Written by: Joseph Reinmann, CEO Kataman Metals

For anyone who still thinks that Hot Rolled Coil futures will never work – it’s time to think again. A new CME U.S Midwest Domestic HRC Futures volume record was set for October, with total volume of 5,021 contracts traded, equating to over 100,000 tons, topping the previous monthly high of 4,645 contracts traded in July of 2009. In addition, the CME is rolling out an options contract on HRC starting on December 12th. An option on a future is the right, but not the obligation, to buy or sell a specified number of underlying futures contracts at an agreed upon price on or before a given future date. HRC options will provide yet another tool to manage your HRC price risk.

HRC futures prices on the CME continued to head higher this week increasing $13 per ton for the first half of 2012. Volume has been strong. In the past 5 trading days 39,120 tons (1,956 lots) of HRC changed hands on the CME. Buyers seem to be snapping up whatever the sellers are offering. The HRC futures market continues to show signs of bullishness following the recent spate of mill price increase announcements.

Below is a table with yesterday’s HRC futures settlement prices on the CME contract for each month through June 2012:

LME Billet Prices Unchanged amidst Turmoil

The three month LME steel billet price settled yesterday at $535 unchanged from last Friday’s settlement and still below the $550 to $600 trading range where it has remained throughout most of 2012.

The LME billet Official Cash Settlement price settled yesterday at $525 also unchanged from last Friday.

The recent bankruptcy filing by broker MF Global caused waves in the LME billet market this past week. The LME suspended 274 steel billet warrants held by MF Global last Friday since bankrupt MF Global was unable to comply with LME lending rules. Under LME rules, a party holding over 50 percent of the total warrants must be prepared to lend metal to other market participants if required to do so by the LME.

Traders said that Stemcor – a UK based steel trader – was the dominant longholder – and is said to be holding between 50 and 80 percent of all of the outstanding LME billet warrants.

LME billet supplies have been tight all year – often resulting in inexplicable spikes in LME billet prices which we have written about in this column. Perhaps now with the LME stepping in to insure an orderly market we may be approaching the end of this perpetual squeeze.

December Scrap Outlook Mixed

So far the outlook for the December scrap market is mixed. Shredded scrap today FAS U.S. East Coast is approximately $420 which represents fair value relative to the prevailing LME billet prices. The current cargo freight rates from U.S. East Coast to Turkey are about $30 per ton. Scrap to Billet Conversion costs in Turkey is about $80 per ton. So, $420 shred plus $30 freight = $450 per ton CFR Turkey. $450 + $80 per ton for conversion equal $530 which is right in line with the LME billet settlement prices yesterday. We will keep an eye on the LME billet futures prices over the next two weeks to see if they might give us clues to the December scrap market.

If you are interested in learning more about futures trading, Steel Market Update is holding its next Hedging Price Risk workshop in Houston, TX on January 25, 2012. Check out the full program and registration details. Discounts for SMU members!