US ferrous futures see cautious trading as imports increase

US hot-rolled coil prices held firm in the front part of the curve following spot prices, as prices further down the curve fell slightly from recent highs on the back of rising imports in the third and fourth quarters. Busheling scrap futures remained steady ahead of the August buy week.

Demand remained steady as mills raised spot offers but service centers were willing to pay the price for spot tons as import arrival times are way off. Some mills were in no rush to sell any remaining production unless they were to receive higher bids.

Trading volumes were up around 33% week on week, according to CME Group data. The rolling of positions was again subdued during the week ended July 27, as some fresh hedges entered the market from August through October to combat rising spot prices. The market again saw fresh buying coming in for the first half 2022 contracts, as the spread traded almost unchanged from the previous week.

The hot-rolled coil spot market has seen recent spot tradable values up to $1,920/st for September production, with indicative service center bids at $1,880/st. An offer from a West Coast mill remained around $1,930/st for October production. An import trade was heard at $1,620/st DDP Houston for August production from Turkey, November arrival. Cold-rolled coil tradable values remained firm up to $2,100/st for October domestic production.

The Platts TSI US HRC index hit a record high of $1,869.75/st on July 26, with prices up by 326% since August 2020, when the recovery began.

Spot prices remain firm

The July/August contango continued to widen settling at $79/st on July 27, as prices remain higher for longer.

The structure of the forward curve tightened slightly during the week as backwardations increased further out with the fourth quarter and first quarter 2022 prices pulling back from recent highs. The July/December backwardation tightened to $171/st on July 27, from $331/st on June 1, as most of August production sold out, pushing prices further down the curve higher with limited availability even for September domestic and Canadian production for October.

The rolling of hedges moved further along the curve, especially from August to January 2022, as the spread settled at a $328/st backwardation. As prices have fallen from recent highs it will be hard for the market to hedge imports going forward unless the materials remain close to the ports as the curve has held the backwardation structure into the fourth quarter. Some fresh buying came into the curve, mainly in Q1 2022 as imports are expected to remain strong into Q4.

The December contract fell by $37/st on the week to $1,615/st on July 27, and up $115/st from June 25. The Q3/Q4 spread backwardation tightened to around $145/st, as producer offers remained firm.

Contracts for 2022 continued to see good trading volumes even as Q1 2022 moved lower by around $14/st to $1,500/st on July 27 -- with 1,272 lots trading in the quarter during the week ended July 27.

The front part of the curve's contango continued to widen on the back of long domestic mill delivery lead times but increasing imports kept backwardations rising in the latter part of the year, with a large shipment, expected from Turkey in the fourth quarter to help fill tons lost from outages. Market sources cited rising imports as the reason behind cautious spot market buying.

Import lead times helped to flatten the curve during April and May, but that opportunity remains tight looking into the fourth quarter with spreads holding the backwardation and lead times now pushing to year's end. Many participants are less willing to book tons.

US mill HRC lead times dipped slightly to 8.4 weeks on July 21, well above the 10-year average of 4.8 weeks.

The July/Q4 backwardation expanded to around $116/st with some fresh hedging further down the curve. Most of the larger volumes were positioning in the third quarter of 2021 and the first quarter of 2022.

Rising transportation costs, especially by truck, made imports even more unattractive in the Midwest from the Gulf. Still, traders were looking to fill the demand gap from recent shutdowns by importing cargoes from Turkey, especially from the Great Lakes region. Import offers were heard at $1,560/st from Turkey for November arrival, and at $1,520/st from a Mexican mill by a Midwest service center. Worsening global logistics issues and arrival delays were also cited.

According to preliminary US Census data for June, imports of hot-rolled sheets are expected at 310,865 mt. Imports from Canada are seen at 150,277 mt, up around 17% month on month, while imports from South Korea are expected to be 56,368 mt. Imports from South Korea usually feed the US Gulf Coast. Imports from Turkey look to be up by 13,588 mt, at 37,150 mt.

As futures continue to rally, the spot/third-month LME spread slipped into a slight contango on June 24, which lasted until July 6 when the spread flipped again. Backwardations tightened as prices fell from recent highs, but fundamentals did not change and spot prices continued to rise.

As of the July 20 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money increased by 1,315 lots to 14,538 lots, and spread positions fell by 217 lots to 1,244 lots. At the same time, commercial short positions fell by 212 lots to 11,371 lots and swap dealers increased long positions by 109 lots to 2,335 lots.

Electric arc furnace mill margins in the Midwest were fairly unchanged during the week ended July 27, as prime scrap prices remained steady and with HRC prices hitting new record highs. The Platts HRC/MW busheling spread was at $1,258.14/st and the Platts HRC/shredded spread dipped slightly to $1,389.62/st. Margins have risen 273% since the start of Q4 2020.

Prime scrap to remain more inelastic

Midwest busheling scrap futures trade was steady during the week ended July 27, as the 2021 contango continued to narrow after the July contract expiration. The August/December spread settled at a $28/lt contango, as December traded up to $693/lt.

The widening arbitrage between HRC and busheling scrap attracted buying, especially versus Q3-Q4 HRC short hedges.

The December contract settled at a $43/lt premium to spot on July 27, as the market eyed forward prime scrap consumption from additional electric-arc furnace capacity and strong mill demand. The Platts busheling scrap delivered Midwest spot price was unchanged at $650/lt on July 26.

The busheling to shredded scrap differential remained flat at $147.25/lt during the week ended July 26, as Midwest prime scrap prices were firm during the week. But mini-mills look at evolving technologies to better utilize obsolete scrap.

Midwest shredded scrap prices held at $502.75/lt on the same day and continue to do so, but market sources indicate slightly lower levels for the August buy-week, down by $10-$30/lt.

Market tightness was supported by the auto sector shutdowns on the back of semiconductor chip shortages. The logistical issues on the trucking side are starting to ease, market sources said. Prime scrap is expected to stay unchanged for August.

The Southern US busheling scrap price dipped slightly to $647.50/lt on July 26, and has held at that level since, while Southern shredded prices were steady at $505/lt.

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