HRC futures: Ferrous futures in consolidation mode

Written by Dave Feldstein

The March scrap trade is set to pick up steam next week. The March CME busheling future settled on Thursday at $440, indicating a $49 month-over-month (m/m) decline. Since peaking at $565 on Dec. 13, the March future has dropped $125. The March Turkish scrap future settled on Thursday at $392, indicating a tight $48 premium for busheling over Turkish scrap. The March Turkish scrap future settled at $421.50 on Jan. 29, dropping $29.50 since then.

March CME busheling future $/lt rolling and LME Turkish scrap future $/mt

A big reason for the decline in scrap is likely the sharp drop in iron ore. The rolling 2nd month SGX iron ore future ended 2023 at $140.08 per metric ton (mt). Ore took its first leg lower, falling from $140 to $125 during the first two weeks of the year. Ore finished January at $134.14 before falling $17.64 in February to settle at $116.50. Notice the chart pattern showing lower highs and lower lows.

Rolling 2nd month SGX iron ore future $/mt

After a steel correction to start the year, Midwest HRC futures have been rangebound over the past couple of weeks. The March future has found support around the $800 level. Will the March future hold at $800 and possible bounce? That is one possibility. However, if it falls below $800, breaking below support, look out below.

March CME HRC Future $/st

The February Midwest HRC future expired this week, settling at $917, down $164 m/m. Open interest (the number of outstanding futures contracts, or tons in this case, across the HRC futures curve) climbed 32,140 short tons (st) m/m in February to 524,880 st as of February’s expiration on Tuesday night. Note the increasing open interest coupled with a downtrend in price indicating a technically strong bear market.

Rolling 2nd month CME HRC future $/st and open interest (red) (22-day M.A. ylw)

Circling back to busheling, open interest across the busheling futures curve climbed to 116,380 st last night, its highest since May 2023. Similar to HRC, busheling has seen expanding open interest accompanying a more than $100 decline in price, thus also indicating a technically strong bear market.

Rolling 2nd month CME BUS future $/lt and open interest (red) (22-day M.A. ylw)

As noted, the market has paused over the past couple weeks. It appears to be consolidating while CRU catches up with the futures. In fact, the spread between the CRU and the 2nd month future has narrowed from as much as +$188 to +$50 since Jan. 31.

The Midwest HRC future is financially settled using the average of the Wednesday CRU Midwest HRC prints for said month. This week’s CRU print was $840, having declined $243 from Jan. 24’s print of $1,083. The CRU has declined by an average of $48.60 per week over those five weeks. Will that rate of decline continue? Or has the market correction been exhausted? Is a bottom near? Typically, an explosive move follows a period of consolidation. Keep an eye on what the March future does around the $800 level to see if the market bounces or breaks while expecting a big move whichever direction it goes.

Disclaimer: The content of this article is for informational purposes only. The views in this article do not represent financial services or advice. Any opinion expressed by Mr. Feldstein should not be treated as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Views and forecasts expressed are as of date indicated, are subject to change without notice, may not come to be and do not represent a recommendation or offer of any particular security, strategy or investment. Strategies mentioned may not be suitable for you. You must make an independent decision regarding investments or strategies mentioned in this article. It is recommended you consider your own particular circumstances and seek the advice from a financial professional before taking action in financial markets.

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