THE GOOD

  • Brazil and South Korea cut (Fed funds equivalent) interest rates last week.
  • Chinese raw material and steel prices showing bounce off recent lows. Expectations are for further expansionary government stimulus after the commencement of the 18th party congress on November 8.  Baosteel holding steel prices steady for November; Wuhan Iron & Steel raised HRC prices $24/t.
  • China HSBC services PMI came in up 2.3 MoM to 54.3.
  • China’s daily crude steel output fell to 1.843m tonnes/day according to the CISA.
  • According to the World Steel Association, steel use in the NAFTA region is expected to grow by 7.5% in 2012 to some 130.4 m tonnes attributed growth to “improvements in construction activities and strong performance in the automotive industry.”
  • The Federal Reserve “Beige Book” was release last week stating that “the U.S. economy was expanding “modestly” last month, supported by improvements in housing and auto sales, even as the labor market showed little change. Residential real estate conditions improved since the last report. Conditions in the manufacturing sector were mixed since the last report, though on balance, more districts reported that conditions had improved than worsened. Significant gains in manufacturing related to the construction, energy and transportation sectors were reported across several districts, with particularly robust gains tied to the automotive industry.”

 

THE BAD

  • Global geo-political tensions heightened after Turkey, on two separate occasions, forced down cargo planes (in their airspace) suspected of carrying military cargo to Syria while Israeli forces shot down a Hezbollah drone, then launch new attacks on Hezbollah forces in Gaza.
  • Ex-China global Scrap prices weaken significantly; scrap surcharges down $40-60.
  • IMF lowers global growth forecasts; warns new downturn would be tougher to tame. “Risks for a serious global slowdown are alarmingly high,” said the IMF’s world economic outlook report.  The fund expects the world economy to expand just 3.3% this year and 3.6% in 2013, as growth slows in every major nation and political uncertainties threaten recoveries in the U.S. and euro zone.  That is a revision downward of 0.2 and 0.3 for 2012 and 2013, respectively.  
  • The American Iron & Steel Institute (AISI) reported their estimated raw steel production data for the week ending October 6, 2012 down 1.3% compared to the week earlier and 2.0% lower than the same week one year ago. The AISI estimates the capacity utilization rate to be 71.1%.
  • World Steel Association’s conference in New Delhi was held last week. “The slowing growth of China’s economy likely means the Asian giant and its steel industry have reached “an inflection point,” and that slowdown could have a knock-on effect of increased global overcapacity, as well as additional volatility throughout the steel supply chain, several speakers said. Lakshmi Mittal added: “The driver is China and the driver is iron ore.” Mittal was not optimistic in his outlook for the global steel industry in the near term. “This year I don’t think the steel industry’s global business will grow more than 2.5 – 3%,” he said. He cited poor demand in China and Russia for his bearish outlook. Things have not been good for the last six, nine months,” SBB 10/10
  • Iron ore swaps could not hold their rally off China’s Golden week holiday.  Four straight days of losses following last Tuesday’s close at $115/tonne for December SGX iron ore swaps.

 

THE FELDSTEIN

Uncertainties abound…..

A more positive tone of macro-economic news this past week as the U.S. Federal Reserve’s Biege Book showed that the U.S. economy was “expanding “modestly” supported by improvements in housing and auto sales. Significant gains in manufacturing related to the construction, energy and transportation sectors were reported across several districts, with particularly robust gains tied to the automotive industry.”  The Fed reported that steel production was flat (Cleveland & San Francisco Districts) to down (St. Louis District) and coal production was down in the Cleveland District.  Brazil and South Korea added to the global stimulus parade by cutting their respective interest rates.  However, the International Monetary Fund lowered their global growth forecasts expecting the world economy to expand just 3.3% this year and 3.6% in 2013; a revision downward of 0.2 and 0.3 for 2012 and 2013, respectively.  “Risks for a serious global slowdown are alarmingly high,” said the IMF’s world economic outlook report, which blamed slow growth and political uncertainty in the U.S. (election and fiscal cliff) and Europe (Europe) for the increased risks.

On the geo-political front, the Turkish/Syrian conflict continued with Turkey, on separate occasions, forcing a Syrian and Armenian plane flying over Turkey, each suspected of carrying military cargo bound for Syria, to land for inspection.  However, there was no further serious escalation of the conflict.  Last week, Israel shot down a drone claimed by Hezbollah then launched multiple air attacks against Gaza militant groups killing at least five and escalating violence in the area.

Prices of raw materials (coal, iron ore) and steel (HRC, scrap, rebar) in China increased early last week as the Chinese returned from their “Golden Week” holiday.  However, prices gave back some of the early week gains continuing on Monday, Oct. 15th.  Still, prices are well off of their lows set last month.  Baosteel announced they would hold prices unchanged for November while Wuhan Iron & Steel raised HRC prices $24/t. Chinese mills raised export prices, but few transactions occurred.

Scrap prices (and surcharges) dropped $40-$65 per ton as scrap demand is seen as weak globally.  This is no surprise as the AISA and CISA both reported lower relative levels of steel production and capacity utilization for the U.S. and China, respectively.  

Chinese daily crude steel output fell to 1.843m tonnes/day, still contributing to the global oversupply of steel, but Chinese production is trending lower in consecutive periods.  Whether this is due to the Chinese holiday or is part of a trend remains to be seen.  Most likely, Chinese mills will ramp up production in the face of the upcoming change in congress as expectations are growing that the new government body will announce significant infrastructure/stimulus projects. 

Europe remains weak.   North European coil prices have softened on soft demand as producers compete with cheaper imports.  The Spanish government announced the intention to pass a new law that would effectively increase steelmaker’s energy costs by 15%.  The Italian government ordered Italy’s largest steel producer, Ilva, to shut down operations at its Taranto steelworks because of heavy pollution.  Turkey lowered their growth forecasts for 2013.

Last week, 300 Kumba iron ore miners seized a fleet of heavy mining equipment and began striking for higher wages.  The mine, which produces 120,000 tonnes per day, was shut down on Oct. 4th.  BHP announced plans to lay off an undisclosed number of staff in the firm’s iron ore division.  While the supply side of iron ore has made rapid and significant changes, 96 million tonnes of ore still sit at Chinese ports.  “The driver is China and the driver is iron ore,” said Lakshmi Mittal at last week’s World Steel Association’s conference in New Delhi. Whether there is another leg lower in iron ore and the effect that has on the global steel industry is one of the big uncertainties in the steel industry right now.  Other uncertainties include the direction of global economic strength, the U.S. election, and the U.S. fiscal cliff, the European debt crisis, China’s new government, Iran’s nuclear ambitions and Syria.  Of course, there are many more I missed.

Nevertheless, this is the first week since the summer where there seemed to be some kind of balance between THE GOOD and THE BAD.  Perhaps this is the start of a sustained recovery in steel; then again, maybe this is the scene in The Perfect Storm when the skies are clear because George Clooney and Mark Wahlberg are sitting in the eye of the hurricane just before a hundred foot wave sends their boat to the bottom of the Atlantic.  I guess that’s why they play the game, as they say.