US ferrous futures curve loosens as demand remains firm

US hot-rolled coil and busheling scrap futures continued higher in the week ended June 22, following record high spot prices in the week and demand remaining strong even as suppliers start to push out more metal.

Market participant have mentioned concerns for rising freight costs and continued bottlenecking as possible factors.

Trading volumes were down slightly week on week. Some positions have continued to roll further down the curve in order to hedge rising spot prices. Fresh buying coming in December through year-end 2022, as spreads have loosened throughout the curve this week. The HRC spot market has seen recent spot tradable values of up to $1,750/st for August production. Offers from $1,720/st to $1,750/st from integrated mills for August production, with cold-rolled transactions ranging from $1,920/st to $2,040/st.

The Platts TSI US HRC index hit a record high of $1,692/st on June 21, as prices are up $1,252.75/st since August 2020, when the recovery began.

Spot price supported by demand

The June/July spread moved into further contango trading just above $80/st on June 22, from a $40/st backwardation on May 18.

The structure of the forward curve continued to flatten during the week but backwardations still remain. The June/December spread loosened to around a $181/st backwardation on June 22, 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 through Q4 2022 as import offers have slowed into year-end.

The December contract made new highs of $1,488/st on June 22. The Q3/Q4 spread loosened to around $185/st backwardation from around $216/st backwardation the week prior.

Contracts for 2022 continued to see volumes with Q1 2022, trading up just over $60/st to $1,340/st on June 22, just under 1,200 lots trading in 2022 during the week ended June 22.

Spreads loosened slightly during the week ended June 22, 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 further into contango trading around $75/st as spot prices are expected to remain strong in the near term. The June/Q4 also moved in on the week to around $115/st backwardation with some fresh hedging further down the curve. Most of the larger volumes were rolling out of July into August and September with the backwardations in both spreads easing during the week, short hedges looked to take advantage, along with some fresh buying through H1 2022.

US mill HRC lead times increased slightly to 8.4 weeks on June 16, well above the 10-year average of 4.8 weeks.

Import offers continue to be few and far between as lead times for delivery are pushing into year-end. Rising transportation costs from Houston especially by truck are making imports even more unattractive due to logistics issues. An import transaction was heard at $1,560/st DDP Houston from Korea for August/September shipment by a service center.

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 15 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money decreased by 596 lots to 13,764 lots and spread positions increased by 54 lots to 1,720 lots, while short positions by commercials increased by 814 lots to 12,077 lots and short positions by swap dealers decreased by 126 lots to 2,273 lots.

Electric-arc furnace mill margins in the Midwest continued to expand week on week June 21, even with prime scrap prices rallying, as HRC prices hit new record highs, with the Platts HRC/busheling spread rallying to $1,120.57/st and the Platts HRC/shredded spread increased to $1,243.12/st. Margins were up around 232% since the start of Q4 2020.

Scrap remains supported

Midwest busheling scrap futures traded up to new highs on June 22, with August through December bid above $700/lt. The July/December spread moved out to around a $40/lt contango from flat the week prior, as spot prices look strong ahead of the July 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 $73/lt premium to spot on June 22, 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 $640/lt on June 17 and has held that level.

The busheling-to-shredded scrap differential continued to push higher as Midwest prime scrap prices rallied during the week ending June 18 to $137.25/lt as busheling prices were up $10/lt to $640/lt, Midwest shredded scrap prices were unchanged at $502.75/lt on June 21, as prices in the Midwest for obsolete grades are expected to soften slightly for July even 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 prices held $625/lt while Southern shredded prices held $510/lt on June 21.

"Tradable value for prime scrap in the South up $40/lt to $60/lt for July," said a Trader. While prime scrap prices looked steady to unchanged for July in the Midwest a broker said.

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