The following article on the hot rolled coil (HRC), scrap and financial futures markets was written by Jack Marshall of Crunch Risk LLC. Here is how Jack saw trading over the past week:
As the Russia/Ukraine conflict continues to smolder the upward trend in spot HR prices appears to have stalled this week following an impressive $540/ST climb since the end of February.
The strong upward velocity of the HR spot market led to a strong upward price move along the forward curve but especially in the nearer futures months. As of the April 12 settlements, the
Q2’22 HR average price was up $414/ST (40%), the Q3’22 HR average was up $337/ST (33%), and the Q4’22 HR average was up $287/ST (29%) from the February 25 settlements.
These numbers all reflect a pullback from mid-March highs, which were closer to a 60% rise due to the outbreak of war. The war has been a mixed bag with respect to open interest, but the
general trend has open interest moving lower.
That’s likely due to the combination of high volatility, which has led to considerably higher initial margin requirements, and shifting expectations regarding market demand and future price direction. HR futures trading has seemed a bit slower so far in April. But that is likely because we had a very brisk March with almost 35,000 contracts trading.
The progression of the war has shifted the shape of the forward curve, which was pretty flat, to a more steeply backwardated curve.
Feb 25th – Apr’22 settlement $1025/ST versus Dec’22 settlement $990/ST (-35/ST)
Apr 12th – Apr’22 settlement $1470/ST versus Dec’22 settlement $1279/ST (-191/ST)
With markets adjusting to metallics supply disruptions from the Black Sea, how soon will HR spot prices return to their pre-war trend? Imports are already pointing to lower prices for July delivery.
However, forecasting prices remains difficult given the ongoing global supply disruptions due to Covid lockdowns in China, high oil prices, and of course rising US interest rates and recession concerns.
Below is a graph showing the history of the CME Group hot rolled futures forward curve. You will need to view the graph on our website to use its interactive features; you can do so by clicking here. If you need assistance with either logging in or navigating the website, please contact us at info@SteelMarketUpdate.com.
BUS futures have also had a strong run up on the back of the expectations of supply disruptions due to the war. Early Apr’22 BUS expectations saw near date BUS futures hit $900/GT. But later sales brought the April BUS settlement price ($779/GT) back down to only a $75/GT increase over the prior settlement in March ($704/GT). However, BUS spot climbed almost $260 from the Feb settlement – so still a healthy price rise.
As of April 12, the May’22 BUS future was still $125/GT over the settlement from 25 Feb’22, and the latter half of 2022 BUS average settlement was over $80/ST above the pre-war price.
Basic pig iron prices spiked but have eased back from $1,200/ton. Issues remain on the timing that new sources can be found to fill the shortfall from the Black Sea.
Below is another graph showing the history of the CME Group busheling scrap futures forward curve. You will need to view the graph on our website to use its interactive features; you can do so by clicking here.
Jack MarshallRead more from Jack Marshall
Latest in Futures
HRC futures: ‘Normalcy’ not seen on near-term horizon
Over my years of observing the steel market, there's been a recurring belief that current market disruptions in either the physical spot market or steel futures are temporary anomalies, destined to fade, and that normalcy will soon return. However, the events of the first few weeks of 2024 served as a stark reminder that this expectation seldom materializes, and that the US steel market is still the most volatile steel market in the world.
HRC futures: Understanding and addressing HRC basis risk
It’s no secret that HRC futures have been particularly volatile over the past several years. The most recent instance was the outsized break in the March futures contract early this week. For companies procuring raw material in anticipation of higher prices or even to get ahead on future purchase orders from customers, understanding the relative price of that raw material versus the hot-rolled coil futures curve is important.
HRC futures: Momentum picking up on HR spot price declines
After holding steady for most of January, the hot rolled (HR) index has started to gain some downward momentum. In the last 30 days, it has declined $89 per short ton (st) and is sitting just above $1,000/st.
HRC futures: A flock of canaries in the mine
Much has happened since we last met on Jan. 4. Cleveland-Cliffs announced a price increase on Jan. 3, lifting the futures market in the morning only for it to finish the day $20-$30 per short ton (st) below those morning highs. On Jan. 4, the futures curve was down another $10-$28/st. And in my column for SMU that evening, I asked a question: Would those aggressive sellers be met with a short-squeeze forcing them to cover, or had the market peaked with the negative price action to start the year the proverbial canary in the coal mine?
HRC futures: Changing futures dynamics
What a difference a few weeks make…. As this is our first column after the new year, it is quite interesting to observe how different the steel world looks at the end of January vs. the end of December.