Hot Rolled Futures: Recovery on the Horizon?

SMU contributor Gaurav Chhibbar is a partner at Metal Edge Partners, a firm engaged in Risk Management and Strategic Advisory. In this role, he and his firm design and execute risk management strategies for clients along with providing process and analytical support. In Gaurav’s previous role, he was a trader at Cargill spending time in Metal and Freight markets in Singapore before moving to the U.S. You can learn more about Metal Edge at www.metaledgepartners.com. Gaurav can be reached at gaurav@metaledgepartners.com for queries/comments/questions.

My last article was titled “Futures: A Tail of Hope.” It highlighted how the contango (a curve where the front months are cheaper than the periods further out) had gotten steep. Any such market commands a closer look for those looking at calendar spreads/hedging cheap spot buys. Yesterday the contango got steeper! Market participants had an interesting problem to solve. How to trade a sharp decline in the spot index? As the index fell sharply, reflecting physical spot market transactions, front month futures got sold down (chart below). The back half of the futures, however, were trading up day over day. There were announcements from U.S. Steel about reduction in capacity, as well as optimistic outlooks shared by a few speakers at the SSS Conf in NY. The combination of facts and opinions apparently influenced buyers to come out of hiding and bid up levels Sep’19 onwards.