Hot Rolled Futures Sending Mixed Signals
Jul / 06 / 2012 - Hot Rolled Futures Sending Mixed Signals
Written by: Andre Marshall, Crunchrisk LLC
Financial Markets
In the last week alone we have seen:
• Lower interest rate in Europe, now 0.75%,
• Lower interest rate again in China, now 6%,
• Sub 50 index ISM report for US,
• Sub 50 index manufacturing report for China from HSBC, 4th mo.in a row,
• Rallies in all markets bringing US Equities up approx 5%, Copper up 5.5%, Crude up 10%, and even the USD up 1.5%.
What looks on the surface as Risk On again activity is in reality “short cover” where shorts have had to scramble for the exits as markets rallied upon news of Germany’s re-commitment to the debt crisis in Europe. I feel like we have heard this before!
And so it goes the market continues to trade as a reaction to news. This is causing violent swings and apparent re-directions in a marketplace where sadly nothing has changed. Europe’s debt remains almost insurmountable, Chinas growth is failing, and resources, which were once in chronic shortage, continue to build inventories throughout the distribution channel. It might be of interest to note that Chinese copper stocks, which are mostly wrapped up in finance schemes are at their highest levels, likely north of 1 mln tons. Meanwhile in Aluminum there are over 8 mln tons wrapped up in warehouse finance deals throughout the globe. We all know of the Iron Ore glut building in various places in the channel, and the rumors of steel stocks in China continues at a high pitch.
And here once again, the U.S. is the bright spot. Having addressed our mess 3 years ago, when it was prudent, our ever so modest growth (1.7%) is now the strongest economy in the land?!
And the future looks far from comforting with an election in the U.S., a change of power in China and a precarious re-election possibility for Angela Merkel’s Christian Democrats. Add to that impending tax increases here and abroad and growth looks far from clear.
Stay Tuned, financial markets should remain volatile for the foreseeable future.
HR NYMEX
Well in the futures space we have had an ok week. We have traded 755 lots or 15,100 ST. End week last week Q4 and Q1 traded either side of $640 and $650 respectively. This week 2nd Half 2012 traded 630/ST. The mills price increase announcement has sent the sellers into the shadows for the moment and the bids have risen steadily.
Meanwhile CRU today came out @ $592/ST down $14/ST. This reflects reality that most buyers now are receiving units below $600/ST. It will be interesting to see if the price increases, that are posted around $630/ST will stick. Auto appears to continue to be the pillar of support for steel. We saw again that MoM increase for June was up 2% and we are again back above the 14 mln rate. We will see how much of this current demand is real and how much might be in preparation for the USW talks. Early reaction to price increases basis current RFQ’s and spot orders suggests this may be a struggle for the mills despite slightly increasing lead times.
LME Billet:
Cash closed $391/MT and 3’s closed $415/MT. These prices have edged up about $20/MT from their low closes. This market is dead and will suffer further illiquidity going forward. Most futures activity will continue on through the NYMEX Platts’ Billet contract.
Raw Materials:
Iron Ore spot is just north of $135/T. This market has seen trader length interest in anticipation of some significant Chinese stimulus program, which so far does not seem forthcoming unless interest rate cuts are what they had in mind. Stay tuned. Meanwhile nearby futures levels are either side of $130/T and Cal ’13 is either side of $123/T. This market has not had a similar reaction down as has other ferrous markets in other regions. If this stimulus does not materialize soon then one could expect to see another move down for Iron Ore. Chinese over production cannot go on forever.
Scrap had an impressive $60+ down move in July only to possibly face a similar move down for August. What started as expectations of 30-40 down soon moved to 40-60 down. We will find out early next week. The mill increases might soften the blow, but a blow is expected. Early transactions look so far like 40-50 down. This would put us closer to 330-340 for primes or shred in the MW. The price increase if anything might help to absorb June’s unsold overhang. With Severstal and RG out this will have to mean much better lead times for minis in the next few days.
I’m not sure that there has ever been a time of such mixed signals in the market. It would be pretty early for the bottom to come in early July, but it seems everything has come early in this cycle. One thing is clear as far as the U.S. price direction is concerned; Demand is critical! Even then, price volatility probably remains muted until the globe can get its house in order as imports will provide a ceiling to any rally for the immediate term.
SMU Note: Attendees to our next Managing Price Risk workshop will be able to learn more about using financial derivatives such as HR Futures, Options and Over-the-Counter (OTC) Swaps as part of a strategy to protect margins, inventory values, offer long-term pricing and as protection against wild steel price swings. Our full day course – which can be counted towards CPM recertification credits – is being held in Chicago on July 25th at the Chicago Board of Trade. The course is team taught by Andre Marshall of Crunch Risk as well as members of the CME Group and John Packard, Publisher of Steel Market Update (31+ years of active steel sales experience).
Registration is open and SMU member companies receive a $100 per person discount.
