Written by: Andre Marshall, CEO Crunch Risk, LLC.

Financial Markets:

The markets all continue to climb in their positive trends, but do so despite fundamentals, and mostly due to drivers of circumstance. The stock market continues to climb on very little volume, and despite horrific PE’s historically at this point. Why? Money flows leaving government bonds, due to realization there will be no QE, Money flows leaving Europe realizing there will likely be no QE, and Money flows leaving China realizing there will be no QE. You get the picture. The U.S. and its stock market are the least bad choice at this juncture. So here we are at 1415 S+P 500 with only 160 points to go to an All Time High!

Commodity markets also enjoy similar accidental interest although in general money flows have left commodities as well. Crude is up not on fundamentals, but on fears of turmoil in Syria and Lebanon. Most softs are up due to the drought situation as is, one could argue, scrap.

Looking big picture this has been going on really for some time. First our market benefitted from governments printing money and now because we are the safe haven again. In this stock market rally, which started in March of 2009,  we have regained 83% of the 2007 stock market all time high. We recognize this at a point when the world has all time high unemployment,  Europe has -0.5% growth, we have 1.5% to 2% growth and China has 7%+ growth and likely a lot lower.

For those watching government bond yields here, they may be signaling a turn however. The 10 year treasury hit a 3 month high yield of 1.803% yesterday, thus the exiting money flows as the long bond traders escape declining asset values. At some point, of course, there is a tipping point and the flows will reverse when yields become so attractive that the flows reverse again, probably not before we see 3-3.5% yields or more. We will see how long these flows head into an ever over-valued stock market in this current environment. For now the markets don’t care about fundamentals!

NYMEX HR:

What’s true in the financial markets appears true in the U.S. ferrous markets. Wednesday CRU printed $660/ST, up $28/ST, a very big move, but which was arguably catching up with reality. The prices have stuck so far despite some of the most depressed ferrous prices globally. Why?  We have had a confluence of factors going into that: The strike worries, USS Gary coming down for 2 mos even though slab inventories in place, TK’s volumes dropping, too lean inventories in the downstream channel, Russian trade duty case pending, and our favorite, the oh so predictable scrap market. A real perfect storm of conditions.  With the global picture where it is, it is hard to imagine any scenario where prices rise from here for any period, even with a strike, but then again it no one would have predicted this much of a move we’ve had already.

In HR  Futures, it was a modest week with 553 lots trading or 11,060 ST. Almost all of it was Q1’13,  which traded either side of $665/ST. Bids have come up approximately $15 from lower levels we experienced a few weeks back, but offers have risen $20-25/ST. Trades occur in the current environment when sellers reach and hits the buyers bids. The curve is now flat to slightly backwardated with most months bid and offered either side of $660/ST.






Billet:

LME Cash settled $374/MT and 3 month settled $390/MT. Warehouse queues preventing metal from coming out timely continue to kill this contract.

CME Platt’s billet settled $549.5/T on Aug, $547.5/T for Q4 and $552.5/T for Q1. Offers in the market crept down to $547.50 for Q4 as buy interest appears to be hiding for now.

Raw Materials:

Iron Ore is depressed, no other way to state it. All the anticipatory buying ahead of government intervention in this sliding economy has given up the charge. Spot hit $111+ on TSI. Forward months are lower still scale down through $105 in Cal ’13. The market looks like it’s headed for $100/T, which should be big psychological support. This market is all about China health. Right now it looks really sick.

Turkish scrap bids have dried up. The spot, which peaked at $415 is now $408 basis TSI. The forward market has also retraced. Last week we had traded October at $402, this week the balance of the year is offered at $395-400/T. Buyers are scarce here as well. It is not clear what drove the buying spurt that caused the rally. With Iron Ore looking so depressed it’s hard to imagine the mills in MENA are that aggressive on scrap. Again here like elsewhere inventories had gotten too low and so probably some inventory replenishment going on. Growth prospects in this region still questionable in the immediate term.

US scrap. Holy cow, $80, really! That’s what some markets rose to. A number of factors in this market. Inventories had gotten too low which all of a sudden had gotten lower as the price rise in steel started to stick. The drought had a bigger effect on flows that many realized. From shredders not receiving as many bodies from pick and pulls, to collectors not wanting to be out in the heat to demo projects not operating in the heat. The price clearly had gotten too low for collection. So expectations form here are that there might be a residual effect on September maybe up another $20 to flat. Will depend on the mills and how strong their order books really are. The lead times are not all that strong considering the price so it will be interesting to see where they are on buying in a few weeks. Wanting to support scrap prices to help steel prices at the lows is one thing, paying up for scrap with the potential for a market that might turn down again is another.

SMU Note: Andre Marshall will participate in our “Pre-Summit Workshop” on Managing Price Risk prior to our 3rd Annual Steel Summit Conference in Rosemont, IL on Monday, October 8, 2012.  The Pre-Summit workshop is complimentary courtesy of the CME Group.  You can learn more about our Steel Summit Conference on our website: www.SteelMarketUpdate.com