Tight supply continues to fuel rally in US ferrous futures

Hot-rolled coil and busheling scrap futures continued their move higher during the week ended May 11, with long-lasting supply constraints and lead times, along with rising transportation costs in the US, continuing to support both markets.

Trading volumes dipped slightly week on week; some long hedges have continued to roll further down the curve in order to combat the flattening of the front half of the curve, as spreads eased on the rally. The HRC spot market has seen recent spot tradable values of up to $1,540/st earlier in the week for June production. A few offers were around at $1,550/st for June and at $1,600/st for July production.

The Platts TSI US HRC index sat just below the record high at $1,514.25/st on May 11, as prices are up $1,075/st since August 2020, when the recovery began.

Steel prices stay higher for longer

The market saw the rolling of hedges mainly in the front two months to the third quarter and fourth quarter as shorts looked to take advantage of the easing spreads. This comes as the curve structure was relatively flat on May 11 from the prior week. Some long consumer hedges were rolled through the curve as June/July moved into a slight contango.

The June/July spread traded out to a $12/st contango on May 10 on CME Globex. It is possible to see this spread move into a wider contango as previous front-month spreads have, as supply remains tighter for a longer period, along with rising producer prices, long lead times and logistic concerns.

The June/December spread was little changed on the week, sitting around a $220/st backwardation on May 11, as most of June production has sold out, forcing prices higher further down the curve. The rolling of hedges picked up especially out of June into Q3 and Q4, as May/June contango widened and the whole curve has continued to loosen as spot prices rallied again.

Some fresh buying came into the curve in Q4 through January 2023. The December contract rallied another $57/st during the past week to a high of $1,420/st on May 7. The Q3-Q4 spread tightened slightly by around $10/st to $145/st, as open interest continued to rebound from the April contract expiration which lost 4,251 lots.

"Looks to be some hedges coming in from banks in December," a trader said.

The first quarter strip continued to see volume trading up to $1,380/st on May 11, up $70/st on the week.

Spreads continued widening during the week, with Q3 as the exception 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. Import lead times have also increased helping to flatten the curve. The June/Q3 spread widened to around flat trading around $1,630/st, with June/Q4 also easing to around $145/st as evidence of some fresh buying coming into the market to offset short hedge rolls. The majority of the trading volumes were seen in H2 during the week. Most of the larger volumes were spread into the third and fourth quarter.

US mill HRC lead times were unchanged at 8.8 weeks on May 4, still 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 delivered Houston from Turkey at $1,540/st.

According to preliminary license data from the US Department of Commerce's Office of Enforcement and Compliance, imports of hot-rolled sheets are expected at around 169,075 mt in April. Imports from Canada were seen around 95,535 mt, down 19% while imports from South Korea looked to dip slightly to 26,626 mt. Imports from South Korea usually feed the USGC region.

The June exchange HRC contract arbitrage tightened on May 10 to a $15/st premium to CME, from a $5.50/st premium to LME on May 4.

The spot-to-three month LME spread moved into contango and has continued to build during the previous month as the rest of the curve structure has loosened.

As of the May 4 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money decreased by 1,007 lots to 12,350 lots and spread positions decreased by 500 lots to 2,668 lots, while short positions by commercials decreased by 2,522 lots to 10,350 lots and short positions by swap dealers increased by 211 lots to 2,755 lots.

Electric-arc furnace mill margins rose week on week on May 10, as HRC prices remained at record highs, with the Platts HRC/busheling spread at $1,001.11/st and the Platts HRC/shredded spread at $1,112.27/st. Margins were up around 197% since the start of Q4 2020.

Scrap market supported

Busheling scrap futures remained firm during the week ended May 11, with H2 2021 trading just above $680/lt. The 2021 curve contango widened slightly with June/December spread settling around $60/lt, $15/lt wider from the previous week. The August-September strip traded at $690/lt on May 10, which was up another $10/lt from the previous week. The widening arbitrage between HRC and busheling scrap has attracted buying especially versus Q3-Q4 HRC short hedges.

The September contract settled at a $115/lt premium to spot on May 11, as the market eyed forward prime scrap consumption from additional EAF capacity, the increase in auto production and strong mill demand. The Platts busheling scrap spot price held at $575/lt on May 7.

The busheling-to-shredded scrap differential were unchanged on the week, dipping slightly to $124.50/lt as busheling prices hit $575/lt on May 7. Midwest shredded scrap prices moved higher to $450.50/lt on the same day. This was seen as the May buy week wrapped. Planned auto shutdowns are expected to continue to keep prime scrap tight over obsolete grades, especially with semiconductor chip shortages in the sector. Market tightness has been supported as some mills and scrap dealers are having staffing troubles in order to melt and move scrap to meet demand.

March US scrap exports totaled 1.611 million mt, up 18.8% month on month. Turkey was the top export destination during the month, with Mexico and Taiwan rounding out the top three countries, according to data released by the US Department of Commerce and International Trade Commission.

"Even with June mill outages scrap prices could have another $50/lt in upside," a supplier said.

After insight from Q2 earnings calls, the market can expect some mills to change the mix of scrap grades they are using in order to take advantage of the historic widening of primes versus obsolete scrap grades, as mentioned by both Steel Dynamics and Nucor.

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