US hot-rolled coil futures spreads continue to loosen

US hot-rolled coil and busheling scrap futures continued to rise during the week ended June 8, following spot prices, as supply concerns remained along with high freight costs – even as some mills start to move production in a more timely fashion.

Trading volumes were down slightly week on week after the Memorial Day holiday; some hedges have continued to roll further down the curve in order to combat the rising spot prices long with 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 $1,660/st for July production. A few offers were around at $1,640/st for late July production and $1,650/st for August production.

The Platts TSI US HRC index hit a record high of $1,644/st on June 8, as prices are up $1,204.75/st since August 2020, when the recovery began.

Spot market fundamentals still intact

The market saw continued risk-on again with buying coming from Q3 to Q1 2022 and some positions rolled from June into Q3.

The June/July spread moved into contango trading around $20/st on June 8, from a $45/st backwardation the three weeks prior. 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.

The structure of the forward curve continued to loosen during the week. The June/December spread moved to around a $250/st backwardation on June 8, 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 continued especially into the third quarter, and 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 as import offers continue to rise.

The December contract continued to bounce back to a high of $1,414/st on June 4 and still holding around the $1,400/st level on June 8. The Q3/Q4 spread eased to around a $200/st backwardation from around $334/st backwardation the week prior.

"Fundamentals haven't changed and consumers have been out hedging," a trader said.

2022 contracts continued to see some activity in Q1 2022, trading up around $85/st to $1,235/st on June 8.

Spreads loosened during the week ended June 8, as the backwardations have eased but still remain, as is the case in many short supply markets, sources said. The curve continues to steepen on the back of long domestic mill delivery lead times as physical market participants looked to hedge for imports to help fill the void in US demand in the weeks prior, sources added.

Import lead times have helped to flatten the curve during the previous two months but that opportunity has closed with the spreads moving into a steeper backwardation. The June/Q3 spread was loosened trading around flat as spot prices are expected to remain strong in the near term. The June/Q4 loosened to around $220/st as evidence of some rolling out of the front of the curve along with some fresh hedging further down the curve. Trading volumes were spread throughout 2021 again during the week with spread activity continuing out of June. Most of the larger volumes were buying through year-end or the rolling of positions out of the June contract into the third quarter.

US mill HRC lead times dipped slightly to 8.4 weeks on June 2, still well above the 10-year average of 4.8 weeks.

Import offers continued to come into the market as domestic supply remained tight. HRC import offers were heard delivered duty paid Houston from Morocco at $1,560/st and a transaction delivered Houston from Mexico with October arrival. Offers from Canadian mills were around $1,600/st ex-works for September production.

According to US Census data for April, released on June 6, imports of hot-rolled sheets were 205,128 mt in April. Imports from Canada were seen at 104,324 mt, down 12% month on month, while imports from South Korea were up to 50,529 mt. Imports from South Korea usually feed the USGC region.

The July exchange HRC contract arbitrage was fairly unchanged on June 7 with a $12/st premium to LME, from a $13/st premium to LME on June 1.

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 1 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money decreased by 1,912 lots to 13,926 lots and spread positions decreased by 297 lots to 1,631 lots, while short positions by commercials decreased by 1,459 lots to 10,776 lots and short positions by swap dealers decreased by 392 lots to 2,382 lots.

Electric-arc furnace mill margins dropped slightly week on week June 7, with prime scrap prices rallying, as HRC prices remained at record highs, with the Platts HRC/busheling spread at $1,080.21/st and the Platts HRC/shredded spread decreased to $1,190.04/st. Margins were up around 220% since the start of Q4 2020.

Scrap market remains supported

Busheling scrap futures remained firm during the week ended June 8, with H2 contracts up another $5/lt or more on the day. The 2021 curve traded up to a one-month high as the contango held with the June/December spread settling around $50/lt, $10/lt tighter from two weeks ago. The widening arbitrage between HRC and busheling scrap has attracted buying especially versus Q3-Q4 HRC short hedges.

The September contract traded up to a $62/lt premium to spot on June 8, 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 $625/lt on June 7.

The busheling-to-shredded scrap differential tightened back up as Midwest prime scrap prices rallied during the week ending June 4 to $123/lt as busheling prices were up $45/lt to $625/lt, Midwest shredded scrap prices were up slightly to $502/lt on June 7, 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 $505/lt on June 7 as the June buy-week wrapped.

"Demand is on target and moving in the right direction," said a Midwest supplier.

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