Content

Market Commentary

Last week was a quiet week in the physical market after the wave of panic buying earlier in the month has ebbed and upward momentum in pricing has slowed as a result. While transactions continue to occur around $1,500 for HRC, a breakdown of the traditional leading indicators has caused a lack of clarity around the next six weeks of steel pricing. As we have mentioned before, the incredible pace at the beginning of this rally was the result of dramatically higher input costs being pushed through the market by mills, however, we retain the view that a rally was eminent anyways. In our view, there is an overweight assumption in the market that increasing raw material costs were the only cause of these elevated prices. This view is, in turn, leading buyers to believe that as soon as scrap prices settle lower, mills will start chasing orders lower. For additional support of this theory, many point to lead times which continue to be only slightly elevated compared to historical norms.

The fact remains, however, that mills input costs and more importantly, the availability of raw materials are far from guaranteed. Rather than a lack of demand, it appears that uncertainty around these inputs is causing mills to keep lead times artificially low by only booking what they can physically guarantee at certain cost. Taking a step back, the takeaway from all of this is clear – both upside and downside risks are growing and the significant volatility we have seen over the last two years is not going away any time soon.

Risks

Below are the most pertinent upside and downside price risks:

Upside Risks:

  • Inventory at end users and service centers below normal operational levels
  • Higher share of discretionary income allocated to goods from steel intensive industries
  • Changes in China’s policies regarding ferrous markets, including production cuts and exports
  • Unplanned & extended planned outages, including operational issues leaving mills behind
  • Energy & construction industry rebound
  • Easing labor and supply chain constraints allowing increased manufacturing activity
  • Mills extending outages/taking down capacity to keep prices elevated
  • Global supply chains and logistics restraints causing regional shortages

Downside Risks:

  • Increased domestic production capacity
  • Elevated price differentials and hedging opportunities leading to sustained higher imports
  • Steel consumers substitute to lower cost alternatives
  • Steel buyers and consumers “double ordering” to more than cover steel needs
  • Tightening credit markets, as elevated prices push total costs to credit caps
  • Supply chain disruptions allowing producers to catch up on orders
  • Limited desire to restock at elevated prices, causing a “Buyer’s Strike”
  • Economic slowdown caused by the emergence of Coronavirus Variants

HRC Futures

All of the below data points are as of April 15, 2022.

The Platts TSI Daily Midwest HRC Index was up another $20 to $1,500.

Platts TSI Daily Midwest HRC Index

The CME Midwest HRC futures curve is below with last Friday’s settlements in white. The entire curve sold off last week, most significantly in the later months.

May ferrous futures were mixed. Aussie coking coal gained 24.8%, while busheling lost 10%.

Global flat rolled indexes were mixed, with Antwerp HRC down 2.5%, while Midwest HRC was up 1.4%.

The AISI Capacity Utilization was up 0.4% to 79.7%.

AISI Steel Capacity Utilization Rate (orange) and Platts TSI Daily Midwest HRC Index (white)

Imports & Differentials

April flat rolled import license data is forecasting a decrease of 148k to 1.06M MoM.

All Sheet Imports (white) w/ 3-Mo. (green) & 12-Mo. Moving Average (red)

Tube imports license data is forecasting a decrease of 65k to 520k in April.

All Tube Imports (white) w/ 3-Mo. (green) & 12-Mo. Moving Average (red)

All Sheet plus Tube (white) w/ 3-Mo. (green) & 12-Mo. Moving Average (red)

April AZ/AL import license data is forecasting a decrease of 30k to 90k.

Galvalume Imports (white) w/ 3 Mo. (green) & 12 Mo. Moving Average (red)

Below is April import license data through April 11th, 2022.

Below is the Midwest HRC price vs. each listed country’s export price using pricing from SBB Platts. We have adjusted each export price to include any tariff or transportation cost to get a comparable delivered price. Global differentials increased across the board this week, as the U.S. price continues to grind higher, while the rest of the world is trending flat to lower.

SBB Platt’s HRC, CRC and HDG pricing is below. The Midwest HRC & CRC prices were up 1.4%, and 1.1%, respectively. The Midwest HDG price was unchanged. Outside of the U.S., the Southern European HRC price was down the most, 5%.

Raw Materials

Raw material prices were mixed, with Aussie coking coal was up 25.3%, while Black Sea pig iron was down 6.3%.

Below is the iron ore future curve with Friday’s settlements in orange, and the prior week’s settlements in green. Last week, the entire curve shifted slightly lower at all expirations.

SGX Iron Ore Futures Curve

The ex-flat rolled prices are listed below.

Chinese Inventory

Below are inventory levels for Chinese finished steel products and iron ore. Inventories were lower for rebar, iron ore and in the 5 major cities, while they increased slightly for HRC.

Economic Data

The remaining significant economic data is to the right.

Base & Precious Metals

Base and precious metal futures were mixed. LME zinc was up 3.7% and silver was up 3.9%.

LME Zinc

Silver

Currencies

The U.S. dollar gained 0.66 to 100.50, while the yen lost another 1.7%.

U.S. Dollar Index

Yen

Energy

Last week, the May WTI crude oil future gained $8.69 or 8.8% to $106.95/bbl. The aggregate inventory level was up 0.4% and crude oil production remains at 11.8m bbl/day. The Baker Hughes North American rig count was unchanged, while the U.S. rig count was up another 4 rigs.

May WTI Crude Oil Futures (orange) vs. Aggregate Energy Inventory (white)

Front Month WTI Crude Oil Future (orange) and Baker Hughes N.A. Rig Count (white)

Rates

The U.S. 10-year yield was up another 13 bps, closing the week at 2.83%. The German 10-year yield was up 14 bps to 0.84%, and Japanese 10-year yield was up 1 bps to 0.24%.

U.S. Ten-Year Bond Yield

Japanese Ten-Year Bond Yield

German Ten-Year Bond Yield

Equities

Below are equity indexes and steel related companies:

The list below details some upside and downside risks relevant to the steel industry.  The bolded ones are occurring or highly likely.

Upside Risks:

  • Inventory at end users and service centers below normal operational levels
  • Higher share of discretionary income allocated to goods from steel intensive industries
  • Changes in China’s policies regarding ferrous markets, including production cuts and exports
  • Unplanned & extended planned outages, including operational issues leaving mills behind
  • Energy & construction industry rebound
  • Easing labor and supply chain constraints allowing increased manufacturing activity
  • Mills extending outages/taking down capacity to keep prices elevated
  • Global supply chains and logistics restraints causing regional shortages
  • A weakening US Dollar
  • Fiscal policy measures including a new stimulus and/or infrastructure package
  • Fluctuating auto production, pushing steel demand out into the future
  • Low interest rates
  • Threat of further protectionist trade policies muting imports
  • Unexpected and sustained inflation

Downside Risks:

  • Increased domestic production capacity
  • Elevated price differentials and hedging opportunities leading to sustained higher imports
  • Steel consumers substitute to lower cost alternatives
  • Steel buyers and consumers “double ordering” to more than cover steel needs
  • Tightening credit markets, as elevated prices push total costs to credit caps
  • Supply chain disruptions allowing producers to catch up on orders
  • Limited desire to restock at elevated prices, causing a “Buyer’s Strike”
  • Economic slowdown caused by the emergence of Coronavirus Variants
  • Reduction and/or removal of domestic trade barriers
  • Political & geopolitical uncertainty
  • Chinese restrictions in property market
  • Unexpected sharp China RMB devaluation