There was little to report from the steel market during the third week of September. The negotiations with the USW, ArcelorMittal and US Steel continued to press on without resolution; however, the rhetoric out of the USW became more aggressive. This update was posted on September 18th and includes a veiled threat of the USW going on strike.
Otherwise, the “buyers strike” continues. The question of whether this lack of purchasing is due to a sharp drop in demand or buyers refraining from purchasing steel as the strategy of withholding purchases is rewarded week after week as flat rolled prices and lead times continue to fall. The upside risk is to the latter, where a sharp correction higher could occur as the pent up demand continues to build.
The third quarter is close to being finished and the first week of October will bring more information about demand when the ISM Manufacturing Index, auto sales, employment and August construction spending reports are announced.
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
– 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 October CME HRC future gained $2 to $839, while the Platts TSI Daily Midwest HRC Index fell $13.5 to $848.5/st.
October 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.
Flat rolled indexes were mostly lower.
The AISI Capacity Utilization Rate fell to 70.4%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
September’s flat rolled import license data is pointing to a significant jump to 1.13m.
September is forecast to fall another 30k tons to 499k.
September combined flat rolled and tube import licenses are forecast to rebound to 1.63m.
Flat Rolled (blue) and Tube (red) Imports
September AZ/AL import licenses are projecting an almost 40k ton MoM increase to 101k tons, the largest monthly total since August 2017.
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.
Price changes of raw materials were mixed with little movement overall. Pig iron was under pressure.
The October SGX iron ore future gained $0.21 or 0.3% to $68.86 while LME Turkish scrap gained $0.50 or 0.2% to $314.5/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 the price rebounded back into the triangle now threatening to break through the downtrend line. Ore volatility continues to be at ultra-low levels as ore prices have remained in a compressed range since March.
2nd Month SGX Ore Future
Ex-flat rolled prices were quiet were mixed with the January rebar future higher in China, but physical rebar prices lower in Turkey and Europe.
The September Philadelphia Fed Index rebounded to 22.9 and beat expectations. The Dallas Fed Manufacturing Index slipped to 28.1 and missed expectations. August existing home sales were flat MoM at 5.34m annualized units, slightly missing expectations.
The S&P 500 continues its relentless rally higher. Equity markets listed below all moved higher.
S&P 500
Steel mill stocks were mostly higher
ArcelorMittal
Service center’s stocks were also mostly higher.
Ryerson Inc.
Iron ore miners were all up.
LME base metal’s prices saw a sharp rebound after weeks of selling off.
CME December Copper Future
LME 3-Month Rolling Zinc Future
LME 3-Month Rolling Nickel Future
LME 3-Month Rolling Aluminum Future
The U.S. dollar continued to move lower while the Euro rallied 1.1%. The Brazilian real, Russian ruble and Aussie dollar saw gains while the Turkish lira was down.
US Dollar Index
Euro
Brazilian Real
Russian Ruble
Turkish Lira
The November WTI crude oil future gained $2.01 or 2.9% to $70.78/bbl. Crude oil inventory fell 0.5% and gasoline inventory fell 0.7%, while distillate inventory gained 0.6%. The aggregate inventory level fell 0.4%. Crude oil production inched back up to 11m bbl/day. The US rig count cut 2 rigs and the North American rig count lost 31 rigs. The November natural gas future jumped 8.1% to $2.97/mbtu, while inventory rose 3.3% to 2.7 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 continued to rally closing the week at 3.06%. Mortgage rates rose 13 basis points to 4.66% and have gained 81 basis points YTD.
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
– 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