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Market Commentary

As the sentiment in the domestic HRC market has deteriorated recently with downside risks growing, we want to understand where the bottom in pricing may be so that we can understand the risk and rewards in our inventory and business. We will do this using the historical relationships between domestic HRC prices and the China HRC price, scrap pricing, and mill profitability.

Due to China’s significant size within the global steel market, we tend to focus on the China export price, as it drives changes in the world HRC price. Back at the beginning of July when the domestic spot HRC price bottomed near $510/st, the differential between the US price and the China export price also bottomed. The chart below shows the differential, which is the difference between the Midwest HRC price and the China export price, including transportation costs.

Currently, the China export price is $40/st lower than it was at the beginning of July. With this differential currently sitting near $35/st, we believe if this differential returns to the negative $50/st level of July, the new bottom in domestic HRC price is near $470/st.

Another market that reached a low point in late June was the domestic scrap market, with the #1 Busheling scrap price hitting its lowest levels of the year up to that point. The front month futures price hit $264 on June 21st before rallying through July and into August. However, this rally has faded and breached the previous low, and currently sits at $244.

The current expectation for October scrap is down at least $20. Therefore, with the current price $20 below the low of the summer and an additional $20 drop expected, scrap pricing could be $40 below the June low when domestic HRC prices bottomed near $510/st. This also points to new bottom for HRC near the $470 level. Mill profitability has remained stable over the past several weeks as the current spot market still provides a solid margin over the mill’s cost. However, this also means that mills are able to withstand much lower spot pricing, and mini-mills cost advantage will lead them to fill order books over the next few months at lower prices.

Now is a good time to pick prices that look attractive for 2020, and be ready to lock them in should the market continue sliding lower.

Durable Goods

Below are final July new orders from the Durable Goods report. Overall, new orders were higher YoY, but lower than they were in June. This is due to normal seasonality, and the report points to a stabilization of the recent downtrend in new orders. The final chart looks at the months on hand (inventory divided by shipments) for durable goods categories that are steel intensive. Months on hand increased 8.0% since June, but this is likely due to stocking inventory in the midst of rising steel prices and improved outlook. We expect MOH to move lower in the August report.

July U.S. Durable Goods New Orders

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

U.S. Capital Goods Orders Nondefense, Ex Aircraft NSA YoY % Change

Risks

Below are the most pertinent upside and downside price risks:

Upside Risks:

  • Unplanned & extended planned outages
  • Chinese economic stimulus measures
  • Low current and expected import levels
  • Domestic supply disruption
  • Further section 232 tariffs and quotas restricting supply
  • Chronically low inventory levels and restocking

Downside Risks:

  • Tariff resolution and/or 232 exclusions
  • Trade War Fallout
  • Strengthening U.S. dollar
  • Increased domestic production capacity
  • Weaker demand in construction and automotive
  • Weak global economics/PMIs
  • Political & geopolitical uncertainty
  • Increasing import differentials
  • Declining raw materials prices

HRC Futures

The Platts TSI Daily Midwest HRC Index was down $6.25 to $560.00.

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 on the week, reaching the lowest levels in the last 5 week.

October ferrous futures were mixed. Iron ore futures gained 12.5%, while busheling lost 9.9%.

The global flat rolled indexes were all lower. Midwest HDG was down the most, at 2.6%.

The AISI Capacity Utilization Rate was down 0.7% to 78.8%, and fell further below the 80% goal set by the Trump administration last October. This is the lowest utilization rate since August 2018, and upcoming planned outages suggest that raw steel production will continue to decline.

AISI Steel Capacity Utilization Rate (orange) and TSI Daily HRC Price (white)

Imports & Differentials

September flat rolled import license data is forecasting a small increase of 12k to 737k MoM.

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

Tube imports license data is forecasting a MoM increase of 92k to 584k tons in September.

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)

AZ/AL import license data is forecasting an increase of 49k in September to 110k.

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

Below is August import license data through September 10, 2019.

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. Brazilian and Russian differentials were higher, while the remaining global differentials continued lower.

SBB Platt’s HRC, CRC and HDG pricing is below. The Midwest HDG, HRC and CRC prices were down on the week 2.6%, 1.1% and 0.3%, respectively. The Brazilian HRC and CRC export prices were lower, 7.4% and 5.9% respectively, while the Russian HRC export price was down 4.2%.

Raw Materials

Raw material prices were mixed. The IODEX and SGX iron ore futures were each up 12.5%, while shredded FOB East Coast was down 12.4%.

Below is the iron ore future curve with Friday’s settlments in orange, and the prior week’s settlements in green; the entire curve shifted higher.

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. HRC, Rebar and 5-City inventory levels were lower again, while Iron Ore port inventory has continued to increase. Another month of poor manufacturing data suggests that the trend of destocking finished products will likely continue.

Economic Data

The remainder of the pertinent economic data is to the right. This week’s CPI printing suggests that inflation is within the target range. While a rate cut in the September is all but guaranteed, continued strength in inflation printings would suggest that the FED Funds Rate should remain flat, putting the FOMC in a difficult position as growth outlook deteriorates.

Base & Precious Metals

Base and precious metals future pricing was mixed. LME copper gained 2.5%, while silver lost 3%.

LME Copper

Currencies

The U.S. dollar lost 0.14 to 98.39 while the ruble and pound were each up, 2.1% and 1.8%, respectively.

US Dollar Index

Mexican Peso

Turkish Lira

Energy

Last week, the October WTI crude oil future lost $1.67 or 3% to $54.85/bbl. The aggregate inventory level was 0.6% lower, and crude oil production was unchanged 12.4m bbl/day. The Baker Hughes North American rig count lost twenty-five rigs and the U.S. count lost twelve. Shockwaves were sent through the energy market after the weekend attack on Saudi Arabia’s oil production facilities, but implications appear subdued with production being restored quicker than expected.

October 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 34 bps, closing the week at 1.90%. The German 10-year yield was up 19 bps to minus 0.45% and the Japanese 10-year yield was up 8 bps to minus 0.15%.

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 orange ones are occurring or look to be highly likely.  The upside risks look to be in control.

Upside Risks:

  • Unplanned & extended planned outages
  • Chinese economic stimulus measures
  • Low current and expected import levels
  • Domestic supply disruption
  • Further section 232 tariffs and quotas restricting supply
  • Chronically low inventory levels and restocking
  • Strong global flat rolled prices
  • 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

Downside Risks:

  • Tariff resolution and/or 232 exclusions
  • Trade War Fallout
  • Strengthening U.S. dollar
  • Increased domestic production capacity
  • Weaker demand in construction and automotive
  • Weak global economics/PMIs
  • Political & geopolitical uncertainty
  • Increasing import differentials
  • Declining raw materials prices
  • Crude oil prices remaining subdued
  • U.S. Recession
  • Falling global flat rolled prices
  • Declining rates of growth in manufacturing/demand destruction
  • Crashing iron ore, scrap and finished steel prices
  • Domestic automotive industry under pressure
  • 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