US ferrous futures rally on pause

New York — Hot-rolled coil and busheling scrap futures retreated from the recent highs made during the previous week on March 16, as buying has concentrated around the June/July contracts and import offers have come into the market to help fill some of the supply void.

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 continued to roll further down the curve in order to earn some of the backwardations. The HRC market has seen spot tradable values ranging from $1,275/st to $1,330/st this week for a very limited volume of April and May production.

The Platts TSI US HRC index held at a record $1,300/st on March 16. Prices have risen $860.75/st since August 2020, when recovery began.

The market saw continued but smaller short-covering in Q2 and Q3, as the curve again loosened slightly through December 2021 from March 9 levels.

The March/April spread continued to widen during the week ended March 16, trading at around $60/st contango, out from around a $90/st backwardation one month ago. As supply remains tighter for longer period, 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

"June production from Canada is already being offered at $1,400/st," a service center said.

The April/December spread loosened slightly by $5/st to around a $370/st backwardation on March 16, 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 $205/st.

The Q1 2022 strip was supported and continued to see activity around $900/st, up $100/st from March 2.

HRC spreads were mixed this week. The Q2/Q3 spread loosened up by $30/st to around $100/st, along with Q2/Q4 moving slightly to around $305/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 were seen in Q2 during the week.

"Looks to be some service center buying out for June in the mid $1,200s," a trader said

Some larger size buying was seen during the week in Q2, as mills have been scrambling to secure rising tons even at a much higher level than anticipated.

The spreads have been mixed 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 during the week preceding March 16, as the rolling of positions further down the curve was subdued. The Q4 strip showed continued support, holding the $980/st to $985/st levels, as some market participants saw value at these levels down the curve, especially versus busheling prices and Q2/Q3 hedges.

US mill HRC lead times increased slightly to 8.9 weeks on March 10, an increase of 128% since mid-July.

Import offers continued to come into the market as domestic supply remained tight. HRC import offers were heard on March 16 from Turkey at $1,100/st for June arrival, with a transaction at $1,180/st for July arrival. Offers from South Korea were heard from $1,100-$1,120/st for August arrival by a trader.

The April exchange HRC contract arbitrage increased on March 15 to $17.50/st premium for CME over LME, from a $10/st premium on March 8.

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

As of March 9 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increasing by 1,929 lots to 10,778 lots, while short positions by commercials increased by 944 lots to 13,205 lots. The same report showed an increase of 141 lots in long positions by managed money in busheling futures to 4,589 lots, as busheling futures made new year-to-date highs on March 8 then retreated slightly to end that week.

"Some of that short positioning could be offset by OTC trades banks are holding," a second trader said.

Electric-arc furnace mill margins increased on March 16 as HRC prices strengthened, with the Platts HRC/busheling spread at $791.07/st and the Platts HRC/shredded spread at $897.32/st. Margins are up around 135% since the start of Q4 2020.

Scrap dips from highs

Busheling scrap futures have been supported around the recent new highs that occurred on March 8, with the April and May contracts holding the $600/lt and $630/lt levels, respectively. The curve has continued to flatten as the Q2/Q3 spread traded at flat on March 15, from a slight $10/lt backwardation during the prior week. The widening arbitrage between HRC and busheling scrap has attracted buying as the H2 2021 HRC/Busheling spread.

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 bounced back recently with the dip in scrap prices due to the lower than expected print in the underlying spot index and was bid around $670 for May and June on CME Group on March 16. There was continued interest in mill margins compressing but the question remains when it will occur.

The May contract was holding at around a $60/lt premium to spot on March 16, as the market eyes forward prime scrap consumption from additional electric arc furnace capacity, even after Platts busheling scrap spot prices held $570/lt on March 12.

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

The busheling-to-shredded scrap differential rose slightly to $119/lt as busheling prices held at $570/lt on March 12. Midwest shredded scrap prices declined to $451/lt on the same day, as the March buy-week was over. Planned auto shutdowns are expected to continue to keep prime scrap tight.

"A lot of risk to rising obsolete scrap prices," a third trader said.