Content

Market Commentary

Prices continue to slide in both the physical and financial markets with a steady drumbeat of bearish news around mill orderbooks, elevated imports, and growing inventories. As downward pressure mounts, all eyes should turn to the side of domestic producers as we look for the bottom. In the next couple of weeks, these mills will report Q4 earnings. These earnings calls will provide insight into how aggressively they plan on confronting this falling price environment from a production and outages standpoint. Under current market dynamics, mills are more profitable selling spot tons, even $200 below published prices, than at any point in 2018. They have also negotiated favorable lagging index contracts and fixed price contracts for the rest of 2022, which will allow them to continue producing significant profits. With all signs clearly pointing to lower prices ahead and mills continuing to generate outsized profits, will they really take down production? Or are they better off maintaining or increasing production to drive the domestic price to, or below, global prices and stem the flow of imports? We will be looking for these answers in the weeks and months ahead.

Durable Goods

Below are final November new orders from the Durable Goods report. New orders for manufactured goods were up 16.8% compared to November 2020, but down 1.3% compared to October. Manufacturing ex-transportation new orders were up 16.3% compared to November 2020, but down 2.7% compared to October.

November U.S. Durable Goods New Orders NSA

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

The chart looks at the months on hand (inventory divided by shipments) for durable goods categories that are steel intensive. Since December 2020, inventories for steel intensive manufactured goods have steadily grown, while shipments have dipped in the last three months. This caused MOH to increase in November and continue its 4-month trend higher, while the 12-month moving average leveled off. November’s reading, while lagged, is in line with healthy economic activity within the manufacturing sector.

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 January 14, 2022.

The Platts TSI Daily Midwest HRC Index decreased by another $80 to $1,400.

Platts TSI Daily Midwest HRC Index

The CME Midwest HRC futures curve is below with last Friday’s settlements in white. The front of the curve was down sharply for the second week in a row, while further out expirations were down only slightly. The overall result is the flattening of the futures curve beyond the March expiration.

February ferrous futures were mixed. Aussie coking coal gained another 6.6%, while shredded lost another 2%.

Global flat rolled indexes were mostly lower again this week, led by Midwest HRC, down 5.4%, while Chinese spot HRC was up for the second week in a row, 1.5%.

The AISI Capacity Utilization rose 1.4% to 82.3%.

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

Imports & Differentials

January flat rolled import license data is forecasting a decrease of 77k to 1.16M MoM.

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

Tube imports license data is forecasting an increase of 73k to 545k in January.

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)

January AZ/AL import license data is forecasting a decrease of 19k to 111k.

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

Below is December import license data through January 10th, 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. All the watched countries differentials decreased this week, with China, Turkey, and Russia consolidating around a $400 differential and Brazil and Korea around a $600 differential. Although the trend is clearly lower, prices still have a long way to go to reach parity.

SBB Platt’s HRC, CRC and HDG pricing is below. The Midwest HRC, CRC & HDG prices were all lower this week, down 5.4%, 1.1% and 1%, respectively. Outside of the U.S., the Russian HRC export price was down 6.1%.

Raw Materials

Raw material prices were mixed. Aussie coking coal was up 10.2%, while Midwest busheling was down 3.6%.

Below is the iron ore future curve with Friday’s settlements in green, and the prior week’s settlements in orange. Last week, the entire curve shifted slightly lower, more so in later 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. Iron ore inventory levels were slightly lower again, while the HRC, rebar, and 5-city Inventory levels all rose this week.

Economic Data

The remaining significant economic data is to the right.

Base & Precious Metals

Base and precious metal futures were mostly higher, led by LME nickel, which gained 7%, while LME zinc was down 0.3%.

LME Nickel

Currencies

The U.S. dollar lost 0.55 to 95.17, while the Turkish lira gained 2.5%.

U.S. Dollar Index

Turkish Lira

Energy

Last week, the February WTI crude oil future gained another $4.92 or 6.2% to $83.82/bbl. The aggregate inventory level was up 0.8%, while crude oil production dipped to 11.7m bbl/day. The Baker Hughes North American rig count was up by another 63 rigs, and the U.S. rig count was up 13 rigs.

February 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 2 bps, closing the week at 1.78%. The German and Japanese 10-year yields were both unchanged on the week, at -0.04%, and 0.14%, respectively.

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