ANALYSIS: US ferrous futures retreat from 2021 highs as China ramps up emissions curbs

Hot-rolled coil futures hit resistance March 9, a day after touching year-to-date highs, as China announced increased environmental controls in its largest steelmaking region of Tangshan. China's move also put pressure on iron ore prices and combined with US auto shutdowns to weigh on US HRC futures just as new import offers for June/July production start to come into the market.

Both both HRC and US scrap prices reached year-to-date highs on March 8.

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 and the lack of ships to haul scrap containers were also adding some fuel to the fire.

Uncertainties around supply for the first quarter have now moved into the second and third quarters even as more import offers have come into the market.

Long hedges have been rolled further down the curve in order to earn some of the backwardations and some fresh selling has come into the market. The HRC market has seen spot tradable values ranging from $1,170/st to $1,260/st this week for a very limited volume of April production.

The Platts TSI US HRC index dipped to $1,242.50/st on March 9, just shy of the record high set on March 4. HRC prices are still up $803.25/st since August 2020 when prices started to recover.

The market saw continued short-covering in Q2 and Q3, as the curve again loosened slightly through December 2021 from March 2 levels.

The March/April spread continued to widen on March 9, trading at around $40/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, it is possible to see the spread move further and into contango in the coming weeks

"Looks to be some short-covering around in Q2/Q3 this week," a trader said.

The April/December spread tightened back by $15/st to around a $360/st backwardation on March 9, 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 $980/st, with the Q3/Q4 spread tightening to $180/st.

The Q1 2022 strip saw continued upside activity, up $105/st from March 2.

HRC spreads started to tighten again this week. The Q2/Q3 spread tightened back up by $30/st to around $130/st, along with Q2/Q4 holding around $310/st as evidence of short hedges being rolled into year-end, matched with slight buying appetite further into 2021. The majority of the trading volumes was seen in Q2 during the 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.

Q2 and Q3 buying was around on March 9, as the rolling of positions further down the curve were subdued. The Q4 strip showed continued support holding the $980/st level as some market participants are seeing value at these levels down the curve, especially versus busheling prices and Q2/Q3 hedges.

US mill HRC lead times dropped slightly to 8.8 weeks on March 3, an increase of 126% since mid-July.

Import offers continue to come into the market as domestic supply remains tight. HRC import offers were heard on March 9 from Turkey in the range of $1,080-$1,095/st for June arrival. Offers from a Mexican mill were also heard from $1,160/st to $1,200/st for June/July production.

The April exchange HRC contract arbitrage was down on March 9 to $10/st premium for CME over LME, from a $28/st premium on March 1. The futures contracts trade on CME Group and the London Metal Exchange.

The Platts hot-rolled/hot-dip galvanized coil premium spread decreased to $164/st on March 8, as HDG transactions and tradable values were fairly unchanged from the prior week.

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

As of March 2 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased by 263 lots to 8,849 lots, while short positions by commercials decreased by 1,646 lots to 12,261 lots. The same report showed an increase of 220 lots in long positions by managed money in busheling futures to 4,448 lots, as busheling futures made new year-to-date highs during the week ended March 5.

Electric-arc furnace mill margins declined slightly on March 9 as prime scrap prices rose during the March scrap buy-week, with the Platts HRC/busheling spread at $733.57/st and the Platts HRC/Shredded spread at $838.26/st. Margins are up around 118% since the start of Q4 2020.

Busheling scrap prices surge past 2011-2012 highs

Busheling scrap futures traded at new highs March 8 before dipping around $10/lt to $15/lt March 9, taking a breather the week prior with buying coming in from the financial side in Q2 as HRC prices sold off. The widening arbitrage between HRC and busheling scrap has attracted buying as the H2 2021 HRC/Busheling spread traded around $418 on CME Clearport, trading 3,000 st and 3,000 lt each.

The HRC/busheling inter-commodity spread started moving lower mid-February as profit-taking was seen in the HRC contract in Q2 and Q3 from the recent run-up in prices. The spread saw continued pressure and was bid around $600 for May and June on CME March 9. There is continued interest in mill margins compressing but the question remains when it will occur.

The April contract is holding at around an $80/lt premium to spot, as the market eyes forward prime scrap consumption from additional electric arc furnace capacity, even after busheling scrap spot prices hit $570/lt on March 5.

Platts' No.1 Busheling prices last broke above $550/lt in March 2008.

The busheling-to-shredded scrap differential rose to $117.25/lt as busheling prices hit at $570/lt on March 5. Midwest shredded scrap prices rose to $452.75/lt on the same day, as the March buy-week came to an end. Planned auto shutdowns are expected to continue to keep prime scrap tight.

"The busheling market is extremely tight and will continue to be the leading indicator," a supplier said.

The arbitrage between Platts HMS 1/2 80:20 CFR Turkey minus freight to the Shredded Delivered Midwest scrap spread tightened to a $23.10/mt premium to US MW Shredded March 9, as transportation costs continue to rise along with tightening supply in the Midwest. The Shredded FOB East Coast price was $427.50/mt the same day, down $2.75/mt from the previous week.

The IODEX 62% Fe/US Shredded MW scrap ratio climbed back above 2.5 on March 5, with the ratio touching 2.72 on March 9, as IODEX Fe 62% fell to $163.60/mt. As China has inmposed strict environmental controls in Tangshan, the top steel-producing region, slowing the production of steel.

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