Hot Rolled Coil Futures: HRC Curve Flattens Near $965; Busheling Rebounds to $565

February CME HRC Futures

The front of the HRC futures curve has fallen dramatically so far this year. The March future has declined by $290, April $230, May $195 and June $140 as of this afternoon’s settlement. The curve has moved out of its steep downward sloping backwardation into an almost flat curve, confirming the supply shortage has passed.    

CME HRC Futures Curve

The flattening of the curve resulted from March’s $35 decline and April being about unchanged, while May gained $35, June $50, Q3 $65 and Q4 roughly $55 since Jan. 27 when some of the months traded at their recent lows.   

CME HRC Futures Curve

Earlier today, the curve slightly inverted with March settling below April and May. Will the curve continue to transform and shift into contango or upward sloping?   

Over the last couple of weeks, there have been some brief rallies and bursts of intraday buying activity on top of the roughly $50 move higher across the curve. For example, last Thursday, the March future opened at $989 and traded to as high as $1,025 before falling back down to close at $995 on Friday. That same day, the April future traded above $1,000 to as high as $1,003, but also fell back the next day with both settling in the $960s today. These failed rallies tell us there are sellers lurking. Is this behavior in the futures market a microcosm of what is happening on the physical front? 

The breakneck volatility seen at the start of the year has rapidly dissipated. During the first three weeks of ’22, the April future fell $136 from $1,190 to $954. Since Jan. 15, the April future has been stuck in a range between $960 and $1,000. 

April CME HRC Future

In fact, all of the months of ’22, excluding February and March, have been rangebound, trading somewhere in the $900 – $1,000 range. After peaking above 900k last month, open interest has declined and appears on pace to finish around 800k when the February contract expires next week. Open interest is how many outstanding futures contracts there are at the end of each day.  In the chart below, the red line is the aggregate open interest across all futures months with the yellow dotted line a 22-day moving average. 

CME Rolling 2nd Mo. HRC Future

The spread between the rolling second month HR future and the spot/index price has narrowed dramatically in recent weeks and the two could be at parity in the next few weeks. Both the futures market and a good number on the physical side appear to believe there will be a floor in this $950 area. Hard to say as the future is always changing, but I do wonder what happens if the price of HR falls below this $950-ish perceived floor and area of congestion in the futures market. If the majority of market participants believe that there is support of a floor at $950 and then the floor doesn’t hold, it should create a reaction with a lot of energy behind it. In other words, if the market doesn’t hold the $950 level, look out below.

Let’s get technical. The “head and shoulders” pattern in the 2nd mo. busheling future was flagged at the start of the year and discussed again in my last article on Jan. 27. Busheling’s chart pattern checks every box to qualify as a textbook H&S pattern. After breaking below $580, the busheling future fell to as low as $500, but has since rebounded back to $565 in the March and April months. Is the sell-off in prime scrap over or just getting started? One man’s ceiling is another man’s floor, so will the neckline support level at $580 that was broken below now prove to be a resistance level moving forward?

CME Busheling Future

Since the end of January, the CME busheling futures curve has rebounded nicely with April and May gaining $50 and $45, respectively, most of which followed February’s settlement.

CME Busheling Futures Curve

Open interest in busheling has exploded in 2022, setting a new all-time record high at 133,440 tons as of the expiration of February’s contract (2/10).

Rolling 2nd Mo. Busheling Future

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