Content
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Weekly Highlights
- Market Commentary
- Risks
January 11, 2019
Market Commentary
The 2nd month CME HRC future fell another $8 to $693 as of Friday’s settlement. Volume has picked up dramatically in the future since 2019. Technically, a longterm trendline break followed with heavy volume is more reliable than a break with light volume.
Rolling 2nd Month CME HRC Future
The January CME busheling future settled at $372.11 down $29.35 MoM. RFQs picked up last week, but whether that is due to the return from the holidays or finally a pick-up in new orders will be known as the current week plays out. The government remained shutdown, which means certain data remained unreleased, including steel import data. Construction spending, durable goods and housing data are other pieces of information that remain in the dark, however, it was reported on CNBC.com that December home sales were down 18% YoY according to housing research and analytics firm John Burn Real Estate Consulting.
Downside risks continue to be in charge as rumors surfaced at the end of the week of domestic mills, most notably two integrated mills, had started to price tons aggressively lower. Hot rolled prices continued to move higher in China and oil saw a nice rebound closing the week $3.63 or 7.7% higher to $51.59.
Risks
Upside Risks:
- Domestic mill production capacity cut
- Sharp drop in flat rolled price
- Domestic supply disruption
- Further section 232 tariffs and quotas restricting supply
- Chronically low inventory levels
- Chinese economic stimulus measures
- S. Infrastructure bill
Downside Risks:
- Increased domestic production capacity
- Declining rates of growth in manufacturing/demand destruction
- Weakening global economics/PMIs
- Crude oil prices remaining subdued
- Higher interest rates
- Strengthening U.S. dollar
- Falling global flat rolled prices
- Tariff resolution and/or 232 exclusions, especially Turkey reverting to original 25%
- Trade War Fallout
- Turkey/emerging market contagion
- Political & geopolitical uncertainty
- Stock Market Crash
- U.S. Recession
HRC Futures
The February CME HRC future increased $1 to $718 and the Platts TSI Daily Midwest HRC Index was down $4.75 to $720.
February CME HRC Futures (orange) vs. Platts TSI Daily Midwest HRC Index (white)
The CME Midwest HRC futures curve is shown below with last Friday’s settlements in orange. The first half of 2019 moved lower while the back half rebounded.
February ferrous futures are listed below. Australian coking coal futures saw losses of 5.1%, while LME Turkish scrap saw gains of 3.6%.
Flat rolled indexes were mixed. Chinese Spot HRC was up $11 or 2.2% WoW.
The AISI Capacity Utilization Rate decreased to 80%.
AISI Steel Capacity Utilization Rate and TSI Daily HRC Price
Imports & Differentials
Import license data has been delayed by the shutdown. The last report we saw on December 18 showed December flat rolled import license data forecasting a 35k ton MoM decrease to 822k.
December’s tube import license data is forecasting little change MoM at 531k tons.
December’s combined flat rolled and tube import license data is forecasting 1.35m tons, slightly lower MoM.
Flat Rolled (blue) and Tube (red) Imports
December AZ/AL import licenses are projecting a decrease of 11k tons MoM to 72k.
Galvalume Imports (blue) w/ 3 Mo. Moving Average (red)
Below are HRC and CRC Midwest vs. each country’s export price differentials using pricing from SBB Platts. HRC differentials continued to decline, while Brazilian and Russian CRC differentials increased slightly.
SBB Platt’s HRC, CRC and HDG WoW pricing is below. The U.S. Midwest HRC price was down 0.7%, the Midwest CRC price fell 0.4% and the Midwest HDG price was down 1.2%. The Brazilian domestic HRC price was up 3.4% while the CRC and HDG domestic prices were both up 1.9%.
Raw Materials
Listed below are ferrous raw materials WoW price changes. Coking coal was down 2.7% while #1 busheling and Midwest shred were down 4.5% and 2.1%, respectively.
The February SGX iron ore future gained $0.40 to $72.29 while the January Turkish scrap future fell $3 to $283.00.
The SGX iron ore futures curve has rallied significantly with the front of the curve opening up sharply over the past month.
The SGX iron ore futures curve:
Ex-flat rolled prices were mixed with the May Shanghai rebar future up 3.3%, while Northwest European rebar fell 1.9% WoW.
Chinese Inventory
Below are inventory levels for Chinese finished steel products and iron ore. Chinese rebar and HRC inventory rose 8.4% and 1.9%, respectively, while the 5-city inventory level was not updated at time of publishing. This is the beginning of the seasonal ramp up heading into the spring and summer construction season. The finished steel inventory levels are at their lowest respective levels dating back to 2012.
Steelhome China Iron Ore Total Ports Inventory
Steelhome China HRC Total Inventory
Steelhome China Rebar Total Inventory
Steelhome China 5 City Combined Finished Inventory
Economic Data
Last week’s economic data is posted to the right. Average hourly earnings rose by 0.3% to 1.1% YoY. The December CPI Ex-Food and Energy was up 2.2%, unchanged MoM and in line with expectations. The NFIB Small Business Optimism Index fell slightly to 104.4, but beat expectations of a fall to 103. The FOMC meeting minutes indicated there was more debate about slowing the rate of interest rate increases than first thought.
Equities
The S&P 500 rose 2.5% while the Korean KOSPI Index and Chinese CSI 300 were up 3.3% and 2.2%, respectively.
S&P 500
Steel mill stocks saw additional gains led by AK Steel and Steel Dynamics up 9% and 6.2%, respectively.
AK Steel
Steel Dynamics
Service center stock’s WoW performance is shown below. Friedman and Reliance led the group each up 5.4% and 5.3%, respectively, while Commercial Metals was down 7.2%.
Reliance Steel & Aluminum
Mining’s stocks performances were mixed with Rio Tinto up 2.6%, while BHP Billiton down 4.1%.
Rio Tinto
Energy
The February WTI crude oil future gained $3.63 or 7.57% to $51.59/bbl. Crude oil inventory was down 0.4%, while distillate and gasoline inventory added 8.2% and 3.4%, respectively. The aggregate inventory level was up 2.1%. Crude oil production was unchanged at 11.7m bbl/day. The U.S. rig count was unchanged while the North American added 108 rigs, all from Canada. The February natural gas future rose $0.06 or 1.8% to $3.10/mmBtu. Natural gas inventory fell 3.4%.
Feb. WTI Crude Oil Future (orange) and Feb. Crude 50 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 list below details some upside and downside risks relevant to the steel industry. The orange ones are occurring or look to be highly likely.
Upside Risks:
- Domestic mill production capacity cut
- Sharp drop in flat rolled price
- Domestic supply disruption
- Further section 232 tariffs and quotas restricting supply
- Chronically low inventory levels
- Chinese economic stimulus measures
- U.S. Infrastructure bill
- 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:
- Increased domestic production capacity
- Declining rates of growth in manufacturing/demand destruction
- Weakening global economics/PMIs
- Crude oil prices remaining subdued
- Higher interest rates
- Strengthening U.S. dollar
- Falling global flat rolled prices
- Tariff resolution and/or 232 exclusions, especially Turkey reverting to original 25%
- Trade War Fallout
- Turkey/emerging market contagion
- Political & geopolitical uncertainty
- Stock Market Crash
- U.S. Recession
- Crashing iron ore, scrap and finished steel prices
- Domestic automotive industry under pressure
- Sharp and persistent drop in oil and/or iron ore prices
- 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