11 Feb 2021 | 00:14 UTC — New York

US ferrous futures forward curve continues to see strength on lingering supply woes

Highlights

Signs of short covering seen

HRC short positioning increasing

HRC/Busheling arbitrage opening

New York — Hot-rolled coil futures extended gains Feb. 10, as Q2 prices rallied $90/st during the week on short covering in the front part of the curve.

The market remains susceptible to large price swings as short interest continues to grow, with bank analysts' forecasting that mill margins will correct in the near future, as lead times and scrap prices decline along with capacity coming back online.

Uncertainties around supply for Q1 remained as the market saw continued HRC sales at $1,200/st for March production, while market participants saw tradable value up to around $1,240/st.

The Platts TSI US HRC index rose to a record high of $1,198.75/st on Feb. 10, up more than 172% since August 2020.

The February/March spread traded out to a $12/st contango on Feb. 10 on CME Globex, from a $50/st backwardation last week. The market saw short covering in March and Q2, while Q4 was supported by some fresh buying off recent strong backwardation in H1/H2 2021. As supply remains tight, along with rising producer prices and long lead times, it is possible to see the spread move further into contango in the coming weeks.

US mill HRC lead times have remained elevated at 9.3 weeks as of Feb. 10, an increase of 139% since mid-July but ticking down 0.1% on the week. The Q4 2021 strip last traded at $745/st on Feb. 10 on CME Clearport, with 1,005 lots trading on Feb. 9 and Feb. 10 from $740/st to $745/st due to fresh buying, as some market participants are seeing value at these levels down the curve especially versus busheling prices and Q2 short positions.

Import offers continue to come into the market as domestic supply has remained tight. HRC import offers ranging from $960/st to $1,000/st from Turkey, South Korea, Egypt and Vietnam for April shipment were heard in the market by a trader

"Import offers for have been coming in more and more and have been lower than previous," a trader said

The Q2/Q3 2020 spread tightened by $25/st to around $175/st, as some short-covering was again seen during the recent rally. Q2/Q4 also tightened to $270/st, as hedges were rolled into Q4.

"Still seeing some shorts in Q2 and buying interest in Q4," a trader said.

The futures contract trade on CME Group and the London Metal Exchange.

The March exchange HRC contract arbitrage was up slightly on Feb. 9 to $21.50/st premium for CME over LME.

The Platts hot-rolled/hot-dip galvanized coil premium spread increased slightly to $167/st on Feb. 10, as HDG offers and tradable values were up slightly.

CME's HDG premium contract open interest was unchanged this week at 3,440 st.

As of Feb. 2 close, the last commitment of traders by the Commodity Trading Futures Trading Commission showed short positions by managed money increased by 1,308 lots to 7,855 lots, while short positions by commercials decreased by 1,606 lots to 12,307 lots with the January contract expiration losing 2,179 lots. The same report showed an increase of 492 lots in long positions by managed money in bushel futures to 4,161 lots.

Mill margins increased again on Feb. 10, as prime scrap prices were unchanged during the buy-week. The Platts HRC/Busheling spread was $756.79/st and the Platts HRC/Shredded spread hit $835.58/st on the same day. Margins have been up around 311% in the past seven months from when electric-arc furnaces mills had margins squeezed by rising scrap prices.

Busheling scrap rallies

Busheling scrap forward prices continued to strengthen, with buying coming in from the financial side in Q2. The widening arbitrage between HRC and busheling has attracted buying, as H1 2020 snapped back up almost $40/lt during the week ended Feb. 10, with Q1 and Q2 making new 2021 highs.

HRC/Busheling intercommodity spread was bid back above $500 and $450 for May and June on CME on Feb. 10, triggering some interest in mill margins compressing in H2 2021.

"We are hearing from scrap dealers that prime is extremely tight and will likely remain the case," a second trader said.

The busheling-to-shredded scrap differential rallied again to $88.25/lt, as busheling prices held $495/lt on Feb. 5. Midwest shredded scrap prices dropped $15.75/lt during the week to 406.75 on the same day.

The IODEX 62% Fe/US Shredded MW scrap ratio continued to hold above 2 with the ratio down slightly to 2.45 on Feb. 9, as IODEX Fe 62% dropped to $163.7/mt.

Iron ore prices remain supported due to Chinese steel demand and supply seasonality.

The arbitrage between Platts HMS 1/2 80:20 CFR Turkey minus freight to the Shredded Delivered Midwest scrap spread tightened to $27.82/mt premium to shred on Feb. 10, as the February buy-week ended in the US. The Shredded FOB East Coast prices were $378/mt on the same day, up $5/mt from the previous day.

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