US ferrous futures run into resistance amid supply concerns

New York — Hot-rolled coil futures and busheling scrap futures took a breather from their rallies March 30, as some fresh selling came into the HRC market over the week with market participants trying to hedge late Q2 and Q3 sales.

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 medium term but the strength in steel prices will support rising margins in the near term as lead times remain elevated.

Looking forward, prime scrap prices supported by shortages and consumption from the additional capacity coming back online will pressure flat-rolled prices and thus margins.

Planned outages ahead

Supply constraints will continue for the second and third quarters because of planned outages, even as more import offers have come into the market, but those offers will have limited impact in the near term because of long arrival times. Cleveland-Cliffs' Middletown, Ohio, mill has recently come back online from a 15-day outage, which was originally scheduled for 45 days.

In a lighter volume trading week, some 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 up to $1,360/st this week for May/June production.

The Platts TSI US HRC index held at a record $1,342.50/st on March 30. Prices have risen $903.25/st since August 2020, when the recovery began.

Limited short covering

The market saw continued but limited short covering, as the curve structure tightened slightly from March 23 levels.

The March/April spread went out around a $74/st contango, out from around a $90/st backwardation just over one month ago. The tightness in the April/May spread has started to dissipate, trading from a $13/st backwardation to a $10/st contango on March 29 and March 30, as supply remains tighter for a longer period, along with rising producer prices, long lead times and transportation concerns, it is possible to see the spread move into contango in the coming weeks.

The April/December spread tightened by $35/st to around a $400/st backwardation March 30, as April/May domestic production has sold out, forcing prices higher, and as short position hedges were rolled out to Q4 while December traded down to $910/st, with large trades coming in through banks. The Q3/Q4 spread loosened to around $180/st, as open interest has increased, along with some fresh hedges.

The Q1 2022 strip continued to see activity at $895/st, down $25/st from March 23. March-May 2022 traded at $887/st on March 26, as the market is starting to factor in prices that could start 2022 at higher levels than 2021.

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. The Q2/Q3 spread tightened up by $70/st to around $160/st, with Q2/Q4 tightening to around $340/st as evidence of short hedges being rolled into Q3/Q4. The majority of the trading volumes were seen in H2 during the week. Some Q3/Q4 selling took place during the week preceding March 30, along with some rolling of positions from Q3 to Q4.

Some larger volume selling through banks was seen in Q4 as the strip dropped back through $1,000/st.

Lead times elevated

US mill HRC lead times sat at nine weeks on March 24, an increase of 131% since mid-July and well above the 10-year average of 4.8 weeks.

Import offers continued to come into the market as domestic supply remained tight. HRC import offers were heard from a trader March 29 and 30 from Turkey at $1,170/st for June arrival and $1,180/st for late July arrival.

According to preliminary US Census data, imports of hot-rolled coil sheets are expected to increase by almost 65% month over month in February to 197,746 mt, with large increases coming from South Korea and Japan, which would usually feed the Gulf and West coasts.

The May exchange HRC contract arbitrage loosened March 29 to flat, from a $13/st premium to LME on March 22.

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

As of March 23 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased by 876 lots to 11,089 lots, while short positions by commercials decreased by 326 lots to 12,700 lots.

Electric-arc furnace mill margins increased March 29 as HRC prices continued to strengthen, with the Platts HRC/busheling spread at $833.57/st and the Platts HRC/shredded spread at $945.40/st. Margins are up around 147% since the start of Q4 2020.

Prime scrap steady ahead of buy week

Busheling scrap futures have seen some slight pressure again during the week ended March 30, with the May and June contracts holding above the $600/lt levels. The curve has tightened back up on the week as the second half of 2021 has dropped by around $15/lt during the week ended March 30. The widening arbitrage between HRC and busheling scrap has attracted buying especially versus Q3/Q4 HRC short hedges.

The HRC/busheling inter-commodity spread started to move lower for Q3/Q4, as the spread was bid $700 and $667 for May and June on CME Globex on March 30. There was continued interest in mill margins compressing, but the question remains when it will occur as more analysts are calling for shortages in prime scrap.

The June contract last traded at a $40/lt premium to spot March 29, as the market eyes forward prime scrap consumption from additional electric arc furnace capacity, the increase in auto production and strong mill demand. The Platts busheling scrap spot prices held at $570/lt on March 26.

"Tradable values for prime scrap are unchanged from March ahead of the April buy week," a supplier said.

Midwest shredded scrap slips

The busheling-to-shredded scrap differential rose slightly to $126/lt as busheling prices held at $570/lt on March 26. Midwest shredded scrap prices declined to $444/lt on March 30. Planned auto shutdowns are expected to continue to keep prime scrap tight over obsolete grades, especially with semiconductor chip shortages in the sector.

"The autos have still been taking steel even with the chip shortages," a trader said.

The arbitrage between Platts HMS 1/2 80:20 CFR Turkey minus freight to the Shredded Delivered Midwest scrap spread loosened week on week to a $41.72/mt premium to US MW Shredded on March 30, as transportation costs continue to rise along with tightening supply in the Midwest. The Shredded FOB East Coast price was $400.25/mt the same day, up $2/mt from the previous week.

The IODEX 62% Fe/US Shredded MW scrap ratio continued to hold above 2.5, with the ratio at 2.63 on March 30, as IODEX Fe 62% was at $166.50/mt. China has imposed strict environmental controls in Tangshan, the top steel-producing region, slowing the production of steel. Goldman Sachs analysts forecast iron ore prices will decline faster than scrap prices with a rising global surplus.

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