Final Thoughts
Hot Rolled Futures: Mills Sensing $800 in Near Term
Written by Michael D'Angelo
January 19, 2023
Editor’s note: SMU Contributor Michael D’Angelo is a researcher and trader at Marex. In his role, Mike performs fundamental and quantitative analysis, which directly leads to actionable trading/risk management strategies across the base, precious, and ferrous metals derivative spaces. Prior to joining Marex, Mike received a BA in economics with a minor in finance from Princeton University. Mike can be reached at mdangelo@marex.com for comments/questions.
CRU’s weekly Midwest hot-rolled coil (HRC) index inched down to $702 this week after three consecutive weekly increases. However, prices will likely continue to rise as top steelmakers Cleveland-Cliffs and Nucor both announced $50/ton price increases this past week. Consensus seemed to be that prices will reach $800 within the next three months or so, but mills have been facing resistance lately, with buyers hoping Q2 prices will come back down.
The Consumer Price Index (CPI) was in line with expectations, but Empire Manufacturing, Industrial Production, Capacity Utilization, and Building Permits all missed expectations recently. Retail Sales also missed to the downside on Wednesday. The slew of misses initially caused a rally on the theory that weak numbers give the Federal Reserve more room to start cutting. However, the market quickly changed its mind and began selling off on concerns of a weak economy.
European prices have also been coming up as production slowed substantially in the downturn. However, buyers are questioning the sustainability of the rally as the demand picture has not improved that much. US prices are now just about on par with European prices after enjoying a premium for quite some time.
The curve remains upward sloping with February/May valued at about $30 contango, although it was trading closer to $50-60 contango last week. As we can see, the futures market is pricing in that $800 expectation that mills are banking on.
SMU’s Steel Mill Willingness to Negotiate survey has been plummeting. From July to November we were seeing readings consistently above 90. Fast forward a month and a half to today’s reading, which came in at just 38! The reading is consistent with recent news flow of mills regaining power and being stubborn to offer discounts much below $800.
American Iron and Steel Institute (AISI) Steel Production inched up by 7,000 tons to 1.602 million tons. However, the metric is still at levels not seen since late 2020.
Imports for December were expected to be around 2.1 million metric tons based on licensing data, slightly below the historical average. Imports for the first few weeks of January were projected at 1.2 million metric tons, which implies a similar number to last month.
By Michael D’Angelo, Marex, mdangelo@marex.com
Michael D'Angelo
Read more from Michael D'AngeloLatest in Final Thoughts
Final thoughts
What's the tea in the steel industry this week? Here's the latest SMU gossip column! Just kidding... kind of. Yes, some of the comments we receive in our weekly flat-rolled market steel buyers' survey are honestly too much to put into print. Some make us laugh. Some make us cringe. Some are cryptic. Most are serious. We appreciate them all. Below are some highlights from our survey results this week. Some of the comments that we can share with you are also included, in italics, in the buyers' own words, with minimal editing on our part.
Final thoughts
Last week we wrote about a brief lull in price movement, labeling it a period of wait and see. It did, in fact, turn out to be pretty brief. This week... things are little bit different. Perhaps right now we are more in a period of "hope and pray" or "Here we go, hold on to your hats."
Final thoughts
Unless you've been under a rock, you know by know that Nucor's published HR price for this week is $760 per short ton, down $65/st from the company’s $825/st a week ago. I could use more colorful words. But I think it’s safe to say that most of the market was not expecting this. For starters, US sheet mills never announce price decreases. (OK, not never. It has come to my attention that Severstal North America rescinded a price increase back on Feb. 14, 2012. And it caused quite the ruckus.)
Final thoughts
Is it just me, or does it seem like the summer doldrums might have arrived a little early? I could be wrong there. It’s possible we could see a jump in prices should buyers need to step back into the market to restock. I’ll be curious to see what service center inventories are when we update those figures on May 15. In the meantime, just about everyone we survey thinks HR prices have peaked or soon will. (See slide 17 in the April 26 survey.) Lead times have flattened out. And some of you tell me that you’re starting to see signs of them pulling back. (We’ll know more when we update our lead time data on Thursday.)
Final thoughts
Everybody has a plan… until they’ve dealt with volatility in the HRC market. While Mike Tyson’s original quote was about getting punched in the mouth, it’s unlikely the ex-champ has gone many pricing rounds with hot-rolled coil.