ANALYSIS: US HRC futures trade lower looking to spot market guidance

US hot-rolled coil futures forward curve gave back most of its gains during the week ended Jan. 4 as the market has been rangebound for most of December.

Q1 contracts still found some support as positions were rolled further into the first quarter.

The spot market remained weak as inventories have risen and large consumers will look to try and negotiate spot deals at much lower levels than contracted tons as the bid/ask spread continues to widen.

The hot-rolled coil spot market has seen the range of tradable values widen mostly from $1,300/st to $1,600/st for January/February production with larger service centers seeing tradable value as low as $1,150/st for large tonnage future purchases. Hot-dipped galvanized tradable values were seen below $2,000/st depending on tonnage pushing out to February.

The Platts TSI US HRC index was unchanged on Jan. 4 at $1,500/st, down by 23% from the start of the fourth quarter.

Trading volumes were down 12% week on week during the holiday week, according to CME Group data, as futures remained inside the December trading range as some light buying returned after the December contract expiration. Some rolling of positions continued as customers looked to take advantage of the steep curve. The market again saw some fresh buying mainly through the third quarter.

Spot activity remains quiet

The December/January spread went out trading around the $190/st level as January became the front-month contract. January saw some increased volumes as positions were rolled further into the first quarter. The contract settled at $1,438/st on Jan. 4, up $15/st on the week, still off the Sept. 27 lows of $1,360/st.

The January/February spread saw light trading volumes as February futures saw some rolling activity into March/April, the spread last trading between around $130/st backwardation before it settled at $109/st on Jan. 4.

The structure of the whole forward curve tightened slightly during the week as first half of 2022 activity remained firm and further dated backwardations increased as the Q3 strip saw some pressure. Some consumers passed on tons and remained on the sidelines awaiting clearer guidance for the first quarter. Q1 contracts continued to find support around the $1,300/st to $1,350/st level but uncertainties remained around competition from imports and domestic demand for the balance of 2022. The January/Q2 2022 spread settled around a $280/st backwardation, tighter by $20/st on the week

Flows were mixed across the curve as backwardations steepened on falling second half 2022 futures bids.

Volumes for Q2 2022 contracts slipped during the week with 1,325 lots trading during the week ended Jan. 4, as Q2 2022 strip dipped by $5/st to $1,160/st.

The H1/H2 2022 spread settled tighter on the week as the Q4 2022 strip fell by $60/st, over the past two weeks on light trading. Prices have moved lower through the month and are pricing in uncertainties and lower bank analyst forecasts.

The front part of the curve has seen backwardations hold steady as mill delivery lead times decreased and imports helped keep backwardations intact into 2022, as some service centers have filled inventory gaps and customers were fine with contracted tons filling inventory holes.

US mill HRC lead times continued to fall to 3.9 weeks on Dec. 29, now below the 10-year average of five weeks. Hot-dipped galvanized lead times ticked down to 6.5 weeks, a level not seen since July 2020.

Buyers have continued to keep an eye on inventories as they have been tepid to enter the spot market due to rapidly declining spot prices.

Imports were tracking at elevated levels and putting pressure on Q1 spot prices. However, imports will not be able to fill all demand gaps and consumers are starting to see some value at these levels. It will be harder to hedge imports from the short side going forward, with futures still trading below some import prices.

As logistics remain challenging, traders and service centers have been trying to take advantage of the import arbitrage. The arbitrage has continued to widen from Canada, Turkey, Vietnam and South Korea, putting pressure on domestic prices as they compete for tons during 2022. However, some traders have been less willing to book imports for further into 2022 given shortening lead times and uncertainty around domestic prices.

HRC tradable values from a Mexican mill were heard around the $1,140/st level DDP Houston. Tradable values from Turkey and South Korea were heard from $1,200/st to $1,260/st for April/May delivery.

According to US Census Bureau, preliminary November data was tracking imports of hot-rolled sheets at 423,139 mt during the month. Imports from Canada were showing 160,294 mt at this time, while imports from South Korea were 17,697 mt and imports from Turkey were 60,031 mt. Imports from South Korea and Turkey usually feed the US Gulf Coast.

As futures try to find support on light volumes, the Platts HRC spot/third-month futures spread on the London Metal Exchange loosened. Spot prices held steady at lower levels during this trading week. Fundamentals have weakened in the spot market heading into year-end but backwardations still remained throughout the curve.

As of the Dec. 28 close, the last Commitment of Traders report showed short positions by managed money increased by 447 lots to 22,335 lots, as 10 traders hold 51.3% of short open interest, and spread positions were unchanged. At the same time, commercial long positions increased by 523 lots to 27,548 lots, and swap dealers increased long positions by 589 lots to 12,504 lots.

Platts HRC EXW Indiana futures trade on the LME Select and on CME Clearport and CME Globex.