Content
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Weekly Highlights
- Market Commentary
- Durable Goods
- Risks
March 22, 2019
Market Commentary
It was another sleepy week in the steel business as hot rolled prices continue to be range bound. Domestic mills continue to overproduce according to AISI raw steel production data. Flat rolled imports continued to remain subdued. January factory orders ex-transportation and durable goods ex-transportation declined MoM. The March Richmond Fed Manufacturing Index fell to 10 from 16. The March Dallas Fed. Manufacturing Activity Index fell to 8.3 from 13.1 missing expectations of 8.9. Rig counts saw a dramatic drop last week with the U.S. rig count falling ten rigs to 1,016 rigs after its most recent peak of 1,083 the last week of 2018 while the North American rig count fell sixty-six rigs in just the last week down from its most recent peak of 1,291 rigs at the end of January.
Baker Hughes U.S. & North American Rig Count
There were a couple bright spots on the economic front. The March Philadelphia Fed Index saw a solid expectations beating rebound jumping to 13.7 from -4.1 in February. February Existing Home Sales saw an unexpected increase to a S.A.A.R. of 5.51m units.
Durable Goods
The following table shows YoY and MoM percentage change in January new orders from the durable goods report. Similar to many other industries, the data indicated the manufacturing industry experienced slowing growth. For comparison, January 2018 saw these three categories each post YoY growth in excess of 5%.
U.S. Durable Goods New Orders
The next series of charts show the unadjusted new orders data on a monthly basis over the last three years, with 2019 in red, 2018 in green and 2017 in blue.
U.S. Durable Goods New Orders Ex-Transportation NSA
U.S. Durable Goods New Orders Transportation Equipment NSA
U.S. Durable Goods New Orders Motor Vehicles & Parts NSA
U.S. Durable Goods New Orders Construction Materials & Supplies NSA
U.S. Durable Goods New Orders Fabricated Metal Products NSA
U.S. Durable Goods New Orders Machinery Manufacturing NSA
U.S. Durable Goods New Orders Motor Vehicle Bodies, Trailers & Parts
These charts show the YoY percentage change in new orders for the following categories. These charts show a clearer picture of slowing growth across the manufacturing industry with most categories showing a downtrend in YoY growth.
U.S. Total Manufacturing New Orders Ex-Transportation NSA YoY % Change
U.S. Durable Goods New Orders Ex-Transportation NSA YoY % Change
U.S. Durable Goods New Orders Transportation Equipment NSA YoY % Change
U.S. Durable Goods New Orders Motor Vehicles & Parts NSA YoY % Change
U.S. Durable Goods New Orders Construction Materials & Supplies NSA YoY % Change
U.S. Durable Goods New Orders Fabricated Metal Products NSA YoY % Change
U.S. Durable Goods New Orders Machinery YoY % Change
U.S. Durable Goods New Orders Total Manufacturing ex-Transportation YoY % Change
Residential construction data continues to worsen. February housing starts and building permits fell MoM, saw negtive YoY growth and disappointed expectations. The Case-Shiller 20-City Home Price Index NSA YoY % Change continues to plummet.
U.S. Housing Starts YoY% Change
U.S. Building Permits YoY% Change
S&P Case-Shiller 20-City Composite City Home Price NSA Index YoY% Change
Following the FOMC’s rate decision to keep rates unchanged, dovish statement and dovish press conference, the U.S. ten-year Treasury fell to close the week at 2.44%, the lowest level since January 2018 while the yield on the German ten-year Bund fell into negative territory.
U.S. Ten-Year Treasury Yield (orange) and German Treasury Yield (white)
The following issues provide the foundation of our cautious view:
- Declining rates of growth in manufacturing and tariff induced demand destruction
- Increased/increasing domestic steel production capacity
- Weakening global economics and manufacturing PMIs
- Crude oil price correction
- Higher interest rates
- Strengthening U.S. dollar
- U.S. residential construction industry slowing
- Slowing auto sales
- Tariff resolution potential
Seasonally adjusted January U.S. construction spending was up a better than expected 1.3% MoM and 0.3% YoY.
Risks
Upside Risks:
- Chinese economic stimulus measures
- Rallying raw materials prices
- Shrinking import differentials
- Domestic mill production capacity cut
- Domestic supply disruption
- Further section 232 tariffs and quotas restricting supply
- Chronically low inventory levels
Downside Risks:
- Tariff resolution and/or 232 exclusions
- Increased domestic production capacity “Too Much Steel”
- Declining rates of growth in manufacturing/demand destruction
- Weaker demand in construction and automotive
- Weakening global economics/PMIs
- Crude oil prices remaining subdued
- Higher interest rates
- Strengthening U.S. dollar
- Falling global flat rolled prices
- Trade War Fallout
- Turkey/emerging market contagion
- Political & geopolitical uncertainty
HRC Futures
The April CME Midwest HRC future was unchanged at $716, while the Platts TSI Daily Midwest HRC Index was up $4.75 to $699.25.
April CME HRC Futures (orange) vs. Platts TSI Daily Midwest HRC Index (white)
The CME Midwest HRC futures curve shown below with last Friday’s settlements in orange.
April ferrous futures saw little change. April LME Turkish scrap lost 1.5%.
Flat rolled indexes were mixed. Midwest HDG was down 1.8%.
The AISI Capacity Utilization Rate decreased to 82.9%.
AISI Steel Capacity Utilization Rate (orange) and TSI Daily HRC Price (white)
This chart is a moving sum of the last fifty-two weeks of AISI crude steel production data and show AISI mills are producing crude steel at a tonnage rate not seen since 2014. This is likely a major factor muting higher flat rolled prices, despite ultra-low flat rolled imports and service center inventory.
AISI U.S. Steel Raw Steel Production 52-Week Moving Sum
Imports & Differentials
March flat rolled import licenses are forecast to fall slightly MoM to 696k while February flat rolled import licenses are forecast to fall 88k tons MoM to 702k.
All Sheet Imports (white) w/ 3-Mo. (green) & 12-Mo. Moving Average (red)
March tube import license data is forecasted to fall 67k to 513k tons MoM after another steep drop in February.
All Tube Imports (white) w/ 3-Mo. (green) & 12-Mo. Moving Average (red)
The combined flat and tube import license forecast looks to fall 70k tons in March after a 257k decrease in February.
All Sheet Plus Tube w/ 3-Mo. (green) & 12-Mo. Moving Average (red)
AZ/AL import licenses are forecast to increase 19k to 77k in March.
Galvalume Imports (white) w/ 3 Mo. (green) & 12 Mo. Moving Average (red)
Below are HRC and CRC Midwest vs. each country’s export price differentials using pricing from SBB Platts. Each of the four HRC and three CRC differentials increased last week.
SBB Platt’s HRC, CRC and HDG WoW pricing is below. Midwest HRC and CRC gained while HDG fell. Houston CRC gained 2.6%. Brazilian Domestic HRC fell 4.3%.
Raw Materials
Scrap prices were slightly higher. Brazilian and Black Sea pig iron were each up 1.5%.
The April SGX iron ore future gained $1.12 to $85.70 and the April Turkish scrap future lost $5 to $322.
The SGX iron ore futures curve has held most of the gains made following the Vale dam disaster.
The SGX iron ore futures curve:
Ex-flat rolled prices saw little movement.
Chinese Inventory
Below are inventory levels for Chinese finished steel products and iron ore. Chinese finished steel inventory levels look to have reached their seasonal peak and started to trend lower.
Steelhome China Iron Ore Total Ports Inventory
Steelhome China HRC Total Inventory
Steelhome China Rebar Total Inventory
Steelhome China 5 City Combined Finished Inventory
Equities
The S&P 500 was down 0.7%. Global markets were mixed. The Shanghai Property Index and the China CSI 300 rose 2.9% and 2.4%, respectively.
S&P 500
Steel mill stocks were all lower last week. ArcelorMittal led the group, falling 3.9%.
ArcelorMittal
Service center stocks were mostly lower, led by Worthington, which lost 7.5%, while Commercial Metals rose 4.6%.
Commercial Metals
Mining’s stocks were mixed. Cleveland Cliffs fell 6.6%.
Cleveland Cliffs
Energy
Last week, the May WTI crude oil future gained $0.22 or 0.4% to $59.04/bbl. Crude oil inventories fell 1.9% while distillate and gasoline inventory fell 3% and 1.9%, respectively. The aggregate inventory level was down 2.2%. Crude oil production rose to 12.1m bbl/day. The U.S. rig count lost ten rigs while the North American rig count lost sixty-six rigs. The May natural gas future lost $0.03 or 1% to $2.77/mmBtu. Natural gas inventory fell 3.7%.
Front Month WTI Crude Oil Future (orange) and Baker Hughes N.A. Rig Count
May WTI Crude Oil Future (orange) and May Crude 15 Delta Put Volatility (white)
May WTI Crude Oil Futures (orange) vs. Aggregate Energy Inventory (white)
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)
Rates
The U.S. 10-year treasury yield was down fifteen basis points closing the week at 2.44%. The German 10-year yield was down ten basis points turning negative to -0.02% while the Japanese 10-year yield was down four basis points to -0.07%.
U.S. Ten-Year Bond Yield
German Ten-Year Bond Yield
Japanese Ten-Year Bond Yield
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:
- Chinese economic stimulus measures
- Skyrocketing iron ore and scrap prices
- Shrinking import differentials
- 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
- 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:
- Tariff resolution and/or 232 exclusions
- Increased domestic production capacity too much steel
- Declining rates of growth in manufacturing/demand destruction
- Weakening global economics/PMIs
- Crude oil prices remaining subdued
- Weak demand in housing or automotive
- Higher interest rates
- Strengthening U.S. dollar
- Falling global flat rolled prices
- 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.