Futures

Futures: HR Prices Continuing Sluggish Reversion to the Mean

Written by Jack Marshall


Go figure, in the last month, HR spot has continued to decline. The index tied to CME HR futures has given up $140/ST ($1,130/ST to $990/ST). A look at the fundamentals would appear to support the latest market direction. The list includes declining steelmaking component prices (zinc, coking coal, iron ore and scrap), a sharply lower May Chicago PMI—down for the seventh consecutive month (40.4)—another down month for ISM Manufacturing in May (46.9), and a tepid Fed Beige Book.

Of particular concern from May ISM was the new order component, which contracted at a faster rate and the continuing contraction of the backlog orders component. The data seem to bear out Q1 concerns that the demand in the middle of 2023 would contract due to Federal Reserve tightening and reduced liquidity. While automotive demand might be a bright spot year to date, along with a slow uptake on steel imports due to fear of continued price declines, the HR curve still is pricing in a further $150-$200/ST decline.

However in the last month settlements for the Jul’23 to Jun’24 HR strip average have increased over $20/ST ($803/ST to $825/ST) as macro buyers come in on the back end of the curve. 

Will demand going into the latter half of the year match up with the additional steelmaking capacity that should be coming online? The latest American Iron and Steel Institute production figures suggest the producers are managing outputs to match current sluggish demand. With the exception of a few pockets, it appears that commercial demand has been slow and inventories remain fairly tight.

Commercial HR hedge interests have been pretty light this past month, with a slight uptick in volumes in the first week of June. The flat nature of the curve and the rising back end of the curve will further contract HR hedge volumes from commercial interests. Open interest reached almost 30,000 contracts in May before the front month rolled off.

Futures 0608 2023 Fig1

Initial expectations for Jun’23 BUS settle suggested soft sideways to down slightly, but over the last few weeks a more bearish sentiment kicked in, and current Jun’23 BUS futures are trading at $511/ST ($550 -$511 = down $39/GT from May’23 settlement). This year BUS spot has been slow to retrace after the first quarter. It has proven to be very sticky at the mid-$500 level, but with pig iron trading at the $515-520/ST recently and slow demand for scrap exports some gradual decline is expected.

Recent lower prices for obsolete scrap are hurting scrap collections, and new production capacity could limit the price declines in BUS going forward should HR demand pickup. Some of this expectation can be seen in the uptick over the last month in average price of the H2’23 BUS futures, which on a settlement basis are up just shy of $15/GT.

Futures 0608 2023 Fig2

Editor’s note: Want to learn more about steel futures? Registration is open for SMU’s Introduction to Steel Hedging: Managing Price Risk Workshop. It will be held on April 26 in Chicago. Learn more and register here.

By Jack Marshall of Crunch Risk LLC

Jakc Marshall, SMU Contrubutor

Jack Marshall

Read 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: 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?