US ferrous futures drop sharply as spreads move to tighter backwardation

New York — US hot-rolled coil futures saw their largest weekly drop of the year in the week ending May 18, as the market gave back all the gains of the prior four weeks, according to data from the CME Group, as many market participants said the market was overbought and due for a price correction.

Hot-rolled trading volumes increased week on week after the selloff in the forward curve. Once selling pressure receded, the market was supported especially through the end of 2021 as fundamentals have not changed and spot prices continue to rally across the flat-rolled and substrate markets, S&P Global Platts data showed. The HRC spot market has seen recent spot tradable values of up to $1,600/st for June/July production.

The Platts TSI US HRC index sat just below the record high at $1,550.75/st on May 18, and prices were up $1,111.25/st since August 2020, when the recovery began.

Spot steel prices higher for longer

Market sources see selling pressure coming in, especially in the second half of 2021 and into 2022, as the September contract traded down to the limit of $90/st on May 17. Some of the biggest downside moves came in the November contract, which was down $275/st on the week from the high of $1,485/st on May 10. The Q4 strip traded down at $1,200/st on CME Clearport from $1,485/st the week prior. The flattening of the forward curve over the past month has lead to this steep decline in H2 2021.

The June/July spread moved to a $45/st backwardation on May 18, from a $13/st contango the week prior. It is possible to see this spread move back into 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 structure of the forward curve tightened back up drastically. The June/December spread was at around a $340/st backwardation on May 18, compared with 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 into the third quarter, and it will be harder for the market to hedge imports going forward with the steepening of the structure of the curve. Some fresh buying came into the curve mainly through October.

The December contract fell from a high of $1,426/st on May 10 to a low of $1,168/st on May 18, before rebounding to around $1,200/st. The Q3/Q4 spread moved to around $185/st from around $150/st the week prior.

The first quarter 2022 strip saw light volumes trading but still managed to drop by around $275/st week on week, as risk-off was seen across the forward curve and especially in those months where the spreads have flattened the most.

Spreads corrected during the week, as the backwardation built back up, as is the case in many short supply markets, sources said. The flattening of the backwardation came to an end this week 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 in the weeks prior, sources added.

Import lead times have helped to flatten the curve. The June/Q3 spread tightened back up to around $120/st from around flat last week, with June/Q4 tightening to around $306/st as evidence of some fresh buying coming into the market in the front of the curve offset any hedge rolls. The majority of trading volumes were seen through 2021 during the week. Most of the larger volumes were selling out of the fourth quarter.

US mill HRC lead times dropped slightly to 8.7 weeks on May 12, 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 between $1,460/st to $1,480/st for September arrival.

According to preliminary license data from the US Department of Commerce's Office of Enforcement and Compliance, imports of hot-rolled sheets were expected at around 175,367 mt in April. Imports from Canada were seen around 101,827 mt, down 14%, while imports from South Korea looked to dip slightly to 26,626 mt. Imports from South Korea usually feed the US Gulf Coast region.

After the recent selloff in futures, the spot-to-three month LME spread moved into backwardation and the rest of the curve steepened, giving up recent gains in H2 2021. Fundamentals have not changed and spot prices continue to rise.

As of the May 11 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased by 887 lots to 13,237 lots and spread positions increased by 127 lots to 2,795 lots, while short positions by commercials increased by 24 lots to 10,3754 lots and short positions by swap dealers increased by 48 lots to 2,803 lots.

Electric-arc furnace mill margins continued to rise week on week on May 18, as HRC prices remained just shy of record highs, with the Platts HRC/busheling spread at $1,037.36/st and the Platts HRC/shredded spread at $1,146.06/st. Margins were up around 208% since the start of Q4 2020.

The busheling-to-shredded scrap differential were little changed on the week, dipping slightly to $121.75/lt as busheling prices held $575/lt on May 14. Midwest shredded scrap prices moved higher to $453.25/lt on the same day.

Planned auto shutdowns are expected to continue to keep prime scrap tight over obsolete grades, sources said. Market tightness has been supported by some mills and scrap dealers who have been facing staffing troubles for melting and moving scrap to meet demand.