CME Hot Rolled Futures Higher; but LME Billet Declines
Written by: Joseph P. Reinmann, CEO of Kataman Metals
I would like to wish all of the SMU members a happy and prosperous New Year.
Hot Rolled Coil (HRC) futures prices on the CME continued to head higher this week increasing $11 per ton for the first half of 2012. But for the second half of 2012 the futures were flat. And as we look at the forward curve as depicted on the table below, the HRC futures market is indicating that February will be the high point in this current cycle. The average price for the 2012 HRC settlements this week was $716.50, but it’s interesting to note the downward bias by quarter:
Q1-2012 at $737, Q2-2012 at $720; Q3-2012 at $705 and Q4-2012 at $705.
Volume was moderate this week on the CME U.S. Midwest Hot Rolled futures contract with 9,600 tons (480 lots) changing hands.
Below is a table with yesterday’s HRC futures settlement prices on the CME contract for each month through December 2012:
LME Billet Prices Surprise to the Downside
The three month LME steel billet price settled yesterday at $525.50 down $30.00 so far in this new year. The three month LME billet peaked on December 13 at $575 and is now down $50 from its peak three weeks ago.
The LME billet Official Cash Settlement price settled yesterday at $525.50 down $34.50 so far in this new year. The Cash LME billet peaked on December 16 at $565 and is down $39.50 from its peak.
The direction of LME billet prices usually foretell what is about to happen next in the ferrous scrap markets. But those two markets – scrap and LME billet – have inexplicably diverged over the past three weeks.
January Scrap Prices Up Strong
Despite the $30 per ton drop in billet prices this week, U.S. scrap prices have soared by as much as $30 to $50 per ton this week. These two markets – which are historically closely correlated – have diverged by a surprising $80 per ton this week alone and by as much as $100 over the past month. It is inconceivable that scrap and billet can remain so far out of their normal relationship and we expect that over the next month that the difference between these two markets will revert to the mean. And the only way these two markets revert to the mean is if Billet goes up or scrap goes down.
Note: Our next Hedging Price Risk workshop will be held in Houston, Texas on February 9, 2012. For more information go to www.steelmarketupdate.com/events