HRC Futures: Utilizing Futures Spreads

Several past columns in SMU have included comments about the futures forward curve, using terms like contango and backwardation. This week, we wanted to take time to discuss why these concepts matter, and what to look for in the forward curve to take advantage price relationships in the market.

The concepts may make more sense in terms of day-to-day operations of a steel company. Let us say that a company has a view that, despite recent price declines, the steel market will rebound over the next few months. In that scenario, it is plausible to think that the company may intentionally build inventories now, to be ready for future sales volumes. This strategy would require several things in terms of the company’s readiness: 1) the company must have storage space for the additional material, 2) the company would require either available credit or cash reserves to purchase the material today. Enter the bull calendar spread…

Logan Davis

Logan Davis is the business development manager for the metals team at Commodity & Ingredient Hedging (CIH). He worked with CIH for five years on the client services side before returning to his family’s dairy operation to manage their commodity price risk along with the CIH dairy team. He has returned to present prospective metals clients with solutions to their price risk via CIH’s tools and services. Having been both a consultant and a client, Logan has a unique perspective on markets, risk, and the obstacles that both consultants and clients can encounter. Logan holds a Series 3 License.