Content
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Weekly Highlights
- Market Commentary
- Durable Goods
- Upside & Downside Risks
November 11, 2022
Market Commentary
Last week, we ended the top section of the report, which detailed recent economic data by noting the disparity between auto sales and the (inverse) unemployment rate. This relationship historically shows how low unemployment drives demand for cars. The chart below shows auto production, going back to the beginning of 2000 with the dotted yellow line representing the 2-year average before the pandemic (2018 & 2019).
Auto production has been significantly hampered by supply chain woes and the microchip shortage. Those restrictions have eased over the last 6 months and auto production is slowly grinding higher while increasing interest rates have been a growing headwind for demand in both the manufacturing and construction sectors. Up to this point, the downside pressure has been more significant, however, pent-up demand for autos, which we estimate at ~1.1 million cars, in a reduced supply environment, like today’s, could bridge the gap left from a manufacturing slowdown and support falling steel prices.
Durable Goods
The above-mentioned dynamic is clear in the September durable goods report, where we observe the differences between manufacturing new orders with and without transportation equipment. Compared to September last year, total manufacturing was up 7.1% and it was up slightly, 0.5% compared to August. Manufacturing without transportation is only up 3.0% compared to September 2021 and is down -1.5% compared to August.
September U.S. Durable Goods New Orders NSA
Despite growing at the slowest YoY rate since February of 2021, Total Manufacturing New Orders Ex-Transportation increased for the 23rd consecutive month.
U.S. Total Manufacturing New Orders Ex-Transportation NSA YoY % Change
The chart below looks at the months on hand (inventory divided by shipments) from the September durable goods report, using categories that are steel intensive. MoH rebounded this month, driven by a 3.7% decrease in shipments compared to a 0.5% decrease in inventories. The 12-month moving average is trending lower, as inventories slid over the last 3 months, while shipments have been mostly elevated since February. If this trend of higher shipments and lower inventories continues, manufacturers are more likely to restock once it is clear that input prices have stopped falling.
Risks
Upside Risks:
- A sudden dovish shift in financial policy leading to less aggressive rate hikes
- Strategic outages overshooting and causing production to fall below demand levels
- Easing supply chain restraints and labor shortages causing an increase in activity
- Energy issues abroad curtailing global production
- China reopening its economy with further stimulus measures
Downside Risks:
- Economic slowdown caused by increasing interest rates and sustained restrictive policy from the Federal Reserve
- Decreasing input costs allowing mills to aggressively sell lower while remaining profitable
- Increased domestic production capacity leading to an increase in competitive pricing
- Sustained levels of import arrivals keeping pressure on domestic mill pricing
- Limited desire to restock and persistently short lead times causing a “Buyer’s Strike”
HRC Futures
All of the below data points are as of November 11, 2022.
The Platts TSI Daily Midwest HRC Index was down another $5, ending at $650.
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 continued it’s recent trend and printed lower, while the remainder of the curve showed very little change.
The 2nd month ferrous futures ended the week mixed, busheling gained 9.5%, while Aussie coking coal lost 11.4%.
Global flat rolled indexes were mixed last week, with Northern European HRC, up 2.3%, while Antwerp HRC was down 3.5%.
The AISI Capacity Utilization was down another 1% to 73.5%.
AISI Steel Capacity Utilization Rate (orange) and Platts TSI Daily Midwest HRC Index (white)
Imports & Differentials
November flat rolled import license data is forecasting a decrease of 9k to 803k MoM.
All Sheet Imports (white) w/ 3-Mo. (green) & 12-Mo. Moving Average (red)
Tube imports license data is forecasting an increase of 115k to 538k in November.
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)
November AZ/AL import license data is forecasting an increase of 4k to 68k.
Galvalume Imports (white) w/ 3 Mo. (green) & 12 Mo. Moving Average (red)
Below is November import license data through November 7th, 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 global differentials, excluding Russia’s, decreased further this week.
Global prices were mostly lower again this week, led by the Russian export HRC price, down 6.9%. On the other hand, the East Asian and Chinese HRC prices both increased this week, up 1.5% and 1%, respectively.
Raw Materials
Raw material prices were mixed again this week, with New Orleans delivered pig iron up, 9%, while Midwest busheling was down 8%.
Below is the iron ore future curve with Friday’s settlements in orange, and the prior week’s settlements in green. Iron ore continued to rally last week, as some of the political headwinds in China have started to dissipate.
SGX Iron Ore Futures Curve
The ex-flat rolled prices are listed below.
Energy
Last week, the December WTI crude oil future lost $3.65 or 3.9% to $88.96/bbl. The aggregate inventory level rose 0.3%. The Baker Hughes North American rig count was unchanged, while the U.S. rig count increased by 9 rigs.
December 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 35 bps, closing the week at 3.81%. The move came at the end of the week, after Thursday’s CPI print came in below expectations. The German 10-year yield was down 14 bps to 2.16%, and the Japanese 10-year yield was down 2 bps to 0.24%.
U.S. Ten-Year Bond Yield
Japanese Ten-Year Bond Yield
German Ten-Year Bond Yield
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
- A 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 issues abroad curtailing global production
- 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
- Fluctuating auto production, pushing steel demand out into the future
- The 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 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 the property market
- Unexpected sharp China RMB devaluation