US ferrous futures curve holds backwardation as supply remains tight – S&P Global

US hot-rolled coil and busheling scrap futures continued to hold firm during the week ended June 15, with spot prices continuing to rise, as supply concerns remain as some mills have been able to catch up on production even with rising freight costs.

Not registered?

Receive daily email alerts, subscriber notes & personalize your experience.

Register Now

Trading volumes were up slightly week on week. Some positions have continued to roll further down the curve in orderto hedge spot prices long. Fresh buying coming in December through the first quarter of 2022 as spreads have loosened throughout the curve this week. The HRC spot market has seen recent spot tradable values of up to $1,720/st for July production. An offer at $1,680/st was seen from a Midwest mini-mill for late July production and an offer at $1,720/st from an integrated mill was seen for July production.

The Platts TSI US HRC index hit a record high of $1,657.75/st on June 15, as prices are up $1,218.50/st since August 2020, when the recovery began.

Spot market remains tight on supply

The market saw continued risk-on again as open interest continued to increase with buying coming from this year’s third quarter to Q1 2022 rolling out of the June contract was subdued.

The June/July spread moved into further contango trading around $30/st on June 15, from a $40/st backwardation on May 18 . It is possible to see this spread move more into contango as previous front-month spreads have, as supply remains tighter for a longer period, along with rising producer prices, long lead times and logistic concerns remain.

The structure of the forward curve was relatively flat during the week. The June/December spread ticked up to around a $278/st backwardation on June 15, compared with a $334/st backwardation on June 1, as most of July production has sold out, forcing prices higher further down the curve with limited availability even for July/August domestic production. The rolling of hedges moved further down the curve, as it will be harder for the market to hedge imports going forward with the steepening of the structure of the curve. Some fresh buying came into the curve mainly in Q4 2021/Q1 2022 as import offers have slowed into year-end.

The December contract dipped slightly from the highs but remains around $1,379/st on June 15. The Q3/Q4 spread was steady around $215/st backwardation from around $235/st backwardation the two weeks prior.

“Many consumers are convinced these high prices will remain till next year,” a Midwest Service Center said.

Volumes increase for 2022 futures contracts

Contracts for 2022 continued to see some activity in Q1 2022, trading up around $45/st to $1,280/st on June 15, with over 12,000 st trading in the strip on CME Clearport during the week.

e264510c 7c93 4f09 8a59 04501c9cbc0f

Spreads loosened slightly during the week ended June 15, as the backwardations have eased but still remain, as is the case in many short supply markets, sources said. The curve continues to remain steep on the back of long domestic mill delivery lead times limited imports available before the close of the year.

Import lead times have helped to flatten the curve during the previous April and May but that opportunity has closed, with the spreads moving into a steeper backwardation and those lead times now pushing to year’s end, leaving many participants not willing to book tons at the very end of the year. The June/Q3 spread moved into a slight contango trading around $9/st as spot prices are expected to remain strong in the near term. The June/Q4 was relatively flat on the week at $215/st with some fresh hedging further down the curve. Trading volumes were spread throughout the curve again during the week. Most of the larger volumes were rolling out Q3 and some fresh buying through H1 2022.

US mill HRC lead times dipped slightly to 8.3 weeks on June 9, still well above the 10-year average of 4.8 weeks.

No new import offers came were reported this week continued as domestic supply remained tight. First River Consulting does not expect to see a significant increase in ports as globally high steel prices have close arbitrage opportunities.

According to US Department of Commerce’s enforcement and compliance license data for May, imports of hot-rolled sheets are expected at 205,149 mt. Imports from Canada look to be around 104,811 mt, up 487 mt month on month, while imports from South Korea look down to 35,235 mt. Imports from South Korea usually feed the US Gulf Coast. Imports from Turkey look to be up by 11,787 mt to 22,546 mt.

5143dc3e 9543 45fd b890 50ff4556cb54

The July exchange HRC contract arbitrage flipped on June 15 with a $7/st premium to CME, from a $12/st premium to LME on June 8.

As futures continue to rebound, the spot-to-three month LME spread has held the backwardation and the rest of the curve steepened significantly. Fundamentals have not changed and spot prices continue to rise.

As of the June 8 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money increased by 434 lots to 14,360 lots and spread positions increased by 35 lots to 1,666 lots, while short positions by commercials increased by 487 lots to 11,263 lots and short positions by swap dealers increased by 17 lots to 2,399 lots.

2178ccfc 216b 439a 99bd 2da9464a04aa

Electric-arc furnace mill margins in the Midwest expanded slightly week on week June 15, with prime scrap prices rallying, as HRC prices remained at record highs, with the Platts HRC/busheling spread at $1,095.25/st and the Platts HRC/shredded spread increased to $1,208.87/st. Margins were up around 225% since the start of Q4 2020.

Scrap market supported

Busheling scrap futures remained firm during the week ended June 15, with H2 holding around $680/lt. The 2021 curve traded near the May highs with the July/December spread settling around flat, from an $18/lt contango the week prior, as spot prices rose during the June buy-week. The widening arbitrage between HRC and busheling scrap has attracted buying especially versus Q3-Q4 HRC short hedges.

The September contract traded to a $50/lt premium to spot on June 15, as the market eyed forward prime scrap consumption from additional EAF capacity, the increase in auto production and strong mill demand. The Platts busheling scrap delivered Midwest spot price ticked up to $630/lt as of June 14.

Thebusheling-to-shreddedscrap differential tightened back up as Midwest prime scrap prices rallied during the week ending June 11 to $127.75/lt as busheling prices were up $5/lt to $630/lt, Midwest shredded scrap prices were up slightly to $502.75/lt on June 11, as mill demand has been strong during the June buy-week, with the auto sector demand coming back online after the semiconductor chip shortages. Market tightness has been supported as some mills and scrap dealers are having staffing troubles in order to melt and move scrap to meet demand. The Southern US busheling scrap price also hit $625/lt while Southern shredded prices hit $510/lt on June 11 as the June buy-week wrapped.

“Tradable value of up $10/lt to $20/lt on scrap for July,” said a Midwest supplier.

Both Platts HRC EXW Indiana and Shredded Scrap Delivered Midwest index futures trade on CME Clearport and CME Globex.