Hot Rolled Futures Markets Breaking Out

Written by Andre Marshall

The following article on hot rolled coil (HRC) and busheling scrap (BUS) trading was produced by Andre Marshall and Jack Marshall of Crunch Risk LLC.

Well, I wrote last about a month back and at that time I commented that I was surprised how quickly the market (media) had gone from bearish to bullish, really Bullish in only a week – while I was on vacation no less. Well that appears to be to the inflection point where the world realized we couldn’t keep going only in one direction. It doesn’t mean the world is healthy, and it doesn’t mean that the worry should end. It simply means the world being a little less unhealthy was all of a sudden very bad for all the bears out there, who had gone short!!! (like any of you out there who committed to a forward price on an order and didn’t cover it in the futures market, figuring you were safe). So indeed the S+P 500 (equities mrkts. moreover) are in the process of testing the old highs of the market. On the S+P 500 we are headed to test 2137 high. We are last 2083 v. the 2043 we were a month back. Next resistance is at 2115, but not necessarily strong resistance. Best Strap In if you haven’t already.

In commodities, the markets have demonstrated the need to be buckled in here. You might recall a month back I commented that Crude couldn’t seem to break that $42/bbl. resistance and so it was a concern for all commodities not being able to sustain a rally from the lows. Well, we are not only north of $42/bbl. on the June future (next active contract), but we have even breached $44/bbl. level yesterday with the mrkt. last $43.63/bbl.. This is approximately a 10% move in a month. Crude should be headed higher from here to the psychological resistance at $50/bbl.. Copper meanwhile has put in a similar performance, following Crude, with the June futures last $2.55/lb. This is 20 cts. above a month ago level and approximately an 8.5% increase from a month back. Hold on for now!

The CME HR spot month future settlement reflects a significant price move higher in physical markets this week as the front month settlement of $486/ST[$24.30cwt] rose over $10 from last week reflecting the notable increase in the Index that the CME uses to settle its HR spot month contract. We have seen a surge in futures interest this week as participants came into the market likely in response to higher global HR prices, constrained HR supply, recent mill price increases, higher iron ore prices, and higher scrap prices.

Not only has the futures curve moved up but the backwardated slope of the settlement values have shifted further out and gotten steeper this week. In 2016 HR futures over the past week – May and Jun’16 settlements rose $21 from $522/ST[$26.10cwt] to $543[$27.15cwt],  Q3’16 settlements also rose $21/ST from $521/ST[$26.05cwt] to $542/ST[$27.10cwt], and Q4’16 settlements rose $27
from $513/ST[$25.65cwt] to $540/ST[$27.0cwt].

In 2017 HR futures prices moved modestly higher- Q1’17 rose $10 from $507/ST[$25.35cwt] to $517/ST[$25.85cwt], and Cal’17 only rose $4 from $505/ST[$25.25cwt] to $509/ST[$25.45cwt].

Friday trading activity was mainly focused in the 2H’16,  as Q3’16 traded @ $525/ST[$26.25cwt] and $527/ST[$26.35cwt] on 500 ST/mo, and Q4’16 traded @ $520/ST[$26.0cwt] on 500 ST/mo.

HR price increase announcements on Monday spurred heavy trading activity on Tuesday and Wednesday with the focus mainly in Cal’17.  On Tuesday Cal’17 traded @ $504/ST[$25.20cwt] on 920 ST/mo, @$505/ST[$25.25cwt] on 400 ST/mo , @$506/ST[$25.30cwt] on 260 ST/mo, @$507/ST [$25.35cwt] on 920 ST/mo, @$508/ST[$25.40cwt] on 260 ST/mo.

Also trading on Tuesday in Cal’16, May/Aug’16 traded @ $541/ST[$27.05cwt] on 1000 ST/mo and 2H’16 traded @ both $529/ST[$26.45cwt] and $532/ST[$26.60cwt] on 1500 ST/mo for both.

On Wednesday we saw continued trading in Cal’17 with Q1’17 trading @ $517/ST[$25.85cwt] on 500 St/mo, and Cal’17 trading @ $507, $509, and $510/ST on 2,800 ST/mo.

Current bids in May,Jun,Jul’16 suggest the market still is expecting physical prices to rise another $35 to $40 based on spot physical prices trading.

The past week has been active as HR futures have traded 97,180 ST and open interest in the HR contract stands at 490,280 ST (24,514 contracts).

Wednesday Settlement HRC

Spot Month  $486

Q3’16             $542
Q4’16             $540
Q1’17             $517
Cal’17             $509


Not that long ago there was a 1 handle on the price of CFR Turkish Scrap. What a difference a month and a half makes in these recovering markets. This past week CFR scrap has jumped from $267/MT to $291/MT.  This offshore demand is increasing competition for scrap supply.  
Early chatter has BUS up $20/$30 /GT.  BUS futures interests reflect an expectation that Midwest BUS prices will remain well supported due to rising HR prices, improving capacity utilization rates, strong demand from autos, and the addition of Big River Mill.  Supplies remain constrained but are improving as collections increase with the rising prices.

Indicative Futures Levels

May’16   $250/GT
Jun’16   $250/GT
Jul’16   $250/GT

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