HRC Futures: Are You Ready for Some Hot Rolled!

Written by David Feldstein

Editor’s note: SMU Contributor David Feldstein is president of Rock Trading Advisors. David has over 20 years of trading experience in financial markets and has been active in the ferrous futures space for over eight years. You can learn more at www.thefeldstein.com or add him on twitter @TheFeldstein and on Instragram at #thefeldstein.

Since Aug. 25, the last day of the SMU Steel Summit, the October CME HRC future has rallied from $1,845 to $1,900 along with continual increases in physical HR indices. In the chart below, the red line represents total open interest across the 36 months of HR futures and the yellow dotted line is the 22-day moving average.  Open interest has started to rebound, now at 662,000 short tons, after appearing to have peaked at the end of May.

Rolling 2nd Month CME Hot Rolled Coil Future $/st

The source of this latest bull surge seems to be buyers looking to lock in forward prices with the futures curve gaining between $50 to $110/st through September 2022. Since the Steel Summit, the November, December and January futures have gained $100, $109 and $84/st, respectively. 

CME Hot Rolled Coil Futures Curve $/st

While both physical and financial Midwest hot rolled prices continue to gain, the rolling 2nd month busheling future has been in a steady decline falling from just over $700 at the end of June to $588 today, the lowest level since April.  

Rolling 2nd Month CME Busheling Future $/lt

The entire CME busheling futures curve has moved lower with October and November falling by the most, $54 and $53, respectively, since Aug. 25. With the October CME HR future up $55 and BUS future down $54, the two have diverged another $109 to a whopping $1,312 metal spread (the discrepancy between short ton and long ton is ignored when discussing the metal spread).  

CME Busheling Futures Curve $/lt

If you are wondering why busheling has fallen in recent weeks, look no further than iron ore. The rolling SGX iron ore future has collapsed since late July falling almost 40%. Ore initially bounced rebounding back above $165/t, but that rally fizzled with ore settling yesterday at a new (recent) low of $129.60/t. Will ore double bottom or continue lower from here?

Rolling 2nd Month SGX Iron Ore Future $/mt

What to make of all this? Admittedly, it is very confusing. Can anyone really be sure of where steel prices will be next September let alone January? 

Tonight is the start of the 56th NFL season with the Dallas Cowboys visiting the reigning NFL champions, the Tampa Bay Buccaneers.  Considering historical pricing relationships and economic data have been rendered useless in terms of predicting Midwest HRC, perhaps the NFL can help out. The Monday Night Football game that concludes week 8 is the New York Giants playing at Arrowhead Stadium against the Kansas City Chiefs, the team that lost to the Bucs in Super Bowl Fifty-Five. If you ask anyone who knows anything about the NFL, the Chiefs are a lock to win against the Giants. However, when it comes to the NFL, anything can happen on any given, well in this case, Monday. The NFL is so compelling because of this. By week 8, which used to be the season’s mid-point, injuries, breakout stars and upsets galore have shaken up everyone’s preseason expectations. As much as we all think we know what is going to happen, the NFL is incredibly unpredictable.

The Giants at Chiefs game is scheduled to be played on Monday, Nov. 1, which is also the date the U.S. and European trade representatives have penciled in as a deadline to resolve the Section 232 tariffs on steel and aluminum. Whoa, that’s only 8 weeks away! Over the last week, headlines regarding S232 have heated up. Does it really matter though? With domestic hot rolled at $1,950 a ton, the S232 tariff isn’t deterring imports.  Global steel prices plus the 25% tariff add up to somewhere between $1,000-$1,425/st depending on the country of origin. That leaves $525-$950/st of profit margin to be sliced and diced between the parties involved. How long will that last?    

This is the first NFL season with 18 games, each team now getting two bye weeks. Week 18 will be played on Sunday, Jan. 9. Do you think you can accurately forecast the eight division winners as of Jan. 9? How about the prices of Midwest hot rolled, busheling and iron ore on that day? What we can expect in the months ahead are personnel changes, fumbles, swings in momentum, contract negotiations, heart breaking losses, last minute heroics and tons of surprises. And the same could be said for the NFL season.

Disclaimer: The content of this article is for informational purposes only. The views in this article do not represent financial services or advice. Any opinion expressed by Feldstein should not be treated as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Views and forecasts expressed are as of date indicated, are subject to change without notice, may not come to be and do not represent a recommendation or offer of any particular security, strategy or investment. Strategies mentioned may not be suitable for you. You must make an independent decision regarding investments or strategies mentioned in this article. It is recommended you consider your own particular circumstances and seek the advice from a financial professional before taking action in financial markets.

David Feldstein, SMU Contributor

David Feldstein

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