The Fed’s Hawkish Pressure Is Working Against Inflation
Posted: July 3, 2022 Filed under: Agriculture, Bond market, commodities, iron ore, Materials, Monetary Policy, Steel | Tags: 30-year fixed rate mortgage, BHP, BHP Group Limited, corn, FCX, Federal Reserve, Freeport McMoRan, lumber, RIO, Rio Tinto, TIPS, Treasury Inflation-Protected Securities, XME 5 CommentsThe Federal Reserve has stuck by its aggressively hawkish stance despite massive pains suffered in financial markets and growing risks of a recession. Markets are so convinced by and so scared of the Fed that they have raced far ahead of current policy to anticipate a lot of price hikes ahead. Soaring mortgage rates are one example of the Fed’s sharp impact. The 30-year fixed rate mortgage was last this high during the recession of the Great Financial Crisis (GFC).
![Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; June 28, 2022.](https://fred.stlouisfed.org/graph/fredgraph.png?g=RiKx)
These suffocating mortgage rates are an important sign of victory for a Fed whose primary inflation concerns come from housing.
An even clearer sign of victory comes from the bond market, specifically the breakeven rates on five- and 10-year Treasury Inflation-Protected Securities (TIPS). Reuters reported that these TIPS “slid to 2.636% and 2.362%, respectively, a level last seen in September 2021.” Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC, accordingly observed that “the breakeven market, the difference between TIPS versus regular Treasuries, is dramatically downward sloping. It’s barely above the Fed’s long-term average (inflation) target of 2%.” In other words, the bond market is already anticipating that the Fed’s aggressive push to normalize monetary policy and fight inflation will work.
A broad swath of commodities and commodity-related stocks are suffering under the weight of the Fed’s success. The charts below are just a sample: diversified commodities producer BHP Group Limited (BHP), iron ore producer Rio Tinto (RIO), copper producer Freeport McMoRan (FCX), and the metals and mining ETF (XME) (charts from TradingView.com). Even agricultural commodities like corn and lumber look like they have topped. Perhaps these declines represent the early signals of a recession. If so, those concerns may wait for a post-inflationary day.
BHP printed a double-top in 2022 BELOW the 2021 highs.
RIO topped out in 2022 well below 2021’s highs. It now trades at the November, 2021 low and is at risk of challenging the November, 2020 low.
FCX is close to erasing ALL its 2021 gains.
The SPDR S&P Metals & Mining ETF (XME) quickly reversed its entire 2022 breakout.
Spot corn prices closed below the uptrending 200-day moving average for the first time since January. The topping formation for 2022 looks like the dreaded head and shoulders top (shoulders in March and June, the head in April).
Lumber prices topped out in 2022 well below the 2021 highs.
Be careful out there!
Full disclosure: no positions
Stronger demand drives the latest AK Steel price hike
Posted: May 24, 2011 Filed under: commodities, Steel | Tags: AK Steel, AKS Leave a commentThe pricers at AK Steel (AKS) are at it again. This time, the company announced price hikes for carbon steel products:
“Base prices will increase by $50 per ton for hot rolled and cold rolled carbon steel products, and by $60 per ton for coated carbon steel products.”
AKS is facing higher input costs for making steel. More importantly, the company is experiencing stronger demand for its carbon steel products.
AKS has remained essentially flat for 5 months
Source: stockcharts.com
Disclosure: author owns shares in AKS
Input costs drive more price increases at AK Steel
Posted: April 6, 2011 Filed under: commodities, energy, Steel | Tags: AK Steel, AKS Leave a commentWhat’s a debate about inflation without more price hikes from a steel company?
AK Steel (AKS) announced additional surcharges today based on “…reported prices for raw materials and energy used to manufacture the products.” This announcement is one more small reminder of how commodity price pressures begin pushing their way through the supply chain:
“AK Steel…has advised its customers that a $390 per ton surcharge will be added to invoices for electrical steel products shipped in May 2011.”
Disclosure: author owns shares in AKS
AK Steel wastes no time increasing prices again
Posted: February 20, 2011 Filed under: earnings reports, Steel | Tags: AK Steel, AKS Leave a commentWhen AK Steel (AKS) reported earnings for the latest quarter, the company made it clear that it would drive for more pricing power with its customers. True to form, AKS has already announced three separate price hikes in the past in less than three weeks:
February 1
“AK Steel Announces March 2011 Surcharges For Electrical And Stainless Steels”
AKS announces “…a $430 per ton surcharge will be added to invoices for electrical steel products shipped in March 2011.”
February 10
“AK Steel Announces Price Increase For Carbon Steel Products”
AKS announces it “…will increase current spot market base prices for all carbon flat-rolled steel products, effective immediately with new orders. Base prices for carbon flat-rolled products will increase by $50 per ton.”
February 18
“AK Steel Announces Stainless Steel Price Increase”
AKS announces “…it will increase base prices for all 200, 300 and 400 series flat rolled stainless steel products, effective with shipments on February 27, 2011….Base prices of automotive exhaust grades will increase by $.04 per pound. In addition to the base price increases, AK Steel will increase the price for its bright anneal finish extra by $.05 per pound.”
Disclosure: author is long AKS stock
Steel prices pushing through the economy
Posted: February 6, 2011 Filed under: commodities, iron ore, Steel | Tags: AK Steel, AKS Leave a commentTalk to any steel company, and you will quickly discover the impact of commodity inflation. Steel companies in general have struggled to keep up with the soaring prices of coking coal and iron ore. It seems it is only a matter of time before these price pressures begin to push their way into the rest of the economy.
For example, in its latest earnings report, AK Steel (AKS) announced its plans for achieving greater pricing power by passing on input prices more quickly to its customers. We have also chronicled many of AK Steel’s price increases over the past year.
In “Steel-Price Increases Creep Into Supply Chain“, The Wall Street Journal demonstrates how steel companies are responding to higher input costs by passing along these costs to their customers:
“Steelmakers have increased prices six times, for a total increase of 20% to 30%, since November on basic flat-rolled steel, used in everything from cars to toasters, to offset higher input costs of raw materials, such as iron ore and coal. Higher costs for steel, which are expected to continue well into this year, are hitting bottom lines of companies and prompting additional price increases.”
The general expectation seems to insist that these pricing pressures will not percolate into final end consumer prices. However, I believe this thinking is just the lingering aura of the deflationary mindset of the last recession, and it will fade as surely as commodity prices have soared.
Disclosure: Author owns shares in AK Steel
AK Steel increases prices on carbon steel products
Posted: November 30, 2010 Filed under: commodities, Steel | Tags: AK Steel, AKS Leave a commentAK Steel (AKS) is increasing prices yet again. Effective today and starting with new orders, AKS announced: “…it will increase current spot market base prices for all carbon flat-rolled steel products…Base prices for carbon flat-rolled products will increase by $40 per ton.” AKS explained the reason for this price hike as a “…response to increased demand for carbon steel products, as well as the need to recover higher costs for steelmaking inputs.”
Since July, 2010, AKS has increased prices at least 10 times: four increases for carbon steel products and six increases in surcharges for electrical and stainless steel.
Full disclosure: author owns shares in AKS
Steel companies squeezed by lower product prices and higher input costs
Posted: October 28, 2010 Filed under: earnings reports, iron ore, Steel | Tags: AK Steel, AKS, Arcelor Mittal, MT, Steel, U.S. Steel, X Leave a commentA common theme has connected the earnings reports of most steel companies: lower prices for many steel products and higher input costs. This margin squeeze has produced poor earnings, and steel companies are providing very cautious outlooks. While pricing for steel products varies – some strong, some weak – the increasing cost pressures are near universal. Inflation is very real for these companies.
Arcelor Mittal (MT), AK Steel (AKS), and U.S. Steel (X) all reported this week. I have included some quotes from their earnings report to provide some examples of the pressures that these companies face.
“In Q3 the business performed towards the lower end of our expectations against a background of seasonally lower volumes, weakening spot prices and higher costs. Our outlook for Q4 remains cautious as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences.”
“Sales were lower during the third quarter of 2010 as compared to the second quarter of 2010 due to seasonally lower volumes (-8%), partly offset by higher average steel selling prices (+4%).”
“Sales in the Stainless Steel segment were $1.4 billion for the three months ended September 30, 2010, a decrease of 12% as compared to $1.5 billion for the three months ended June 30, 2010. Sales declined primarily due to lower steel shipments (-8%) as discussed above and lower average steel selling prices (-5%) due to a weak market environment and pressure from imports.”
“The company said its average selling price for the third quarter of 2010 was $1,075 per ton, a 2% decrease from the $1,101 per-ton price in the second quarter of 2010, and approximately 8% higher than the $994 per-ton average price realized in the third quarter of 2009.”
“2010 Iron Ore Price Increase Impacts Third Quarter:
AK Steel said that it has agreed with two of its three primary iron ore suppliers that the requirements for the establishment of the annual benchmark price of iron ore for 2010 have been met. That 2010 benchmark is an increase of 98.65% over the 2009 benchmark, and is higher than the 65% increase the company had previously estimated for the first half and for its third quarter guidance. The third primary supplier of iron ore to the company has not acknowledged yet that an annual benchmark price has been established. Instead, that supplier continues to seek a price increase in excess of the 98.65% annual benchmark price. The company does not agree that this supplier has a right under the parties’ contract to charge based on other than an annual benchmark price and, for purposes of the iron ore purchased from this supplier, the company has used an estimated benchmark price increase of 98.65% in its third quarter financial results.”
“The company’s third quarter 2010 financial results reflect the year-to-date impact of the higher iron ore price, which increased the company’s third quarter operating loss by approximately $76.0 million, or $52 per ton.”
“AK Steel said it expects shipments of approximately 1,300,000 to 1,350,000 tons for the fourth quarter, with an average selling price per ton decrease of approximately 4% from the third quarter. While the company expects fourth-quarter maintenance costs to decrease by about $20 million from the third quarter, it nonetheless expects to incur an operating loss of approximately $80 per ton for the fourth quarter of 2010, largely due to the lower shipments and selling prices combined with continued high iron ore and other raw material costs.”
(Quotes transcribed and paraphrased)
“Results declined in 3rd quarter from 2nd from lower flat-rolled average prices, higher raw material costs in flat-rolled segment and European operations: decreased shipments and production volumes, decreased average realized prices, increased costs for facility repair and maintenance (higher activity, not input costs), and consumption of higher cost coal, coke and iron ore purchased to support earlier facility restarts. Decreased spot prices more than compensated for increased contract prices.”
“In 4th quarter, expect lower average realized prices, lower spot and contract.”
“Tubular operations had higher average prices for fifth quarter in a row. Decreased costs for steel substrate. Not expecting same price performance in 4th quarter but costs should continue down.”
Disclosure: author owns X and AKS
Reliance Steel reports steel prices are softening
Posted: October 25, 2010 Filed under: Steel | Tags: Reliance Steel and Aluminum Company, RS Leave a commentReliance Steel & Aluminum Company (RS) is a $3.1B market cap company that “…provides value-added metals processing services and distributes a full line of more than 100,000 metal products. These products include galvanized, hot-rolled and cold-finished steel, stainless steel, aluminum, brass, copper, titanium and alloy steel..” The company reported earnings last Thursday (click here for the transcript of the third quarter conference call) and warned that “steel prices have begun to soften again after going up briefly at the end of the third quarter.”
The company discussed a wide array of pricing dynamics. Here are a few of the more notable examples that describe pricing in the steel industry today:
“Average prices per ton sold in the 2010 third quarter were up 20% compared to the 2009 third quarter and up 1% compared to the 2010 second quarter. For the 2010 third quarter, carbon steel sales were 52% of net sales; aluminum sales were 18%; stainless steel sales were 16%; alloy sales were 8%; toll processing sales were 2%; and other miscellaneous sales were 4%.”
“Steel prices have begun to soften again after going up briefly at the end of the third quarter. Pricing on our other metals seems to be more stable to up entering the fourth quarter, which we expect to be seasonably softer from a volume perspective than the third quarter.”
“…carbon steel pricing on most all products began to decline in July. A fair amount of imports came in during the July through September time frame that was ordered when the dollar was gaining strength. Imports, along with lackluster demand, helped drive prices downward. However, to keep things in perspective, flat-roll prices today are very close to where they were in January o 2010. If domestic mills continue to align production capacity with demand and scrap goes up along with raw materials, we could be close to the bottom of the pricing cycle and stay above the $500 a ton mark.”
“Midwest spot aluminum ingot averaged, for the month of September, $1.05 a pound and has traded at a relatively healthy range all year with a low of $.94 on a monthly average basis to a high of $1.11 a pound.”
“…the base price for stainless has remained flat so far this year. Nickel surcharges, on the other hand, have continued to be volatile. Nickel average monthly surcharges peaked in June at $1.27 a pound, fell to $.93 a pound in September and closed at $1.04 a pound in November. It appears our December monthly average surcharge will be $.05 a pound or higher.”
AK Steel increases prices to offset rising material costs
Posted: September 17, 2010 Filed under: iron ore, Steel | Tags: AK Steel, AKS 1 CommentYesterday, AK Steel (AKS) warned investors that earnings would be lower than expected partly due to increasing material costs (mainly iron ore). Today, AK Steel told its customers that prices will increase as part of an effort to recoup some of those rising material costs. These price hikes are also enabled by strong demand for stainless steel products.
AKS will raise prices for specialty flat-rolled stainless steel products by about 5% to 10%. These products include “…tensilized, bright annealed and special finishes, along with special mechanical requirements.”
Full disclosure: author owns shares of AKS
Higher raw material costs contribute to AK Steel earnings warning
Posted: September 16, 2010 Filed under: earnings reports, Steel | Tags: AK Steel, AKS 1 CommentAK Steel (AKS) reduced its earnings outlook, partially due to higher material costs:
“The company’s revised third quarter outlook primarily reflects costs associated with the acceleration of planned maintenance work at its Ashland (KY) blast furnace, as well as higher raw material and operating costs than were expected at the time of its previous guidance…
…The impact of these changes on the company’s original guidance for the third quarter would result in an operating loss of approximately $20 per ton for the third quarter of 2010. The company’s original guidance was for an operating profit of $15 per ton for the third quarter. Nearly half of the lower expected financial results for the third quarter are attributable to the acceleration of the Ashland blast furnace outage.”
AKS goes on to state that it is expecting that the 2010 global iron ore benchmark price will increase higher than the company’s previous expectations for a 65% year-over-year gain.
Full disclosure: author owns shares in AKS
Steel companies worried about increasing input prices
Posted: June 5, 2010 Filed under: commodities, iron ore, Steel | Tags: Steel Leave a commentIn early May, the World Steel Association (worldsteel) repeated its worries about “the recent unprecedented rises in the price of iron ore and metallurgical coal.” The industry warned that these prices are pressuring margins and are threatening to increase inflation pressures in various countries. The industry also worries that price volatility will increase with the change from annual to three-month spot pricing.
See “The steel industry repeats alarm over recent developments in raw materials markets” for more details.
More price increases from AK Steel
Posted: May 4, 2010 Filed under: commodities, Steel | Tags: AK Steel, AKS 1 CommentSteel stocks have taken a beating since last making 52-week highs at the beginning of April. For example, the Market Vectors Steel ETF, SLX, is down 12% over this time (see chart below). However, the price increases continue to roll out from steel companies like AK Steel (AKS).
Yesterday, AKS announced two price hikes:
“…it will increase base prices for all 200, 300 and 400 series flat rolled stainless steel products by 6% to 9%, depending upon the grade and product form, effective with shipments on May 30, 2010.” (AK Steel Announces Stainless Steel Price Increase)
“…a $435 per ton surcharge will be added to invoices for electrical steel products shipped in June 2010.” (AK Steel Announces June 2010 Surcharges For Electrical And Stainless Steels)
Steel stocks have tumbled over the past month
Full disclosure: Author owns AKS
AK Steel Increases Prices on Carbon Steel Products
Posted: April 9, 2010 Filed under: Steel | Tags: AK Steel, AKS Leave a commentAnother month, another price increase for AK Steel (AKS). Yesterday evening, AKS announced a $40/ton price hike on all carbon steel products. The company explained the reasons for the increase:
“…the price increase is in response to increased demand for carbon steel products, as well as the need to recover higher costs for steelmaking inputs.”
The recovery in the steel industry continues…
Indian steel prices continue to soar in 2010
Posted: April 4, 2010 Filed under: Steel | Tags: India, Steel Leave a commentThe increasing costs of coking coal and iron ore are driving the price of steel ever upward. In India, steel prices have increased for the third time this year. The Hindu Business Times reports:
“According to industry observers, mining firms are entering into supply contracts with steel makers for the April-June quarter at about $110-120 a tonne, which is an increase of 80-100 per cent from the levels of 2009-10 annual contracts.”
Apparently, these latest price increases are leading to price hikes in consumer goods and construction that rely on steel-based inputs. However, Steel Minister Virbhadra Singh is not worried about inflationary pressures:
“‘There has been a spurt in steel prices in the domestic market recently but it is a temporary phenomenon and at present there is no inflationary concern.’”
Iron Ore Prices May Spike Higher Than Expected
Posted: February 3, 2010 Filed under: iron ore, Steel | Tags: Australia, China, iron ore, Steel Leave a commentReuters reported that Australian miners are seeking a 40% increase in contracted iron ore prices for 2010. This is in stark contrast to the 20-30% increase that the China Iron and Steel Association expected for 2010. The differential could lead to more contentious price negotiations – similar to what occurred at the beginning of 2009 – especially given some nervousness about whether steel demand will continue to increase robustly this year.
AKS Steel Expects An Increase In Average Selling Price
Posted: January 25, 2010 Filed under: earnings reports, Steel | Tags: AK Steel, AKS Leave a commentAK Steel (AKS) fourth quarter and annual earnings this morning. The outlook for the first quarter includes an expected increase in average selling price of 3-4%. This price hike appears consistent with a recent series of price hikes from AKS (as reported here on Inflation Watch).
AKS returned to profitability in the third quarter of last year and expects to remain profitable in this year’s first quarter despite shipments remaining flat with fourth quarter levels.
Full disclosure: author intends to purchase AKS today
U.S. Imposes Anti-Dumping Duties on Chinese Steel Grating
Posted: December 30, 2009 Filed under: China, Steel, trade war | Tags: dumping, duties Leave a commentThe Commerce Department’s International Trade Association issued a preliminary finding determining that Chinese companies are dumping steel grating into the U.S. market. Four companies will be charged with an anti-dumping duty of 14.36% while all other Chinese producers/exporters of steel grating will be charged 145.18%.
The U.S. imported $90.7M of steel grating in 2008. Alabama Metal Industries Corp (AL) and Fisher & Ludlow petitioned in this case.
Commerce reports the products covered under this preliminary finding as follows:
“…certain steel grating, consisting of two or more pieces of steel, including load-bearing pieces and cross pieces, joined by any assembly process, regardless of: (1) size or shape; (2) method of manufacture; (3) metallurgy (carbon, alloy, or stainless); (4) the profile of the bars; and (5) whether or not they are galvanized, painted, coated, clad or plated.”
Higher demand and higher costs drive more AK Steel Price Hikes
Posted: December 10, 2009 Filed under: Steel | Tags: AK Steel, AKS Leave a commentAK Steel (AKS) continues to roll out price increases. On December 8th, AKS announced price increases on carbon steel products:
“[AKS] said today that it will increase spot market prices for its carbon steel products by $30 per ton for all new orders accepted for shipment on January 1, 2010 and later. This price increase is in addition to a previously announced increase of $20 per ton for carbon hot rolled products, and $30 per ton for carbon cold rolled and coated products, which is also effective with January 1, 2010 shipments.
AK Steel said that the price increase is in response to increased demand for carbon steel products, as well as the need to recover higher costs for steelmaking inputs.”
Goldman Sachs analysts say steel prices have bottomed
Posted: December 1, 2009 Filed under: commodities, Steel | Tags: Steel Leave a comment“Steel and scrap prices in the U.S. have bottomed in our view, Chinese prices are rising, inventories remain low, a weak dollar has brought the U.S. close to being a net exporter and we expect better industrial and auto demand in 2010,” analysts Sal Tharani and David Stevens wrote in a note…
“Although Chinese steel production remains at record levels, the demand from private-property sector, infrastructure and machinery/industrial activity remains very strong, and we are seeing signs of further acceleration,” [the Goldman Sachs analysts] said.
Related: “Flat-rolled [steel] prices expected to head up on West Coast.”
Tokyo Steel Raises its Prices to Cover Rising Costs of Raw Materials
Posted: November 16, 2009 Filed under: Steel Leave a commentTokyo Steel Manufacturing Co., Japan’s largest maker of construction girders, will increase prices of some products by as much as 4.2 percent because of rising raw material costs.
The Tokyo-based company will raise the price of construction products including deformed steel bar, wire rod, and I-beam by 2,000 yen ($22.3) a metric ton for contracts starting next month, it said today.
Rising steel production in China, the world’s largest maker, will likely spur higher costs for materials including iron ore and steel scrap, pressuring earnings for the industry, Managing Director Naoto Ohori told reporters in Tokyo. Iron ore prices may rise 20 percent next year, Samsung Securities said yesterday.
“Raw material costs are likely to go up,” Ohori said. “Cost increases would be unavoidable for steelmakers.”
Inflation Watch 