Final Thoughts

Johnson: Last Week in HRC Futures

January 8, 2023

Last week was a short one for US HRC futures, but overall volumes were surprisingly strong given the holiday, as traders were eager to start the year. We see this is a good sign, and we will soon have our annual roundup and breakdown of volumes and open interest in 2022 compared to years past, so stay tuned for that.

Nearby months, which do remain impacted by the lackluster print that ended December, were kept on track last week by a strong uptick on the spot market assessment from $664 to $692. Many of the daily indices are leading higher than this now in the $720-$740/ton range, which seems more reflective of current mill offers than anything else, as spot deals have not been as robust as hoped, though they do seem to have improved with the new year (the price reflects this, of course, up $28/ton week over week and likely up again this week). These are not the $40/ton moves the market was once pricing in recently, but the market does have some apparent momentum to the upside. The question is now can mills keep that momentum going? And for how long?

The market still says yes, and for a while, and so the overall contango remains intact. January last trades settled at $728/ton a $36/ton premium to the last index price. One likely scenario for a $728-type finish would be $692, $720, $740, $760, which would end it at $728/ton average for January on the nose. There are only two weeks of spot deal left to settle these final prints and the above scenario seems within reason, but a lot can change in a few weeks.

February and March then last settled at $775 and $780/ton, respectively, reflecting the markets expectation that we are going to keep moving higher, but that we will hit a peak here in Q1 before leveling off. Q2+Q3+Q4 spreads are not dramatic at the moment. For February to reach $775/ton on average, assume the above is true and we finish January at $760/ton. From there it is only a quick $30/ton over a short four-week February to average $775/ton. So March trading level reflects, as much as anything it would seem, the market’s lack of any sense of where we may go from there. Perhaps the market does tread water here for some time, but it’s unlikely to remain flat for months on end, let alone the balance of 2023, so something is likely to have to give here sooner or later, as markets usually do not move in a straight line sideway for very long in this world!

Here is how the forward curve looks as of 1/6/23:

thumbnailspencerJan8 image003

Thanks for reading, and Happy New Year!

Editor’s note: Spencer Johnson has been trading HRC futures for 14 years at StoneX (previously FCStone).

Spencer O. Johnson
LME/Ferrous Trading
StoneX Financial Inc.
O- 212-379-5492
Spencer.johnson@stonex.com

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