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:
HR futures are coming back to life after a quiet spell in May. Month to date in June more than 225,000 short tons (ST) of HR has traded. Q3’22 HR has been especially busy this past week.
Open interest has risen about 3,400 contracts so far this month on a pickup in hedging of physical deals as the spot price has continued its decline. Spot has retraced a little over $200/ST since the end of May, and the average forward curve prices in Q3’22 and Q4’22 have declined $30/ST and $15/ST, respectively.
The curve between Jul’22 and Mar’23 continues to narrow on a settlement basis, shrinking from -$79/ST to -$62/ST. Bearish market sentiment continues to build as continued labor issues and Covid-related supply disruptions along with major inflationary headwinds curtail upcoming quarterly forecasts. In addition, some announced layoffs in the automotive space and difficulties in the housing/construction arena further invite concern. Numerous participants have expressed the expectation that prices will continue to decline at a similar pace for the remainder of June, which given shortening lead times is likely supported. Also, soft metallics prices are adding to the price discomfort.
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 reflects a larger price move lower in the last month. Not only did the spot decline over $70 per gross ton (GT) from May to June settlement ($705.08 to $634.78) but the forward curve also shifted much lower. Q3’22 BUS declined an average of almost $87/GT to $515/GT, and Q4’22 BUS declined an average of $83/GT to $510/GT. The net effect of the faster falling BUS curve prices has helped to push the metal margin (HR minus BUS) higher.
The 2H’22 average metal margin price differential has increased on a settlement basis from roughly $365/ton to $427/ton.
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: Ferrous futures in consolidation mode
The March scrap trade is set to pick up steam next week.
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?