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 $8 to $617, while the October CME Midwest HRC future was down $6 to $599.
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. September auto sales were fantastic helping alleviate concerns over falling auto demand seen throughout 2017. Flat rolled import licenses continue to fall sharply while global differentials remain unattractive leading to expectations of tighter supply over the short and medium term future. A number of domestic steel mill shutdowns are projected to cut 1.2 million tons of production by year end. China recently implemented steel production curtailments of their own cutting over thirty million tons of production in the next three months. Globally, manufacturing PMIs continue to strengthen with the US now above 60 at 60.8. The energy industry continues to regain strength as crude prices are firmly above $50 and US production has rebounded above the high levels seen just prior to Hurricane Harvey.
While global and domestic steel industry fundamentals remain strong, some cracks to the bull case have emerged. Iron ore and scrap prices continue to be under serious pressure. This has in turn pressured finished steel prices lower. 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 was in anticipation of a potentially restrictive 232 ruling. Last, a nascent rally in the US dollar is worth watching as stronger dollar can pressure commodity prices lower.
October CME HRC Futures vs. TSI Daily Midwest HRC Price
Data continues to show persistently low inventory levels at OEMs and service centers. Current conditions are ripe for a massive restocking rally.
The following are the foundation of our current constructive view:
– A global uptrend in manufacturing purchasing managers indexes
– A rebounding US energy industry
– Persistently low flat rolled inventory evidenced in the MSCI, ISM and Durable Goods reports
– Conditions ripe for distribution and customer 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
– 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
September’s ISM Manufacturing PMI gained sharply to 60.8, the highest level since May, 2004. The index was up two points MoM and crushed expectations of 58.1.
ISM Manufacturing PMI (white) and TSI Daily Midwest HRC Index (orange)
The new orders subindex rocketed up 4.3 points to 64.6, supplier deliveries gained 7.3 to 64.4 and prices jumped 9.5 points to 71.5. Meanwhile, the customers’ inventory subindex remains at the ISM’s “recession” levels of 42.
ISM Manufacturing PMI
Both the new orders and backlog subindexes are in nice uptrends.
ISM Manufacturing PMI New Orders (white) and Backlog (orange)
The producers’ and customers’ inventory subindexes continue to be severely dislocated.
ISM Manufacturing PMI Producers’ (white) and Customers’ Inventories (orange)
This chart shows the ISM backlog index minus customers’ inventory subindex at 16, the highest since April, 2011, with the orange line the TSI Daily Midwest HRC Index.
ISM Manufacturing PMI Backlog Minus Customer Inventory
This chart shows the producers’ inventory subindex minus the customers’ inventory subindex retreating to 10.5, but remaining at a historically high level.
ISM Manufacturing PMI Producers’ Inventory Minus Customer Inventory
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.
The regional PMIs all beat expectations and were all up MoM except for the Empire Manufacturing Index, which is at a very high 24.4.
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.
September US Auto Sales of 18.47m seasonally adjusted annualized units crushed expectations of a 17.15m rate and broke the industry out of this year’s downtrend. This was the highest annualized level since 2005.
September US Auto Sales SAAR
Automakers sold almost 42k more care MoM. Automakers sold an additional 86k units vs. September 2016 with all of the big six seeing nice gains except for FCA. The daily sales rate gained 6.8% MoM and 1.9% YoY. YTD sales through September are down 1.9% or 245k units.
Not much change here. Toyota took some market share from Honda and Nissan.
Top Six Auto Manufacturers September Sales
This chart is a regular. It looks at auto sales and the inverted US unemployment rate (inverted bc rate going down is a positive). This was last month’s chart. Notice the divergence between unemployment and auto sales. How does this correct itself? Are jobs going to fall or would auto sales improve?
August US Auto Sales (white) and the Inverted Unemployment Rate (orange)
It was the latter as auto sales improved drastically, in part due to cars replaced by those totaled in the hurricanes, but nevertheless, the two data points are in harmony again.
September US Auto Sales (white) and the Inverted Unemployment Rate (orange)
Below are the nominal monthly auto sales.
US Monthly Auto Sales
This is the monthly auto sales three month moving average.
US Monthly Auto Sales 3 Month Moving Average
September’s strong sales rectified all those bloated inventory woes at the dealerships. Inventory days on hand fell to 64 days from 70 in line with last September.
GM and Nissan had been struggling with inventory as indicated below, but after September look to be in good shape.
Wards Auto Inventory Data per Auto Manufacturers
The chart below shows September’s inventory days on hand for each of the big six automakers for the last four years. This chart changed drastically for the better MoM.
Wards Auto Inventory Days On Hand
August’s seasonally adjusted US construction spending gained 0.5% MoM, just ahead of expectations for a 0.4% gain, while July’s data was revised lower to -1.2% from -0.6%.
August US Construction Put in Place
August’s US unadjusted total construction spending was up 1.1% MoM, 2.6% YoY while YTD spending was up 4.71% YoY. The uptrend continues and YTD spending continues to make new all-time highs.
August’s US unadjusted total private construction spending was down 0.3% MoM, but up 5.33% YoY and YTD spending was up 7.95% YoY. The uptrend continues here as well and YTD spending continues to make new all-time highs.
August’s US unadjusted total private construction spending was down 2% MoM, but up 12.6% YoY and YTD spending was up 12.6% YoY. The uptrend continues here as well, but remains far below the booming mid-2000s. One interesting issue in residential housing is the lack of supply. This should continue to drive development.
To add some color to this, the long run annual average going back to 1970 is 1.44m housing starts and 1.37m building permits. August’s data puts starts 18% below and permits 7% below their long run averages. It seems the biggest issue in housing isn’t demand, but the lack of supply. This should bode well for housing for years to come.
US Annualized Residential Housing Starts (white) & Building Permits (red)
August US unadjusted private nonresidential construction spending was up 2.1% MoM, but down 2.7% YoY, while YTD spending was up 2.9% YoY. The uptrend remains and YTD spending continues to make new all-time highs.
The JP Morgan Global Manufacturing PMI gained 0.1 points to 53.2 and no country on this list had a PMI below 50. The US and European PMIs are leading the world higher.
Europe’s manufacturing PMIs continued the uptrend that started in early 2016 with the manufacturing PMIs of the Eurozone, Germany, Italy and France hitting recent highs in September.
Eurozone (white), German (blue), Italian (green), French (yellow) and Spanish (red) Manufacturing PMIs
The manufacturing PMIs of the US and Germany are breaking to new recent highs while the PMIs of China and Japan look to be starting to trend higher.
US (white), German (blue), Chinese (green) and Japanese (red) Manufacturing PMIs
The official Chinese Manufacturing PMI, which is weighted heavily in favor of the state owned enterprises, gained nicely in September to 52.4, beating expectations of 51.6. The Caixin Chinese PMI, which is more focused on private manufacturers, fell to 51 from 51.6 missing expectations of 51.5.
China Official (white) and Caixan (orange) Manufacturing PMIs
Most of the Chinese PMI subindexes moved incrementally higher, but the overall profile remains not only the same as last month, but interestingly similar to that of the US’s ISM Manufacturing PMI. That is, improving overall with new orders at highs and depleted inventory levels. The one difference between the US and China is China’s weak backlog subindex.
While the subindex titles differ (between China and the US PMIs), the chart below compares producers’ (raw materials) and customers’ (finished goods) inventory and a similar divergence is occurring in China as is seen with the US subindexes.
China Stocks of Finished Goods (white) & Inventories of Raw Materials (red)
This chart shows a nice uptrend forming in China’s new orders and backlog subindexes.
China New Orders (white) & Backlogs of Orders (red)
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 catching up with the other products, but instead scrap has sold off so sharply. The two prices are converging. Asian HRC, coking coal, copper and iron ore continue to hold on to most of their gains while China is on holiday this week.
As of Friday’s settlement, the September CME Midwest HRC future settled at $622/st. October was down $6 to $599. November was down $3 to $602 and December was flat at $605. Q1 2018 gained $5 to $607 and Q2 2018 gained $8 to $610.
Flat rolled prices were under pressure again in Asia. Midwest HRC indexes were down around 1%.
The TSI ASEAN HRC Index was down $12 to $510/st while the TSI North European HRC Index fell $7 to $578/st.
Imports look to have peaked and are rolling over as expected.
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 the drastically revised September forecast of 768k tons.
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 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 were mostly lower, but none by more than 2%. Chinese domestic HRC gained 3%.
Chinese CRC prices were down over 2% while European prices fell almost 1%.
Not much change in HDG pricing.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
The AISI capacity utilization rate fell to 73.8%.
Raw materials were taken to the proverbial woodshed again last week.
The correction in ore and scrap futures has been sharp and fast and continued last week.
The iron ore curve has shifted lower MoM with the curve flattening.
Chinese rebar, Turkish rebar and Black Sea billet prices were down over 2%.
The August Durable Goods Report was better than expected. Durable goods orders ex-transportation was up 0.2%, in line with expectations, but July was revised higher to a 0.8% gain from 0.6%. August capital goods orders nondefense ex-aircraft gained 0.9% vs. expectations of 0.1%. Below is the data broken down with revisions.
This table does the best job of showing the strength in durable goods orders in 2017.
Durable goods inventory data below.
This chart above shows a YoY inventory build in every category except the three transportation ones. One issue addressed over and over in this report is inventory levels are too low based on the ISM, MSCI and Durable Goods Reports. So what gives?
This table takes the YoY percentage change in nominal unadjusted US dollars for inventory and subtracts the YoY percentage change in nominal unadjusted US dollars for 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.
The July Case-Shiller 20-City Home Price Index gained 5.81% YoY, up from 5.65% in June beating expectations. August’s new home sales of 560k annualized sales missed expectations and was down from an upwardly revised 580k in July. August’s pending home sales fell 2.6% MoM and YoY, much worse than expected on both fronts. However, this might be a positive as the supply of homes for sale at the end of July came in at 2.11m, 9% lower than last year. Supply has fallen YoY for 26 consecutive months.
Q2 annualized GDP inched up 0.1% to a better than expected 3.1% growth rate. The August Core Personal Consumption Expenditures Index was up 1.3% YoY, just missing expectations of 1.4%. Inflation measured by the PCE and CPI has been stagnant and disappointing, however, the Federal Reserve Bank of New York created a new broader measure of inflation, the “Underlying Inflation Guage” or UIG, which is painting a different picture of much stronger inflation up to 2.7% in August.
The Federal Reserve Bank of New York Underlying Inflation Gauge
The September University of Michigan Consumer Sentiment Index fell 0.2 points to 95.1 and missed expectations.
The S&P 500 made a new all-time high closing the week at 2516.1. Europe and Japan moved up as well. The Shanghai Property Index continued to get hit.
S&P 500
Shanghai Property Index
Steel stocks were mostly higher with some nice gains. Ryerson was up almost 14% and Olympic Steel 12% on the week.
Ryerson
Olympic Steel
US Steel
CLF gained over 4%, while VALE, RIO and BHP fell.
LME zinc gained over 4%, while aluminum fell 2.6%.
LME 3 Month Rolling Zinc Future
LME 3 Month Rolling Aluminum Future
The US Dollar Index was up almost 1% to 93.07 while the euro fell almost 1% to close just under 1.18. The currencies of Brazil, Canada, Australia, Turkey and Mexico were all down at 1-2.8%.
US Dollar Index
Euro
Mexican Peso
Turkish Lira
Australian Dollar
Canadian Dollar
The November WTI crude oil future closed up 2% to $51.67 climbing to the highest level since May. Crude inventory fell slightly as did the aggregate energy inventory level. Crude production gained almost 0.4% and is now above the level prior to Hurricane Harvey. The US rig count added five rigs.
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 US ten year Treasury yield gained eight basis points to 2.33%. Germany and Japanese yields were up 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:
– China strict steel capacity cuts/China getting serious about curtailing steel production
– 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