HRC Futures: Rally of Epic Proportions

Written by David Feldstein

The following article on the hot rolled coil (HRC) futures market was written by David Feldstein. As the Flack Global Metals Director of Risk Management, Dave is an active participant in the hot rolled futures market, and we believe he provides insightful commentary and trading ideas to our readers. Besides writing futures articles for Steel Market Update, Dave produces articles that our readers may find interesting under the heading “The Feldstein” on the Flack Global Metals website, www.FlackGlobalMetals.com. Note that Steel Market Update does not take any positions on HRC or scrap trading and any recommendations made by David Feldstein are his opinions and not those of SMU. We recommend that anyone interested in trading HRC or scrap futures enlist the help of a licensed broker or bank.

This morning, reports surfaced that steel industry executives were headed to Washington to participate in a press conference where President Trump would announced his decision on the Section 232 Investigation. Then there was news that the announcement would take place at 11 a.m. Eastern. Then there was the announcement that the decision on tariffs would not be announced today, but instead the president would hold a feedback meeting with these executives. Midwest HRC futures rallied sharply in anticipation, speculating Trump would institute broad tariffs. Below is the daily change in HRC futures.

The press conference resulted in President Trump announcing he will officially announce tariffs on steel and aluminum imports next week.

25% for steel, 10% for aluminum; for a long period of time,” said President Trump.

CME Midwest HRC futures have been gaining $10-$20 almost every day since the 232 recommendations were made public on Feb. 16.  The April future, which settled at $706 on Feb. 5, traded as high as $877/st today in anticipation of Trump’s announcement. 

CME Midwest HRC Future Curve

Below is the chart of the CME 2nd month rolling Midwest HRC future highlighting the inverted head and shoulders pattern discussed in this article since November 2017.  The HRC2 price broke through $650 on Dec. 15 and has rallied 33 percent or $215/st since then. 

CME Rolling 2nd Month HRC Future (April)

In the Oct. 10, 2017, edition of the Week Over Week report on Flack Global Metals website, it was pointed out that not only were international HRC and CRC differentials at very low levels, but that the previous two times differentials were that low a sharp rally in the Midwest HRC price soon followed. 

The percentage move of those two rallies was extrapolated to the current HRC rally that began in October 2017 to formulate an educated guess of where the index could top out. The rallies of 41 percent and 58 percent indicated the index could run to between $820 and $920/st if this rally was anything like the previous two. 

Platts TSI Midwest HRC Index

Last night, the Platts TSI Midwest HRC Index printed $777/st while today, April CME HRC futures traded in the middle of this range at $870. With today’s development that President Trump will announce steel tariffs next week, one would have to not only expect the index to print at the high end of this range, but perhaps far, far beyond,  to the land where HRC is priced with four digits. 

That is of course if next week’s announcement of these tariffs can survive the political pressure from manufacturers, exporters, consumers, allies and trading partners, as well as social pressure if the stock market, which dropped as much as 550 points today, continues to move abruptly lower.

Scrap futures have rallied over the past month, but at a much slower pace than HRC.

LME Turkish Scrap Futures & CME No. 1 Busheling  Curves

The SGX iron ore futures curve has moved up about $5 -7 per ton since the end of January with the curve steepening as prices have rallied.

SGX Iron Ore Future Curve

Revisiting the SGX iron ore “cup and handle” chart from the past few articles, the price rallied through the handle and the top of the cup, but has fizzled this week as China returned from its Lunar New Year holiday. Continue to keep a close eye on ore, especially in anticipation of China’s response to today’s tariff announcement.

SGX 2nd Month Iron Ore Future

David Feldstein, SMU Contributor

David Feldstein

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