Hot Rolled Futures: So Goes World Iron Ore Prices, So Goes U.S. & World Steel Prices
Written by: Andre Marshall, CEO of Crunch Risk, LLC.
On the economic front, the markets have rallied on the back of a lack of really terrible news, getting wind in its sails from only just plain bad news, like the employment benefit claims, which came in higher than expected.
We are in a period of heavy incoming money flows into the U.S as we serve as the safe-haven again. The Euro has now traded through the psychological support level of 1.23, having now broken the 20 day sma of 1.2394. This on the back of concerns heading into the Spanish bailout vote, which Germany is expected to agree to, but will not stop the overall bearish sentiment, which is calling for severe deflation in Europe.
As a result of these flows, our markets are buoyed and our companies' results are performing reasonably well vs. expectations as we continue to enjoy a tailwind from our mini-manufacturing renaissance, however, short lived it might be.
The S+P is up 3.75% and as long as money flows flee to safety we will continue to see support on the bid, particularly as our government bonds look more and more like a bubble.
The crude market is up over 9% on the week, mostly on the back of Middle east tensions; take your pick, Syria, Turkey's threats on Syria, Iran, Israel's threats on Iran, Russia's saber rattling on protecting one or the other, a U.S Navy cargo ship firing on threatening fishing vessels in the Strait of Hormuz, a new mine sweeping operation in the Strait, and my favorite the ever hopeful wish that China will start a massive stimulus program.
Copper is up 1.3%, in this case, on the back of real tightness as metal continues to flow out of exchange warehouse and into Chinese finance schemes where well positioned parking lots are getting more rent storing Copper than cars.
Eventually fundamentals will knock some sense into the markets, but until then money flows rule the day.
The sellers are showing their colors finally. Yesterday Aug/Dec traded 30K ST, in three trades @ $640/ST, where three sellers were involved. It was pretty much the volume for the week except for some screen trades earlier in week. Q4 traded today either side of $650, and summer months traded $630 and $625. These levels are lower than where we had the start of the week. Calendar '13 months continue to be bid with little interest from serious sellers, but that may change at the first sign that the index might stall or drop.
Must I really? Ok, Cash settled $393/MT, and 3 month settled $410/MT. This is up slightly on the day and almost exactly where it settled two weeks back. This is what contracts do, when they are dying! Markets are available for futures in billet basis Platt's on the CME.
Wow what a week makes. As expected, Iron Ore is cracking. It has been held up so far by two things, unbelievable over-production in steel in China and traders’ optimism that the Chinese government would come in and stimulate. Well, as reported here, and as expected by many, the market is off this week $5-7 – and in one day down $2 alone - almost all of it on few to no trades. Those traders who got long cargoes when they had the opportunity, are unhappy they did, and Chinese over-production is about to take some serous capacity out – there is no choice. Appetite for Iron Ore cargoes has literally disappeared. Almost nothing has traded spot for three days despite daily drops on offers. This week we are down $5-6 on spot on indexes, where reality is even lower. We saw trades a week ago north of $131, now offers for 62 percent can’t even get $125/T. The forward market is down the same, where now Calendar ’13 is $115/119/T marked down on very few trades and weakening spot offers. Despite this, the front end is hopelessly high, and will go the direction that its forwards suggest it needs to, down!
July was down in the end 40+ dollars, bringing secondaries within breaths of $300 and prime and shreds into the $330-$350 range. The net result was worse than expected from the month prior as the overhang weighed on the market. Despite discussions about chasing units end month and bringing up prices, the mills got what they wanted and at very low levels in aggregate with metal margins for minis are approaching stratospheric levels. The willingness of dealers to hold back some units anticipating a brighter August will depend entirely on whether the mils have the order books in 3 weeks. Unless steel buyers start panicking, it’s not looking optimistic. Many steel orders were brought forward ahead of the price increase. This combined with the orders in the queue for the cheap metal gobbled up by some at $570-$580 has only increased lead times by about 2 weeks. Hard to see where the orders come from outside of auto in three weeks time.
Turkey looked like the bright spot for about a week. Coming back into the market and bringing the export prices up from $373 CFR to $384 CFR over 3 weeks, only to have it dissipate now to $381 this week. What happened? The USD happened. Even if you believed that MENA had some voracious appetite anew – have you read the Paper lately? – the USD’s gains will make our units v. Europe less attractive. The drought here and the quasi-depression there will curb scrap supply in both, but demand may prove to be worse yet. Export to Turkey and China and India are not likely to be positive supportive forces in the foreseeable future with the USD on its current and likely downward trend.
Save for mills that got caught long expensive scrap on the way down, mills’ costs have dropped dramatically along with the world’s economy. It’s natural in such a cycle for the market to pare its size in a downturn and for margins to increase for those in operation – sorry RG! However, margins have increased - metal margins for sure - but production has not decreased meaningfully, not in China and not here. Despite the fact that total tons inventories look lean in the channel, service centers increasingly are having difficulty moving units, and the MSCI inventory report confirms as much. Ship rates just aren’t there, and as much as we think it’s possible, we are not an island. So goes world Iron Ore prices, so goes U.S. and World steel prices.