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Market Commentary

The physical steel market continued to march higher, driven by hand-to-mouth buying as a result of stable demand and the structural shortage. As of late last week, mills are no longer taking requests for September production, while pausing before offering any sizable October tons. Downstream bottlenecks continue to disrupt supply chain efficiency as subsectors across the steel buying community continue to experience labor and parts shortages. Additionally, with planned mill outages around the corner, it appears that large segments of the market have already written off the remainder of 2021 from a supply standpoint and have shifted attention to next year. The combination of these dynamics points to a continuation of the overall trend of higher prices for longer until there is a rebalancing of supply and demand. A significant upside risk that must be considered is unplanned outages, like that of US Steel’s Gary Works, which was a big surprise to the market and caused the HRC futures curve to jump in 4Q 2021. The remainder of this week’s report will look at the June durable goods, which is further confirmation of recent trends in the economic data from last week’s report.

Durable Goods

Below are final June new orders from the Durable Goods report. New orders for manufactured goods were up 23.9% compared to June 2020 and up 7.7% compared to May 2021. Manufacturing ex-transportation new orders were up 17.7% compared to June 2020 and 5.2% higher than in May. The final chart looks at the months on hand (inventory divided by shipments) for durable goods categories that are steel intensive. MOH moved significantly lower and is just above the recent low from March of this year. This move lower was driven by an increase in shipments, compared to relatively unchanged inventories. This is emblematic of the broad steel market’s reluctance to restock. The most likely result of tight inventories is increased volatility for steel prices as near-term demand will dictate price jumps higher. Our current outlook remains bullish on demand, however, if demand slips, mill profitability, metal spreads and global differentials are all at record highs, which leaves more than enough room for negotiation if mills want to move their tons.

June U.S. Durable Goods New Orders NSA

U.S. Total Manufacturing New Orders Ex-Transportation NSA YoY % Change

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
  • Limited spot transactions skewing market indexes to extreme levels
  • Energy & construction industry rebound
  • Prolonged 2022 contract negotiations creating availability concerns in the short term
  • Easing labor and supply chain constraints allowing increased manufacturing activity

Downside Risks:

  • Increased domestic production capacity
  • Increasing 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”

HRC Futures

All of the below data points are as of August 13, 2021.

The Platts TSI Daily Midwest HRC Index increased by $13.25 to $1,900.50.

Platts TSI Daily Midwest HRC Index

The CME Midwest HRC futures curve is below with last Friday’s settlements in white. Last week, the front of the curve shifted higher, while the back was down slightly.

September ferrous futures were mixed. Aussie coking coal future gained another 2%, while iron ore lost 1.8%.

Global flat rolled indexes were mixed. The TSI Platts Midwest HRC price was up another 0.7%, while the TSI ASEAN HRC export price was down 1%.

The AISI Capacity Utilization rate decreased 0.2% to 84.8%.

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

Imports & Differentials

August flat rolled import license data is forecasting an increase of 79k to 1.02m MoM.

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

Tube imports license data is forecasting an increase of 90k to 456k in August.

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)

August AZ/AL import license data is forecasting an increase of 44k to 151k.

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

Below is August import license data through August 9th, 2021.

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. Differentials for all watched countries increased further this week, as the U.S. price continues grinding higher.

SBB Platt’s HRC, CRC and HDG pricing is below. The Midwest HRC, CRC, & HDG prices were up, 0.7%, 0.6% and 0.1%, respectively. Globally, the Southern European CRC price was down 4.2%.

Raw Materials

Raw material prices were mostly lower, led by the IODEX iron ore index, down 6.1%, while Aussie coking coal rose another 1.3%.

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 continued it’s 4 week decline and shifted another step lower.

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. All the watched inventory levels decreased slightly, as the government continues taking action to discourage production and exports.

Economic Data

The remaining significant economic data is below.

Base & Precious Metals

Base and precious metal futures were mostly higher, led by LME Nickel, which gained 2.3%.

LME Nickel

Currencies

The U.S. dollar lost 0.26 to 92.52 and the Korean won lost 2.4%.

U.S. Dollar Index

Korean Won

Energy

Last week, the September WTI crude oil future was up $0.16 or 0.23% to $68.44/bbl. The aggregate inventory level was unchanged, while crude oil production rose to 11.3m bbl/day. The Baker Hughes North American rig count was up 17 rigs, and the U.S. rig count was up 9 rigs.

September 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 down 2 bps, closing the week at 1.28%. The German 10-year yield was down 1 bps to minus 0.47%, while the Japanese 10-year yield was up 2 bps to 0.03%.

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 orange ones are occurring or look to be highly likely.  The upside risks look to be in control.

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
  • Limited spot transactions skewing market indexes to extreme levels
  • Energy & construction industry rebound
  • Prolonged 2022 contract negotiations creating availability concerns in the short term
  • Easing labor and supply chain constraints allowing increased manufacturing activity
  • 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
  • Increasing 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”
  • Reduction and/or removal of domestic trade barriers
  • Political & geopolitical uncertainty
  • Chinese restrictions in property market
  • Unexpected sharp China RMB devaluation