Written by: Bradley Clark, Director of Steel Trading, Kataman Metals

Settlement prices this week on the CME U.S. Midwest Hot Rolled futures contract rose $5 per ton for the balance of 2012 and $5 per ton for January through June 2013 amid a surge of volume.
 
A spike in volume in any market can often lead to a sharp reversal in prices. We had one of the busiest volume weeks this week with over 35,000 tons or 1,750 lots of HRC traded on the CME. 15,000 tons traded yesterday alone for Q4.

The large volume was mainly concentrated in calendar 13 periods as corporate hedgers got busy starting to layer in hedges for next year. At one point the calendar 13 futures traded up nearly $10 dollars week on week from $625 to 635 before settling around $630 per ton. There still remains considerable interest from corporate to lock in calendar 13 prices.
 
This positive sentiment in the HRC futures market reflects the market’s belief that the recent Fed stimulus plan will inflate commodity prices in the coming months and year. Prices on the futures market have found a clear floor over the past couple of weeks, consolidating around current levels. All signs point to further strengthening as natural physical shorts are likely to come into the market as we get closer to year-end to lock in forward pricing by putting on long hedge positions in the futures market.
 
By contrast, the physical HRC market has been quiet. This past week the spot physical hot rolled coil market softened against the back drop of weakening demand. Spot prices are expected to continue easing in the coming weeks as service center inventories reportedly are at healthy levels. The weakening dollar over the past few weeks however should start to curb imports. We’ve heard reports that actual physical spot transactions are currently ranging between $630-650 per net ton, although the CRU price this week was only down $2 per ton.

Below is a table with yesterday’s HRC futures settlement prices on the CME contract for each individual month through Q2 2013 as compared to last week:



OPEN INTEREST: 13,581 lots (1 lot = 20 short tons)
 
U.S. Midwest #1 Busheling Ferrous Scrap (AMM) Futures Off and Running
 
The past week we finally had the long anticipated launch of the new CME/NYMEX busheling futures contract. This new futures contract indexed against the AMM #1 Midwest Busheling index has already sparked a healthy level of interest and logged its first few trades.

The AMM busheling index is published monthly on the 10th of each month. Currently the September index is $391.06 per gross ton with prices predicted to soften for the October 10th print by $20-30 per ton. The futures market is currently pricing in a $30 dollar per ton drop in October with several trades going through between $355 and $360 this week.

The busheling futures are signaling a bottoming out in November which has been trading at $345-$355 and followed by a rebound in prices over the winter months. December through February -- which is typically a seasonally a constructive period for ferrous scrap prices -- has been trading between $375 and $385 per gross ton.
 
CME Busheling Settlement Prices as of 9/19/2012 close:
 
Oct – $360
Nov – 342.50
Dec – 352.50
Q1 – 375
Cal 13 – 375
 
OPEN INTEREST: 16 lots (1 lot = 20 gross tons)
 
CME Black Sea Billet / TSI Turkish Scrap Slide Lower
 
The weakness in the global steel complex continues to weigh heavily on the CME Black Sea Billet contract as well as the TSI Turkish Scrap contract as softening demand in Europe for finished steel products makes the appetite for billet and scrap very limited. Week on week we have seen spot prices fall $20 from $535 to $515 on Billet and $11 on scrap from $380 to $369.

The forward curve, while not experiencing huge amounts of trading volumes on CME billet, has seen price deteriorate by approximately $10 for the most active q4 contract ($520 down to $510 per ton value). The Turkish scrap contract has seen more interest as East coast exporters have looked to hedge exposure by selling down the forward curve between $8-$10 per ton on q4 at $360 and q1 $355.
 
Forward curve TSI Turkish Scrap as of 9/19/2102 close:

Q4 – 360
Q1 – 355
Q2 – 350
Cal 13 – 360
 
Settlement Prices CME Black Sea Billet as of 9/19/2012 close:

Sept – 535.33
Oct – 520
Nov – 520
Dec – 520
Q1 – 525
OPEN INTEREST: 190 lots (1 lot = 100 metric tons)
 
TSI Iron Ore: A Choppy Sea Ahead
 
This was another exceptionally strong week for volumes on the SGX/TSI iron ore contract as over 3 million tons have traded. An extension of price increases occurred at the beginning of the week following on from the previous week’s enormous gains. However, as the days wore on traders began to sense the exuberance of this recent rally beginning to fade and prices retreated sharply on Wednesday and Thursday.

At the time of writing prices are down approximately $2 on most periods along the curve from the previous week. After reaching a high of $116 q1 is trading back down to $105 today (last week’s Thursday close was $107.50). Shanghai rebar futures have been the major intraday driver of iron ore prices this week and after last week’s positive response to Chinese and US stimulus announcements, rebar futures turned lower as many in the market began to look at current fundamentals and saw real demand for steel in China not increasing.

The picture remains muddled for iron ore and rebar as the week comes to a close, on one hand stimulus measures should spur demand in the medium term and with iron ore stocks at relatively low levels there is room for prices to rise further, on the other hand finished steel stock piles remain healthy and demand for steel stemming from the stimulus plans is weeks if not months down the road which could weigh on any attempt to rally further.

It looks like the volatility seen in the iron ore market of late is here to stay through the end of the year.
 
TSI Iron ore forward curve as of 9/20/2012:

Oct - 103 / 104
Nov – 103 / 104
Dec – 103 / 104
Q1 – 105.50 / 106.50
Q2 – 105.50 / 106.50
Cal 13 – 104.50 / 105.50