Content

Market Commentary

Over the last 6 months, the global steel market has experienced its most significant rally in terms of dollars per ton and percentage moves, sandwiched between two separate periods of freefall. If you are experiencing a sense of whiplash, you’re not the only one. This week was a quiet week as far as the domestic physical market was concerned, prices continued their downtrend but with very few transactions and most buyers on the sideline.

Turning to the financial market, the futures curve continues to be steeply backwardated, and provides a significant discount of at least $250 to current spot levels. Additionally, prices on the curve are currently at parity with the global price (adjusted for transportation) beginning in the fall of this year, a dynamic that remains that way through the end of 2023. The main takeaway here is that we are starting to see support levels emerge.

In addition to U.S. versus global price convergence, one of our main arguments for why the domestic market is not going back to its pre-COVID form is because of the consolidation amongst domestic producers. We view the new group of suppliers as better equipped to remain disciplined and achieve higher levels of profitability. On top of that, the overall costs for raw materials remain elevated. The first real test of this thesis was going to be happening in the 2Q22, where domestic prices were on track to bump up against cost-plus-profitability levels for both EAFs and BOFs. Leading up to the invasion, capacity utilization had already begun to decline and each of the mills expressed more interest in selling fewer tons rather than chasing lower orders. This was one of the reasons we were bullish on HRC prices at that period, but the Russian invasion superseded the testing of this new support level. Pending any major changes to the current market dynamics, this new support level will be retested. However, spot prices still have a long way to go before we get there.

 

Risks

Below are the most pertinent upside and downside price risks:

Upside Risks:

  • Inventory at end users and service centers below normal operational levels
  • China reopening their economy with further stimulus measures
  • Unplanned & extended planned outages, including operational issues leaving mills behind
  • Seasonal pick-up in demand leading to regional shortages
  • Further increases to mills input costs

Downside Risks:

  • Elevated price differentials and hedging opportunities leading to sustained higher imports
  • Steel consumers substitute to lower cost alternatives
  • Tightening credit markets, as elevated prices push total costs to credit caps
  • Limited desire to restock at elevated prices, causing a “Buyer’s Strike”
  • Economic slowdown caused by increasing interest rates

HRC Futures

All of the below data points are as of May 27, 2022.

The Platts TSI Daily Midwest HRC Index was down another $60 to $1,240.

Platts TSI Daily Midwest HRC Index

The CME Midwest HRC futures curve is below with last Friday’s settlements in white. Most of the curve was slightly higher, except for August & September expirations which were both down small. The curve has found support at current levels over the past three weeks, trading in a tight range.

The 2nd month ferrous futures were mixed, this week. Turkish scrap gained 2%, while Midwest HRC lost 12.5%. The move in HRC was the result of the 2nd month rolling from June to July, which was priced $150 lower.

Global flat rolled indexes were mostly lower again, led by Black Sea HRC, down another 5.5%, while Antwerp HRC was up 1.6%.

The AISI Capacity Utilization was up 0.2% to 82%.

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

Imports & Differentials

May flat rolled import license data is forecasting a decrease of 57k to 944k MoM.

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

Tube imports license data is forecasting an increase of 21k to 509k in May.

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)

May AZ/AL import license data is forecasting a decrease of 21k to 81k.

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

Below is May import license data through May 23th, 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. Differentials decreased across the board again this week, as the U.S. price continues to more significantly than all the watched global prices.

SBB Platt’s HRC, CRC and HDG pricing is below. The Midwest HRC, CRC, & HDG prices were down 4.6%, 2.3%, & 2.2%, respectively. Outside of the U.S., the Northern European CRC export price was down the most, -8.4%.

Raw Materials

Raw material prices were all lower this week, led by Aussie coking coal, down 11.4%.

Below is the iron ore future curve with Friday’s settlements in orange, and the prior week’s settlements in green. Last week, the front of the curve moved slightly lower, while the back of the curve was unchanged.

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. Destocking continued for all the major watched inventories. The pace lower for iron ore continues to be the most significant.

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 zinc, which gained 3.7%, silver gained 2%.

LME Zinc

Silver

Currencies

The U.S. dollar lost another 1.52 to 101.64, while the Brazilian real gained 3.1%.

U.S. Dollar Index

Brazilian Real

Energy

Last week, the July WTI crude oil future gained $4.79 or 4.3% to $115.07/bbl. The aggregate inventory level was up 0.2% and crude oil production rose 11.9m bbl/day. The Baker Hughes North American rig count was up 14 rigs, while the U.S. rig count was down 1 rig.

July 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 another 4 bps, closing the week at 2.74%. The German 10-year yield was up 2 bps to 0.96%, while Japanese 10-year yield was down 1 bps to 0.23%.

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
  • 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