Ferrous Futures: Global Ferrous Rally Gaining Steam

Rolling Second Month CME Hot Rolled Coil Future $/st & Open Interest

The latest SMU survey forecasting the price of Midwest HR 60 days out showed only 5% of the survey participants predicting prices above $800 and 0% below $600, or about $100 on either side of this week’s CRU. So this survey is telling us the steel industry expects HR prices are suddenly going to go from the volatility of the past two years taking HR from $500, to $1,900, to $955, to $1,655, to $650, to suddenly grind to a halt and sit in a a narrow $200 range?  That sounds likely… NOT!!

How can we explain this? According to Wikipedia, “Recency bias is a cognitive bias that favors recent events over historic ones; a memory bias. Recency bias gives “greater importance to the most recent events.”

HR futures bottomed, and you can’t make this stuff up, 64 days ago on Nov. 9, and have rallied $100 -$120 since. Now what? Will prices continue to rally or reverse lower? There are few guarantees in life, but I can guarantee you this—in 60 days, the price of HR will either be higher, lower, or flat.

CME Hot Rolled Coil Futures Curve $/st

Yesterday, Jeff Currie, Goldman Sachs Global Head of Commodities Research, was interviewed on Bloomberg Markets, the title of which read Goldman’s Currie Sees Oil at $110 by Q3, and he said the following (in italics):

“There is the reversal in the (China’s) zero-covid policy that impacts oil, but when you think about copper, there is also the growth impulse, the stimulus into the property market, the reversal of the three red lines.”

Since bottoming on Nov. 1 at $70.85/ton, iron ore has steadily rallied 73.6%, making a new high almost day after day. Today, it traded just above $123 and settled at $122.85.

Rolling Second Month Iron Ore Future $/t

“This is a big shift! Let’s remember what reopening in the U.S. and Europe did to oil and commodities. We (Goldman) are very postive on both oil as well as copper as you get the reopening.”

Chinese Lunar New Year starts on Sunday, Jan. 22, and runs for a week to 10 days, so expect a clearer picture out of China at the start of February. 2023 is the year of the rabbit, an elusive animal with big ears and quick bursts of speed. Will we see quick bursts higher in commodity prices?    

Rolling Second Month SHFE Chinese HRC Future $/st

“Let not forget, oil, copper, pick your commodity, inventories are exhausted, spare capacity exhausted… the shelves are empty, they’re not prepared for a demand increase.”

Markets have taken notice over the past few trading sessions, with copper and aluminum rallying sharply. If you recall, base metals, iron ore, and Chinese steel prices were among the first to rally out of the lows of Q2 2020.

March CME Copper $/lb

Rolling 3-Month LME Aluminum $/mt

“One other point I want to emphasize for copper, oil and all these markets, physically theyre priced for a recession, they’re destocked, the shelves are empty at the input level, so they’re not prepared for a demand increase.”

When he says “all these markets,” does he mean these same ideas can be applied to steel and ferrous raw materials? The January busheling future surged, settling earlier this week up $59.45 at $449.06, the second straight month with an increase after falling seven straight months from May through November.

Rolling Front Month Busheling $/lt and Turkish Scrap Futures $/mt

One commodity going in the other direction has been natural gas, which has plummeted 45% in 30 days. The relatively mild winter is mostly to blame, but the weather has been a gift to Europe, in addition to the decline in the cost of natural gas as they continue to battle the cold and with their primary gas supplier, Russia. 

February Natural Gas Future $/MMBtu

Steel mills and steel production facilities were idled all over Europe last year in anticipation of energy shortages. When Currie says “so they’re not prepared for a demand increase,” is he talking about the European steel industry, too?

Rolling Second Month CME North European HRC Future $/st

“We see the upside start to be significant.”

Billions of people emerging out of a COVID lockdown, idled steel mills, potentially better-than-expected economic growth, does this remind you of anything? The U.S. is looking at a rebound in automotive, significant growth in nonresidential construction and plummeting steel imports.  When Currie says “they’re destocked, the shelves are empty… not prepared for a demand increase,” he isn’t talking about the domestic service center industry, right?

Rolling Second Month CME Hot Rolled Coil Future $/st & Open Interest

My mantra in 2021 was “keep an open mind about price,” and I will reiterate that here. The notion that volatility is suddenly going to collapse, that the pendulum swinging back and forth at 90 miles an hour is just going to grind to a halt… I ain’t buyin it.   

By David Feldstein, Rock Trading Advisors