Nucor, US Steel and California Steel Industries all formally notified customers of a $40 price increase for flat rolled products effective immediately on Wednesday and Thursday of this week.
Last week, the final August Durable Goods Report showed the sharp seasonal drop in new orders and shipments in July was in fact reversed with sharp gains in line with what happened in 2016 and 2017. OEMs and steel buyers had ample inventory during the buyers strike. It will be interesting to see how depleted those inventories actually became and if these price increase announcements set in motion a cascade of buy orders that push out lead times and magnify what the data from multiple sources show as dangerously low inventory levels. Another interesting phenomenon is what the effect higher interest rates will have on stocking programs as costs of holding metals on service center floors increases.
U.S. Durable Goods New Orders Total Not Seasonally Adjusted
U.S. Durable Goods Shipments Total Not Seasonally Adjusted
The September U.S. Employment Report saw the unemployment rate fall to 3.7%, the lowest since 1970 and while payrolls only added 121k jobs, August’s gains were revised higher to 270k from 201k.
U.S. Unemployment Rate
Manufacturing payrolls remain strong with a better than expected 18k gain and an 8k job upward revision for August. There was no change MoM in average hourly earnings or the labor force participation rate.
U.S. Manufacturing Payrolls N.S.A.
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
Downside Risks:
– Trade War Fallout
– Turkey/emerging market contagion
– 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
October 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.
November ferrous futures are listed below.
Flat rolled indexes were mostly lower with OCTG prices falling over 5%.
The AISI Capacity Utilization Rate fell to 79.2%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Flat rolled and tube imports updated on October 9th.
September combined flat rolled and tube import licenses are forecasting a slight MoM Increase.
Flat Rolled (blue) and Tube (red) Imports
AZ/AL import licenses including October’s forecast updated as of October 9th.
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.
Coking coal and scrap prices strengthened last week.
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 there hasn’t been any 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.
Most of last week’s economic data was discussed in the previous report and the employment and durable goods report were discussed above.
Global stock market performance:
S&P 500
Steel mill stocks WoW.
ArcelorMittal
Service center’s stocks WoW performance…
Olympic Steel
Iron ore miners WoW performance…
LME base metal’s prices…
LME 3-Month Rolling Aluminum Future
The U.S. dollar saw sharp gains after last breaking above 95 to close the previous week.
US Dollar Index
Euro
Japanese Yen
Turkish Lira
The November WTI crude oil future gained $1.09 or 1.5% to $74.34/bbl. Crude oil inventory added 2%, while distillate inventory fell 1.3% and gasoline inventory was close to unchanged. The aggregate inventory level rose 0.75%. Crude oil production was flat at 11.1m bbl/day. The US rig count cut two rigs and the North American rig count added two rigs. The November natural gas future added another fourteen cents or 4.5% to $3.14/mbtu. Natural gas inventory rose 3.5% to 2.87 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 moved abruptly higher adding seventeen basis points to close the week at 3.23%. Mortgage rates rose to 4.75% raising concerns higher rates hampering home sales.
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
– 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
– 232 exclusions
– NAFTA Resolution
– 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