Futures

As HRC Contracts Grow Questions Nag CME Traders

Written by John Packard


“If we all knew the direction steel prices were headed, well I wouldn’t be here with you guys….” This was how the conversation began with one of the contacts SMU made earlier this week while in New York City to attend a number of meetings surrounding the Steel Success Strategies conference.

There were a number of comments made to SMU publisher, John Packard, as he met with various manufacturing, trading, distribution, brokers and analysts as well as steel mills, about the futures market and, in particula, r the article produced by David Feldstein of Flack Steel last Thursday (SMU June 9, 2016). It seems many steel people did not realize how poorly the hot rolled coil (HRC) forward curve on the CME has predicted future price movements (and should not be used as a predictor of HRC price movement). If you have not perused the article you may want to go back to last Thursday’s issue and do so.

Questions About Transparency Behind CME Settlement Number

SMU attended a lunch with a handful of companies who actively trade HRC futures. As the discussion unfolded some interesting comments were made. There was a discussion about the index being used by the CME in order to calculate the settlement price of HRC in the physical market.  For those of you who do not realize this, the CME settlement number is based on the average of the weekly price “prints” of their index provider during the course of a given month. CME is not allowed to discuss or print information related to the weekly hot rolled pricing print due to contractual restrictions with the provider.

SMU also is not allowed to print any information about the CME HRC price provider as we have been banned by the provider from doing so. This is the reason why we do not mention the name of the service in our newsletter or website.

Up until recently, the CME HRC index has been trailing other indices following hot rolled spot pricing in North America. During the lunch we discussed the methodology which potentially creates a situation where orders placed a week or two earlier end up being tabulated in the current number, creating a lag affect when market prices are moving on an almost daily basis.

There was a discussion about the lack of transparency behind the CME HRC number. The methodologies used to index hot rolled pricing (and other products) are readily available on our website as well as Platts, The Steel Index and others. However, those with whom we were meeting for lunch wanted the index used to settle financial transaction to be more transparent. In particular, both buyers and sellers of HRC futures wanted to know how many data points and from what kind of buyers or sellers was the index price based for any given week. This information is not available from the current provider but is available from other indices such as Platts (based on an article written by Joe Innace of Platts in a March 25, 2014 issue of SMU).

An active service center who participates in the futures market was not appreciative of the current price provider’s lack of transparency as the provider has taken the position that this is the number and you can’t ask any questions about that number.

From our perspective it will be interesting if the subject abates as the market calms or if this is an issue which will need to be addressed by the industry in the coming months.

CME HRC Contract Volumes Have Grown

The hot rolled futures contract volumes are much better than they were when the contract was first launched on the CME. The CME Group has shared monthly trading information with SMU which shows the 2014 monthly average was 4,007 contracts (80,140 tons) per month, 2015 rose to 4,785 contracts (95,700 tons per month) and so far this year the number of contracts has been averaging 5,063 per month (101,260 tons per month).

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