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 closing this past week down $5 to $625, while the September CME Midwest HRC future was down $14 to $624. Global and domestic steel industry fundamentals continue to strengthen, although domestic steel prices were under marginal pressure this past week. Hurricanes Harvey and Irma’s destruction have disrupted production in the short term, but will boost demand in the months ahead as totaled autos are replaced and communities are rebuilt. HRC prices remain in a tight range.
October CME HRC Futures vs. TSI Daily Midwest HRC Price
Data continues to show persistently low inventory levels at OEMs and service centers. August’s ISM report indicated a major imbalance between producer and consumer inventory levels. The imbalance hasn’t been this large since the 2010 – 2011, when HRC prices rallied from $550/st to $875/st. Current conditions are ripe for a massive restocking rally.
ISM Prod. Inv. – Cust. Inv. Differential (white) vs. TSI Daily HRC Index (orange)
August MSCI flat rolled data released today showed an increase in both shipments and inventory.
August flat rolled shipments of 2.32m short tons increased 330k st MoM and are just above the August average of the previous six years.
There were three more shipping days in August so the daily shipment rate (DSR) was only up incrementally to 100.93 st per day.
Flat rolled inventory at 4.75m st increased by 2.3% or 108k st MoM, but remains down 5.25% or 264k st YoY.
Adjusted months-on-hand (for the DSR) was 2.14, just above July’s 2.12 MOH.
Unadjusted MOH fell to 2.05 from 2.33 in July.
Year to date, flat rolled shipments are up 2.4%.
The following are the foundation of our current constructive view:
-Rallying ferrous raw materials, global finished steel and base metal prices
-Persistently low flat rolled inventory evidenced in the MSCI, ISM and Durable Goods reports
-Conditions ripe for distribution and customer restocking
-A global uptrend in manufacturing purchasing managers’ indexes
-A rebounding US energy industry
-Falling imports volumes expected for the remainder of 2017; shrinking global differentials
At the end of each “Week Over Week” report is a list of upside and downside risks that influence the domestic HRC price. That list will remain at the end of the report, but going forward the risks deemed to be most timely and significant will be listed below.
At its core, the purpose of this report is not to forecast HRC prices, but to present possibilities to be considered in FGM’s “If this, then what?” framework in order to evaluate risk tied to steel prices and availability.
Upside Risks:
– Rallying ferrous raw materials and global finished steel prices
– Low inventory levels/domestic or global restocking
– Post hurricane development and production
– China pumping up its “old economy”
– Energy industry rebound
– Weaker dollar
– Graphite Electrode Shortage
Downside Risks:
– Political & geopolitical uncertainty
– Domestic automotive industry under pressure
– Rebound in import volumes
– Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma
Listed above in upside risks is the graphite electrode shortage, which made headlines last week when Graftech, currently the largest electrode producer in the world, declared force majeure after Hurricane Harvey disrupted the firm’s needle coke supply. Prior to this announcement, graphite electrode supply was already sharply reduced after China implemented supply-side reforms aimed at controlling pollution.
According to Jefferies equity analyst Rahul Murkya, it takes approximately 2 kg of graphite electrodes to produce one ton of steel or one ton of electrode produces 450 mt of steel. . Prices have soared from $5500/mt to above $30,000/mt. At $5500/t, the graphite electrode adds $12.21/mt to the steel producing cost. At $30,000/mt, a graphite electrode adds $66.58/mt, an additional $54.37/mt.
There are some steps EAFs can take to conserve electrode consumption. While some mills plan to pass on the extra cost, availability becomes the greater issue in the months ahead if the lack of electrode supply lead to production cuts. In fact, it is reported that some Turkish mills have already been forced to run at reduced rates.
The table below compares the prices changes of a cross section of steel related raw materials and finished products. Midwest HRC prices remain near the bottom of the list.
Imports have materially increased in recent months, most likely in response to the potential threat of the 232 Investigation. However, concerns over the 232 Investigation were drastically reduced in July. Nevertheless, new import deals during the months of May, June and July were curtailed as all parties to import transactions looked to avoid the uncertainty and potential penalties tied to the investigation. While the threat of the 232 still looms, the effect was all but eliminated in the short-term as President Trump’s Agenda has floundered. In the mean time, the domestic premium has compressed versus the rest of the world. These events will result in a sharp drop in flat rolled imports in the coming months constricting supply.
SBB Platts HRC and CRC differentials are charted below. Differentials are near or below the lows reached last October.
As of Friday’s settlement, the September CME Midwest HRC future ended the week down $13 to $624/st. Q4 dropped $22 to $620. Q1 2018 fell $22 to $20 and Q2 fell $19 to $620.
Flat rolled indices were mixed.
The TSI North European HRC Index and TSI ASEAN HRC were close to unchanged.
September flat rolled imports look to be up 3% YoY while tube looks to be up 180%! August flat rolled licenses look to be up 7.4% YoY while August Tube licenses look to be up 134%. In the chart below, you can see flat rolled trending lower since peaking in June.
Flat Rolled (blue) and Tube (red) Imports
Flat rolled imports looks to have peaked and are trending lower.
Tube imports have exploded this year, but may have peaked in July. The chart below includes September forecast of 957k tons, but it is still very early in the month to deem that forecast reliable.
Below are HRC, CRC and HDG prices and differentials using pricing from SBB Platts. There were big shifts lower in HRC and CRC differentials this week. The lack of 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 until early 2018 at the earliest.
HRC prices saw huge gains in Russia and The Middle East.
Russian CRC jumped 12%. China was mixed with European CRC down 1-2%.
Middle East Import was marked almost 14% higher.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
AISI capacity utilization was down to 74.3%.
Prices were flat or down for raw materials.
Iron ore and LME Turkish scrap futures were down.
The iron ore curve has shifted lower MoM, but the shape of the curve is relatively unchanged.
Black Sea billet gained 3% while the January Dalian rebar future fell 4.4%
The September Empire Manufacturing Survey clocked 24.4, down slighlty from August, but well above expectations of 18. August industrial production fell 0.9%, missing expectations by 1%. July data was revised higher to 0.4% from 0.2%. August capacity utilization at 76.1% in turn disappointed, but July’s data was revised higher to 76.9% from 76.7%.
CPI and PPI data remain lackluster. Small business optimism remains healthy at 105.3. Retail sales disappointed. Sentiment was down slighlty, but better than expected.
Chinese economic data was mixed as well with retail sales, fixed asset investment and industrial production down MoM and missing expectations, while new yuan loans and aggregate financing was up big MoM and much better than expected.
China New Yuan Loans
The S&P 500 made another new high closing the week at 2497.2. The Shanghai Property Index continues to rally. The Nikkei gained a solid 3.6%.
S&P 500
Shanghai Property Index
Steel stocks were mixed, but mostly lower.
US Steel
Iron ore stocks were all down with ore prices.
Base metals were lower with nickel down 4.3% and copper down 3%. Zinc was flat.
LME 3 Month Rolling Nickel Future
CME December Copper Future
The US Dollar Index rebounded slightly just below 92 as the Japanese yen fell sharply. The British pound jumped over 3%.
US Dollar Index
Japanese Yen
British Pound
The October WTI crude oil future jumped over 5% to $49.89/bbl and traded above $50/bbl. The US rig count cut eight rigs. Production rebounded almost back to pre-Hurricane Harvey levels. Crude oil inventory added 1.25% while the sum of crude, distillate and gasoline inventory was down 0.7% on draws in distillates and gasoline. Natural gas rose 4.6% to $3.02/mbtu. Gas inventory gained almost 3%. The average gas price was down 1% to $2.64.
November WTI Crude Oil Futures and November 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 10 year US Treasury yield gained 15 basis points to 2.2%, a strong move of 7.4%. Rates were up across the board, except in China. Inflation expectations gained nicely 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:
– Rallying ferrous raw materials and global finished steel prices
– Low inventory levels/domestic or global restocking
– Post hurricane development and production
– China pumping up its “old economy”
– Energy industry rebound
– Weaker dollar
– Graphite Electrode Shortage
– Flatbed trucking availability
– Section 232 Investigation
– President Trump’s agenda
– Infrastructure bill/long-term solution to highway spending bill
– China getting serious about curtailing steel production
– Transportation supply constraints
– Post-election economic pick up
– Unplanned domestic supply side disruptions
Downside Risks:
– Political & geopolitical uncertainty
– Domestic automotive industry under pressure
– Rebound in import volumes
– Sharp increase in scrap volumes resulting from Hurricanes Harvey & Irma
– Sharp and persistent drop in oil and 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