Hot Rolled Futures Continue to Slide Amidst Global Slowdown Fears
May / 04 / 2012 - Hot Rolled Futures Continue to Slide Amidst Global Slowdown Fears
Written by: Joseph Reinmann, CEO Kataman Metals
This week we had renewed concerns of a slowdown in the Eurozone, deteriorating manufacturing data, and continued uncertainty over China. Despite that gloomy backdrop, steel output in the U.S. was near a four year high, steel imports into the U.S. were near a four year high, and China’s steel output continues at record levels.
The May spot price for Hot Rolled Coil on CME U.S. Midwest Hot Rolled futures contract settled yesterday at $660, although we have heard physical spot deals being booked easily at $650 and sub $650. On the CME, Q3 HRC settled yesterday at $670, Q4 settled at $673 and Calendar 2013 traded at $685 this week. Anything starting with a “7” is long gone.
Volume on the CME U.S. Midwest Hot Rolled futures contract was firm as 1,700 lots traded (34,000 tons) over the first three days of this week.
Open Interest on the CME hit a record high this past week of 13,187 contracts, or 263,740 tons. An increasing open interest indicates more activity and liquidity for the contract. Increasing open interest is an indication that new money is flowing into the contract and that the present price trend – namely down – will continue. Should Open Interest suddenly decline that will be our signal that the market is liquidating and that the present price trend may be about to reverse. We will keep an eye on Open Interest over the summer for clues as to if and when this current downtrend may start to reverse.
Below is a table with yesterday’s HRC futures settlement prices on the CME contract for each individual month through 2012 as compared to last week:
LME Billet Price at Lowest Levels of 2012
The LME cash billet market settled yesterday at $467.00 nearly matching its 2012 low of $465.50 set on February 15. At the close of trading today, the best bid was $450.
The three month LME steel billet price settled yesterday at $495.00 matching its low of 2012 set on April 26.
It is an extreme anomaly that in the same week that the LME billet was bid at $450, a chief raw material that goes into making billet – namely HMS #1/#2 -- was also bid at $450 CFR Southern Turkey.
Historically HMS #1/#2 CFR southern Turkey trades at a $60 to 80 per MT discount to LME billet. The current par relationship between scrap and billet is unsustainable and a correction must be coming.
We anticipate seeing scrap prices decline before we see a meaningful rally in billet prices.
Iron Ore Quiet
The iron ore market has traded sideways over the last couple of weeks with prices for physical tenders going through between $144-147 per metric ton for index quality ore delivered China. With the Chinese on holiday the beginning of this week the paper market has been very thin on volumes. The backwardation remains down the curve with Q3 trading around $138 and Cal 13 at $128. With conflicting macro data coming out of China and with rebar in a downward trend sentiment remains mixed for the seaborne iron ore market.
Is Scrap a Dam Waiting to Burst?
The U.S. mills that have bought scrap so far for May have paid sideways pricing versus April for most grades. At sideways pricing these mills encountered no resistance and were able to fill their May scrap requirements quickly. We now have reports that several large steel mills have delayed entering the May scrap market, hoping that their delayed purchase strategy will enable them to secure lower prices. In view of falling steel prices, it wouldn’t surprise us to see these late entrants to the May market attempt to drop scrap prices $10 to $20 per ton. Heading into June and July – which are traditionally not great months for scrap prices – we are starting to wonder if the dam is getting ready to burst.
