US ferrous futures continue to march higher

New York — Hot-rolled coil and busheling scrap prices recovered from last week's pause and pushed back to 2021 highs on March 2, as spot material is sold out domestically and with long lead times for imports, domestic prices continued their trajectory higher, triggering some short-covering in the front of the curve and the rolling of hedges further out.

This comes after a week where both HRC and raw material prices took a short pause from their recent rallies across the entire curve.

The market remains susceptible to large price swings as short interest continues to hold, with bank analysts forecasting that mill margins will correct in the near future, as lead times and scrap prices hold recent levels along with capacity coming back online. Rising transportation costs are now adding some fuel to the fire.

Uncertainties around supply for the first quarter have now moved into the second quarter and even third. Hedges have been rolled further down the curve and some fresh buying across the curve has come into the market. The HRC market has seen spot tradable values rise to $1,240/st at a minimum for April/May production, most of which has sold out, with an offer at $1,340/st from a converter.

"Imports are picking up for mid-March through mid-May, but not enough to cover the tons the market is short," a trader said.

The Platts TSI US HRC index held at a record high of $1,242.50/st on March 2, up $803.25/st since August 2020 when prices started to recover.

The February/March spread went out at around a $90/st to $100/st contango on Feb. 26, from a $60/st backwardation to start February. The market once again saw some fresh buying coming in that was last around Feb. 16 to Feb. 18, as buyers search for domestic tons and those who can't try and secure imports and roll hedges based on port arrivals.

The market saw continued rolling of short hedges from March/April into late Q2 and Q3 as the curve flattened slightly through September 2021.

The March/April spread continued to loosen on March 2, trading at around $25/st contango, out from around a $90/st backwardation three weeks ago. As supply remains tighter for longer, along with rising producer prices, long lead times and transportation concerns due to winter storms, it is possible to see the spread move further and into contango in the coming weeks

The April/December spread tightened back by $30/st to around a $430/st backwardation on March 2, as April domestic production has just about sold out, forcing prices higher and as short position hedges were rolled out to Q4 locking in contract highs above $870/st.

The Q1 2022 strip had it's first trade of the year on CME Clearport at $800/st on March 2.

Lead times keeping markets tighter for longer

HRC spreads started to tighten again into February month-end. The Q2/Q3 spread tightened back up by $40/st to around $200/st, along with Q2/Q4 holding around $300/st as evidence of short hedges being rolled into year-end, matched with buying appetite further into 2021. The majority of the trading volumes were seen in Q2 during the prior week.

The spreads tightened 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. US raw steel production capability utilization for January was 75.7%, according to the American Iron and Steel Institute, down 8.13% from January 2020.

Fourth-quarter buying was around on March 2 as the rolling of positions further down the curve was subdued. The Q4 strip continued to rally holding above the $870/st level on March 2, as some market participants are seeing value at these levels down the curve, especially versus busheling prices and Q2 hedges.

US mill HRC lead times bumped back up 0.1 to 8.9 weeks on Feb. 24, an increase of 128% since mid-July, as HRC prices finally broke above the $1,200/st level on Feb. 26.

Import offers continue to come into the market as domestic supply remains tight. HRC import offers were heard March 1 from a South Korea service center at $950/st for July/August arrival.

The April exchange HRC contract arbitrage was up on March 1 to $28/st premium for CME over LME, from a $15.50/st premium on Feb. 23.

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

The Platts hot-rolled/hot-dip galvanized coil premium spread increased to $171.75/st on March 1, as HDG transactions and tradable values were slightly higher from the prior week.

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

As of Feb. 23 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased by 610 lots to 8,586 lots, while short positions by commercials increased by 707 lots to 13,907 lots. The same report showed an increase of 140 lots in long positions by managed money in busheling futures to 4,228 lots, as busheling futures made new year-to-date highs during the week ended Feb. 19.

Electric-arc furnace mill margins once again increased on Mar. 1, as prime scrap prices were unchanged before the March scrap buy-week. The Platts HRC/busheling spread was $800.54/st and the Platts HRC/Shredded spread hit $869.29/st on the same day. Margins have been up around 137% from the beginning of Q4 2020.

Busheling scrap prices eye 2011-2012 highs

Busheling scrap futures traded back to 2021 highs on March 2, after taking a slight breather the week prior with buying coming in from the financial side in Q2. April through June is now holding at or above $600/lt. The widening arbitrage between HRC and busheling scrap has attracted buying, as the whole curve made new 2021 highs again on March 2.

The HRC/busheling inter-commodity spread started moving lower on Feb. 19 by $10, as profit-taking was seen in the HRC contract in Q2 and Q3 from the recent run-up in prices, the spread has since recovered and was bid around $610 and $500 for May and June on CME on March 2. There's continued interest in mill margins compressing but the question remains when it will occur.

The June contract is holding above a $95/lt premium to spot, as the market eyes forward prime scrap consumption from additional electric arc furnace capacity. Early indications for tradable values are up $50/lt to $70/lt at a minimum from February on March prime scrap, a scrap broker said

Platts' No.1 Busheling prices last broke above $500/lt in May 2011.

The busheling-to-shredded scrap differential dipped to $82.50/lt, as busheling prices held at $495/lt on Feb. 26. Midwest shredded scrap prices rose to $412.50/lt on the same day, as the market awaited prime scrap trade for the March buy-week. Planned auto shutdowns are expected to continue to keep prime scrap tight.

"Even if there are automotive shutdowns they will continue to take in steel," a second trader said.

The arbitrage between Platts HMS 1/2 80:20 CFR Turkey minus freight to the Shredded Delivered Midwest scrap spread tightened to a $13.85/mt premium to Turkish scrap on March 1, as transportation costs continue to rise. The Shredded FOB East Coast price was $430.25/mt on the same day, up $21.75/mt from the previous week.

The IODEX 62% Fe/US Shredded MW scrap ratio continued to hold above 2 with the ratio down slightly to 2.36 on March 1, as IODEX Fe 62% dropped slightly to $174.35/mt.

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

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