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Chinese steel production for the last 11 days of May declined 3.9% to 1.96 million tonnes per day (mtpd); if CISA’s estimates are accurate (and they are usually too low) May production would still come in at around 2.015 mtpd, down a nominal 0.2% from April. Given CISA’s recent forecasting history, we’re fairly certain May will still be a new record – but at least the trend is starting to work in the right direction!

While we are encouraged by the apparent production decline (and 1Q production was underestimated by a full 9% so we need to be skeptical) we remain worried that the recent rate cut – while ultimately good news in China for steel demand – could end up backfiring as steelmakers may keep production going at high levels anticipating future demand.

Our full report is available to subscribers only and provides further thoughts on Chinese steel production and pricing and the implications for steel equities.

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The number of active oil and natural gas rigs in the United States rose 0.2% to 1,984 for the week ending June 8, 2012, climbing close to last month’s peak of 1,986.  The rig count is also up 7.0% from the year-ago level of 1,855.

The highest weekly rig count in the United States since 1940 was recorded on December 28, 1981, at 4,530; the lowest was recorded on April 23, 1999, at 488.

The number of rigs in Canada increased 47.4% this week, jumping from 156 last week to 230 this week.  Despite the increase, the rig count is down 0.9% from the year-ago level of 232.

The highest rig count for Canada was 727 on February 3, 2006; the lowest was 29, recorded on April 24, 1992.

Source: Baker Hughes Inc.

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According to just-published data from American Metal Market (AMM), June prices for shredded scrap (obsolete) tumbled $58 (or 13.5%) to $372/ton, and #1 busheling (prime) scrap plunged $65 (or 14.6%) to $380/ton.

The sharp declines were the largest one month drops for both grades since November 2008, and put prime scrap at the lowest level since December 2009 and shredded at the lowest since November 2010.  Since peaking in January of this year, prices of prime and obsolete scrap have dropped $140/ton (or 26.9%) and $98/ton (or 20.9%), respectively.

We believe the decline for shredded scrap was driven by the evaporation of the export market for obsolete scrap, lower iron ore prices as well as the general slowdown we are seeing in steel demand and production.  While prime scrap is more insulated from the global market, a step-up in supply due to increased manufacturing and a decline in demand due to weaker sheet markets drove the steep pricing decline in the month.

Our full report provides our scrap and steel price outlook as well as the implications for steel equities.

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Steel Market Production Increases – Indian pipemaker Welspun has completed the 80,000 tpy helical submerged arc welded (HSAW) capacity expansion at its Saudi Arabian mill – bringing the mill’s total capacity to 350,000 tpy.

Sources: Steel Business Briefing

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According to American Metal Market, Gerdau (GGB) has announced a surprise $15/ton price cut for all longs, likely responding to sidelined buyers who are waiting for scrap prices to settle. We believe that pricing leader Nucor (NUE) will likely follow with a similar move – down $10-20-ton – as it appears that shredded looks to be settling down $50-60/ton.

We believe that Nucor will raise the base price to offset most of the surcharge decline in order to minimize pricing volatility and to respond to somewhat healthier markets as long product imports likely dropped in May and early June.

Our full report provides further thoughts about domestic and global steel prices as well as the implication for steel equities.

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Steel Market Production Increases – Electrical grid maintenance in Qian’an city in Tangshan, China has caused power shortages to some billet makers with power restrictions having begun on June 1 and scheduled to run until June 13.

Steel Market Production Increases – Chinese linepipe maker Chu Kong has started hot trials on its new 360,000 tpy spiral submerged arc weld (SSAW) pipe mill in Lianyungang city in Eastern China.

Steel Market Production Increases – Chinese linepipe maker Chu Kong intends to inaugurate a new 300,000 tpy COE-formed longitudinal submerged arc welded (LSAW) pipe mill in its Lianyungang works in the fourth quarter of 2012.

Steel Market Production Increases – Isa Unal, the owner of Turkish conglomerate Moher Limited was granted a license to construct a 250,000 tpy rebar mill in Basra, Iraq with construction completion scheduled for the end of 2013.

Sources: Steel Business Briefing

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Our Advance/Decliner Index rose from a 3-year low of 4% to 23% as our Chinese Index posted a short-lived rebound rising from zero to 25% as announced stimulus as well as a pathetic 0.3% production drop boosted some spot prices early in the week before the rally fizzled out by week’s end (any reading below 50 means more price cuts were reported than increases).

So far this week, spot steel prices in China have already given back these gains due to a combination of a disappointing US jobs report, weak Chinese manufacturing data and the continuation of strict Chinese property market controls, and steelmakers have continued to cut export prices.

Our Ex-China Index also increased from 5% to 23% as Brazilian steelmakers took advantage of the strengthening dollar/real relationship and announced price hikes in an attempt to re-establish more “normal” domestic price premiums, while pricing elsewhere continued to fall.

Our full report provides further thoughts about global steel pricing trends and our outlook as well as implications for steel equities.

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HRC lead times for the week ending 5/27 slipped to 2 weeks from 3.8 in the previous week. These levels represent the lowest since the start of the year with some sources even quoting lead times below these levels.

Lead times for HDG remained unchanged at last week’s level of 5.3 weeks – also a low for the year, while CRC slipped to 5.6 from 6.2 last week – just 0.2 weeks off this year’s low of 5.4.

Sources: The Steel Index, Steel Business Briefing