It was a quiet week as the summer is fully in the rearview mirror. The “buyer’s strike” continues, while another strike may be brewing. While the odds are probably low, the tensions are heating up. The letter below was written to USW members and posted on Tuesday night. There are some harsh words and veiled threats. USW membership almost unanimously granted its leaders authorization to go on strike.
The following issues are the foundation of our current bullish view:
– Steel tariffs and quotas
– Domestic economic and manufacturing strength
– A rebounding and strengthening US energy industry
– Persistently low OEM inventory levels evidenced in the ISM, MSCI and Durable Goods reports
– Conditions ripe for OEM restocking
– Global economic strength
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
– Chinese economic stimulus measures
Downside Risks:
– Trade War Fallout
– Turkey/emerging market contagion
– 232 exclusions
– NAFTA Resolution
– 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
Last week, the September CME HRC future fell $3 to $862/st, while the Platts TSI Daily Midwest HRC Index fell $8.5 to $862/st.
September CME HRC Futures (orange) vs. Platts TSI Daily Midwest HRC Index (white)
The CME Midwest HRC futures curve is shown below with Friday’s settlements in orange. HRC futures rebounded last week.
October ferrous futures are listed below. Chinese HRC was under pressure, while Australian coking coal has now rallied back above $200/t..
Flat rolled indexes were mostly lower.
The AISI Capacity Utilization rate broke above 80 to 80.2%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
August’s flat rolled imports are forecast to fall almost 150k tons MoM to 848k. Early September data is pointing to a significant jump back above 1.15m.
August’s tube import forecast is for licenses to fall 44k tons to 527k and September is forecast to fall another 25k tons to 503k.
August’s flat rolled plus tube import licenses are forecasting a large drop to 1.38m while September is forecast to rebound to 1.65m.
Flat Rolled (blue) and Tube (red) Imports
August’s AZ/AL licenses are forecast to fall 32k tons to 62k, but rebound right back to 100k in September.
Galvalume Imports (blue) w/ 3 Mo. Moving Average (red)
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. Differentials have been decreasing in recent weeks with the Midwest indexes faling.
The SBB Platts HRC, CRC and HDG pricing is below.
Coking coal was up 5.8% followed by gains in iron ore with little else changed on the raw materials front.
The October SGX iron ore future gained $0.75 or 1.1% to $68.65 while LME Turkish scrap was unchanged at $314/t.
The SGX iron ore futures curve has sold off and flattened slightly over the past month.
The chart below shows the 2nd month SGX iron ore had broken below its longterm up trend. The “triangle” pattern predicts a significant correction to result, but the correction failed to materialize and instead rebounded back into the triangle moving. Ore volatility is ultra-low as prices remain compressed and range bound.
2nd Month SGX Ore Future
Ex-flat rolled prices were quiet except Chinese rebar futures which fell 3.5% reversing last week’s gains and then some.
The August NFIB Small Business Optimism Index rose to 108.8, the highest level ever. August CPI Ex-Food & Energy rose 2.2% YoY, down from July and missing expectations. The August PPI Ex-Food & Energy rose 2.3%, also down from July and missing expectations.
The S&P 500 continues its relentless rally higher. Globally, equity markets were mostly higher.
S&P 500
Steel mill stocks were mixed.
AK Steel
Service center’s stocks were also mixed.
Northwest Pipe & Tube
Iron ore miners were all up.
LME base metal’s prices were mixed with zinc looking to hold the double bottom at $2300/t.
LME 3-Month Rolling Nickel Future
LME 3-Month Rolling Aluminum Future
LME 3-Month Rolling Zinc Future
The U.S. dollar fell back below 95 while the yen weakened. The Turkish lira, Russian ruble and Mexican peso rebounded, while the Brazilian real fell to new all-time lows vs. the dollar breaking above 4.20.
US Dollar Index
Japanese Yen
Turkish Lira
Russian Ruble
Mexican Peso
Brazilian Real
The October WTI crude oil future gained $1.15 or 1.7% to $68.99/bbl. Crude oil inventory fell 1.3%, while distillate inventory jumped 4.6%. Gasoline inventory levels increased 0.9% and the aggregate level was up 0.3%. Crude oil production down slightly to 10.9m bbl/day. The US rig count added 7 rigs and the North American rig count added 29 rigs. The October natural gas future was about unchanged at $2.77/mbtu, while inventory rose 0.5% to 2.6 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 rallied above 3% and mortgage rates moved above 4.5%. The German ten-year yield rose to 0.45%.
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 September contract negotiations
– 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
– 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