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Market Commentary

The chart below displays the results of FGM’s statistic backtest study of the recent price trend of US Hot-Rolled Coil.  Below are the key takeaways:

  • The two most recent downtrends in US HRC Spot prices have resulted in an average weekly decrease of 3.4%.  This is approximately 1.5 standard deviations faster than the historical average.
  • Assuming that the average weekly rate of decline continues, the HRC forward curve is pricing in 5 more weeks of declining spot prices before flattening.  However, the forward curve is still trading at prices that exceed FGM’s estimated cost support level, which is derived using estimates for mill costs and global imports. The spot price would have to decline for an additional 10 weeks at the average rate to breach the current cost support estimate and would mark the lowest spot price since Q4 2020.
  • While cost support estimates can change suddenly and market dynamics remain unpredictable, the downside risk diminishes on the curve as the gap between the HRC price and cost support estimate narrows.
  • China reopening with added stimulus, potential mill shutdowns, and a pickup in demand to meet growth targets may spur a price rally in 2H, where buyers of discounted pricing on the forward curve achieve lower costs than future spot pricing.

Risks

Below are the most pertinent upside and downside price risks:

Upside Risks:

  • China reopening its economy with further stimulus measures
  • Unplanned & extended planned outages, including operational issues leaving mills behind
  • Seasonal pick-up in demand leading to regional shortages
  • Easing supply chain restraints and labor shortages causing an increase in manufacturing activity
  • Reluctance in placing import orders, leading to a dramatic reduction in arrivals later this year

Downside Risks:

  • Decreasing input costs allowing mills to aggressively sell lower while remaining profitable
  • Elevated price differentials and hedging opportunities leading to sustained higher imports
  • Steel consumers substitute to lower cost alternatives
  • Limited desire to restock at elevated prices and persistently short lead times causing a “Buyer’s Strike”
  • Economic slowdown caused by increasing interest rates

HRC Futures

All of the below data points are as of June 24, 2022.

The Platts TSI Daily Midwest HRC Index was down $20 to $1,050.

Platts TSI Daily Midwest HRC Index

The CME Midwest HRC futures curve is below with last Friday’s settlements in white. The entire curve shifted lower except for the front month, Jun-22 contract. The largest shift down can be observed in the midsection of the curve with a $70 decrease in Aug-22.

The 2nd month ferrous futures were primarily lower this week. Busheling futures rebounded slightly, up 3.0%, while Aussie Coking Coal fell 8.1%.

Global flat rolled indexes moved lower once again, led by HRC Antwerp, down 11.2%.

The AISI Capacity Utilization was down 1.2% to 80.5%.

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

Imports & Differentials

June flat rolled import license data is forecasting a decrease of 35k to 861k MoM.

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

Tube imports license data is forecasting a decrease of 23k to 541k in June.

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)

June AZ/AL import license data is forecasting a decrease of 15k to 105k.

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

Below is June import license data through June 20th, 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. Differential data was mixed across the board with China increasing 6.77% and Brazil falling 5.97%.

SBB Platt’s HRC, CRC and HDG pricing is below. The Midwest HRC prices were down 1.87%, while CRC and HDG prices were flat. China export HRC price was down the most, falling 7.34% WoW.

Raw Materials

Raw material prices were all lower this week, led by Pig Iron Black Sea, down 14.5%.

Below is the iron ore future curve with Friday’s settlements in orange, and the prior week’s settlements in green. Last week, the entre curve shifted slightly lower once again.

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 increased for HRC, while 5 City and iron ore at the ports continues to destock. Rebar inventories were flat.

Economic Data

The remaining significant economic data is shown to the right.

Base & Precious Metals

Base and precious metal futures ended lower, led by LME Nickel futures, falling 12.7%. Silver futures lost 2.4% on the week, outpacing gold’s decline.

LME Nickel

Silver

Currencies

The U.S. dollar fell 0.53 to 104.12, while the Turkish Lira tumbled 2.3%.

U.S. Dollar Index

Turkish Lira

Energy

Last week, the August WTI crude oil future lost $1.94 or 1.77% to $107.62/bbl. The aggregate inventory level remained unchanged. The Baker Hughes North American rig count was up 11 rigs, and the U.S. rig count was up 13.

Aug 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 fell 10 bps, closing the week at 3.13%. The German 10-year yield was down 22 bps to 1.44% and Japanese 10-year yield remained unchanged.

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
  • Fiscal policy measures including a new stimulus package
  • Fluctuating auto production, pushing steel demand out into the future
  • Threat of further protectionist trade policies muting imports

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 buyer’s 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