also indicates the serious risk of a sharp move higher in price were there to be a positive demand shock or supply disruption.
Below is the ISM Manufacturing PMI by month with subindexes; all at very strong levels, except for the two inventory sub-indexes. Notice the YoY improvements. They are pretty spectacular.
Except for the Richmond Fed Manufacturing report, the regional manufacturing reports were all higher and beat expectations. In fact, the Chicago, Empire, Dallas and KC regional indexes were at their highs for the year. The ISM coming in lower and below expectations was somewhat of a surprise considering.
The colors in the table above correspond to the appropriate PMI index below. The chart on the right normalizes the data. The data shows a broad based uptrend.
October US auto sales of 18m SAAR beat expectations of a 17.5m unit rate.
October US Auto Sales SAAR
This chart goes back almost 30 years showing the inverted unemployment rate (because lower is better) compared to auto sales. If you get a new job, you need to get to and from it so common sense confirms what we see in the chart. What was interesting was the unemployment rate kept falling, but auto sales sputtered. While the hurricanes are mostly to blame, auto sales spiked back up toward the orange unemployment line.
October US Auto Sales (white) and the Inverted Unemployment Rate (orange)
Unadjusted auto sales were down 167k units MoM to 1.349m units.
US Monthly Auto Sales
The three month moving average of monthly sales is down slightly MoM to 1.45m units.
US Monthly Auto Sales 3 Month Moving Average
Almost every automaker saw their daily sales rate fall MoM, but almost every company saw their DSR up YoY. The group’s DSR is up 2.6% YoY. However, YTD sales are down 1.8%.
Ford took some share from Toyota, not much change otherwise. To be clear, this is the percentage of only the top six automakers sales, not all automakers.
Top Six Auto Manufacturers September Sales
Auto inventory data from Wards showed a MoM gain in inventory days on hand to 71 from 65, but down 2 days YoY. The big six from above have very healthy YoY inventory levels. Mitsubishi and Volkswagen however look to be struggling mightily.
Looking at days on hand paints a similar picture; that the boost in sales from the hurricanes has helped the big six right their inventory woes from the summer.
Wards Auto Inventory Data per Auto Manufacturers
Comparing the big six inventory levels over the past four years confirms inventory levels look to be healthy and concerns that popped up over the summer have abated for now.
Wards Auto Inventory Days On Hand
September seasonally adjusted US construction spending was up 0.3% MoM beating expectations of a 0.2% contraction. However, August spending was revised lower to a 0.1% gain from a 0.5% gain.
September seasonally adjusted YoY spending is up 2% for total spending and 9.5% for total residential, but down 2.9% for total nonresidential spending.
September unadjusted total US construction spending was down 1.4% MoM, but up 1.1% YoY. Private residential spending was down 2.5% MoM, but up 8.82% YoY. Private nonresidential spending was down 0.4% MoM and 4.5% YoY.
September US Construction Put in Place
Total YTD spending continues to trend higher and make new highs.
Total YTD private spending also continues to trend higher into new all-time highs.
YTD private residential spending is up 11.74%.
YTD private nonresidential spending is up 2%.
These next two charts show the unadjusted spending data for total spending and nonresidential spending. The purpose is to show graphically the seasonality in the construction business, especially the ramp up in spending that will start to occur in February. The orders for those spring deliveries will start being placed in the coming weeks. Taking into account the annual construction spending trends above, the strong employment data and all of the damaged homes and buildings by not only this year’s hurricanes, but also the California wildfires, it is reasonable to expect 2018 construction spending to continue to trend higher.
Monthly Unadjusted Total Construction Spending
Monthly Unadjusted Nonresidential Construction Spending
The table below shows October PMI by country with the left side sorted by economic strength and region and the right side by the highest PMI to the lowest. In aggregate, PMIs were slightly lower. The US at 58.7 and Eurozone at 58.5 remain very strong. Both Chinese PMIs were lower while Japan was down slightly. The JP Morgan Global Manufacturing PMI was up 0.3 to 53.5. Mexico was the only country in contraction falling to 49.2.
The Eurozone continues to trend higher with Italy and Spain both gaining 1.5 points. Germany was flat at 60.6.
Eurozone (white), German (blue), Italian (green), French (yellow) and Spanish (red) Manufacturing PMIs
There was a little weakness in the world’s largest economies, but overall maintaining strength in the west and YoY improvement in China and Japan.
US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
Below are China’s Official and Caixan Manufacturing PMIs, with the official one down 0.8 to 51.6 and the Caixan PMI flat MoM.
China Official (white) and Caixan (orange) Manufacturing PMIs
Except for stocks of finished goods, every subindex fell.
The contraction in the inventory subindexes continues. It will be interesting to see how this factor reacts to the latest production curtailment policy.
China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)
Not a great sign to see new orders and backlogs move lower.
China New Orders (white) & Backlogs of Orders (red)
As you can see below, a drop in new orders probably indicates a fall in Chinese and ASEAN HRC prices.
China New Orders (white), TSI ASEAN HRC Index (red) Chinese Spot Price (blue)
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. Australian coking coal, ASEAN HRC, copper prices have held on to most of their gains since June, 1st.
The futures curve consolidated the previous week’s move higher. October CME Midwest HRC futures settled at $593/st. As of Friday night’s settlements, November was up $4 to $605 and December gained $1 to $625. Q1 and Q2 2018 were flat at $627 and $628, respectively.
Flat rolled index prices were mixed with gains in the US and lower prices in Europe and Asia.
The TSI North European HRC Index shed $10 to $568/st and the TSI ASEAN HRC Index was down $15 to $501/st.
Imports continue to trend lower.
Flat Rolled (blue) and Tube (red) Imports
Flat rolled imports continue to drop.
Tube imports are coming off hard, but are still up big YoY.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. HRC and CRC differentials remain near multi-year lows. The lack of import deals made in the May through July period due to the Section 232 Investigation and now the closing of the import price window supports our belief that imports will decline precipitously in the near term and stay depressed into 2018 unless global price dynamics change.
Notice in the charts above the last two times the differentials bottomed; first in March, 2016 and second at the end of October, 2016. Now look at the chart below and notice the massive rally in the Midwest HRC price that followed in both instances. While not statistically significant, you might want to buckle your chinstrap.
Platts TSI Daily HRC Price
US Midwest HRC gained 3.6% and Brazilian domestic HRC gained 1.7%. Chinese Domestic HRC shed 3.3%, Russian Export HRC fell 3$, Middle East Import lost 2.6% and South European HRC fell 2.4%.
US Midwest CRC prices gained 1.2%. Russian Export CRC fell 4%, South European CRC dropped 1.9%, Chinese export CRC fell 1.65% and North European CRC was down 1.2%..
US Midwest HDG gained 3%, while South European HDG fell 3% and Middle East import HDG fell 2.5%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate fell to 74.3%.
It was an interesting week where iron ore was under pressure but scrap prices rose. There is no doubt China’s winter production cuts will have ripple effects on global ferrous and ferrous raw materials prices. How much lost Chinese production will be directly or indirectly replaced by global steelmakers and how much of those tons will be made by EAFs and how much by BOFs will play out in the coming months.
The November SGX iron ore future was down $2.07 or 5.3% to $58.40/t WoW, while November LME Turkish Scrap future gained $4.5 or 1.4% to $315/t.
The front of the iron ore curve remains flat before shifting into backwardation starting in June, 2018. This is most likely in response to China’s winter production curtailment.
January Chinese rebar futures fell another 2.1% while US Southeast plate was down 2%. Northwest European rebar gained almost 3%.
September new home sales of 667k SAAR beat expectations of 554k in spectacular fashion and were up 18.9% from a 561k home rate in August. Unchanged September pending home sales missed expectations of a 0.5% MoM gain and were down a worse than expected 5.4% YoY. The lack of inventory continues to be a drag on pending home sales.
Q3 GDP of 3% beat expectations of 2.6%. The Q3 personal consumption indesx and GDP price index were both stronger than expected, while core PCE of 1.3% was in line with expectations.
US GDP
Last month, the Federal Reserve Bank of New York’s Underlying Inflation Guage rose to 2.83%.
The Federal Reserve Bank of New York Underlying Inflation Gauge
The September Durable Goods Orders Report beat expectations up 2.2% vs. 1% while orders ex-transportation gained 0.7% vs. expectations of 0.5%. August was revised higher to 0.7% from 0.5%. September capital goods orders gained 1.3% vs. expectations of 0.3% with August revised higher to 1.3% from 1.1%. September capital goods orders ex-transportation gained 0.7% vs. expectations of 0.1%.
YTD through September durable goods orders are doing very YoY in every category except motor vehicles and parts.
Inventory was mostly lower MoM.
The S&P 500 made another new all-time high closing the week at 2578.4. Stock markets saw gains in China, Europe and Japan.
S&P 500
Steel producers were all down while service centers were mixed.
US Steel
Ore stocks all fell with ore.
LME zinc gained 2.4% and LME aluminum gained 1.5%. Copper fell almost 2% while LME Nickel gave back 1.3%.
CME December Copper Future
LME 3 Month Rolling Zinc Future
The US Dollar Index broke above the 94 level closing the week just below 95 at 94.92. The euro fell 1.5%. The Turkish lira fell 3.1%, the Australian dollar was down 1.8%, the Canadian dollar fell 1.5%, the Brazilian real was down 1.3% and the Russian ruble fell 1%.
US Dollar Index
Euro
Australian Dollar
Turkish Lira
The December WTI crude oil future broke to the highest level since April gaining 4% to $53.90. Crude oil inventory gained slightly but aggregate inventory fell 1.2%. The US rig count fell 4 rigs while production rebounded sharply gaining 13.1%. The November natural gas future gained 1.5% to $2.96/mbtu with inventory increasing 1.76%.
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 broke above the 2.4% resistance level trading as high as 2.48% before settling the week at 2.41%. Yield fell in Germany, Spain, Italy and Japan. China’s 10 year Treasury rate gained 10 basis points.
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