Using U.S. Steel’s C4Q14 guidance, we likely saw peak earnings in C3Q14 (which we believe was borne out of channel stuffing, rather than real end-market demand); this is only exacerbated by a number of instances in which global price arbitrage “freebies” in the metals space have effectively been closed…

While many of our peers seem to think, for some strange reason, U.S. HRC prices have magically decoupled from global prices, we simply do not buy this thesis, & rather believe, when looking at the data, the reversal of this dynamic is already underway. What do we mean? Well, while it got little fanfare, Sep. ’14 MSCI service center inventories hit a 5yr-high when reported 10/23, & HRC inventories at the service centers are now at 5yr-highs as well (yes, you heard that right). Furthermore, again, looking at the data rather than making forward prognostications based on one’s views, international scrap prices have collapsed from $390/hectare 8/14 to $323/hectare today (we remind our readers that lower international scrap prices mean U.S. scrap collectors cannot export as profitably, forcing them to sell at much cheaper prices to the EAF vendors [Nucor (NUE), Steel Dynamics (STLD), etc.], implying lower HRC prices in the U.S. market, & also keeping incremental buyers on the sidelines – shredded scrap prices in the U.S. have crashed from $383/l.ton 9/26 to $337/l.ton today, a -12% fall in ~1 month, after being flat for most of the year). These developments, we believe, underpin a U.S. steel market that is very much still impacted by developments globally. Thus, with Chinese HRC prices at lows not seen since 2003, Black Sea/Baltic Sea HRC at levels not seen since 2009 & North Europe Domestic HRC at levels not seen since 2009, with U.S. prices sitting substantially above the lows set in 2009 (unlike all other HRC prices), we believe the dynamics that connect the global steel markets (i.e., supply/demand, and low-priced steel finding the highest priced market [or, more foreign steel coming into the U.S.]) will continue to intensify. This is where we have a fundamental difference in opinion from the lion’s share of market prognosticators, and why we believe U.S. HRC spot prices will move to $550/mt next year, and stay there…Stated differently, folks, this time is NOT different, and market forces will drive U.S. HRC prices toward global prices (as we have seen with coking coal, iron ore, scrap prices, and international steel prices.