HRC Futures: Uncertain Times Reflect Muted Forward Curves

How soft will demand be given that automotive demand has been the bright spot for steel sales? Recent economic data seem to reflect recent steel mill guidance on softer demand going into the latter half of 2023.

Since the beginning of August , Sep’23 HR futures have lost $46/ST on a settlement basis and the Q4’23 HR futures average has lost $38/ST.  So in spite of the recent monthly declines in spot, the futures market currently does not reflect much further weakness. The change in settlement value for 1H’24 HR average on a settlement basis has a slight pick-up of $5/ST. So far, the lowest price for an HR future has been $703/ST.

It seems odd that the futures curve does not reflect much further erosion of HR prices given all the forecast of uncertainty.

What is reflected in the HR futures is the declining open interest.  Open interest added less than 1,500 contracts this month, and with the front month settling we will likely dip below 18,000 contracts.  

As a reference, HR futures had roughly 30,000 contracts of open interest at the beginning of this year.   

I expect we will see more activity after Labor Day weekend as everyone returns from the summer break, and participants position hedges based on the UAW strike outcome.

BUS futures have also reflected the quiet HR markets. That is until this morning. The near end of the futures curve declined on average about $20/GT from yesterday’s settlement and,  Q4’23 BUS futures settlements have declined about $27/GT this entire month, while the 1H’24 average has risen about $10/GT over the same period. Given that the Sep’23 BUS settle will fall just before the UAW strike deadline, we will likely have to wait another month to get a better sense scrap demand going into Q4’23. Based on trades today in Q1’24, the metal margin for Q1’24 sits at $330/ton.

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