US ferrous futures rebound as spot prices continue to rise

Hot-rolled coil and busheling scrap prices continued their move higher during the past week, as supply constraints remained, while long lead times and rising transportation costs in the US continued 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 rising spot prices and spreads have continued to tighten in the front of the curve. The HRC spot market has seen recent spot tradable values of up to $1,660/st for July production. A few offers were around at $1,640/st to $1,660/st for July production. Offers from Canadian mills were around $1,580/st to $1,600/st ex-works for September production.

The Platts TSI US HRC index hit another record high of $1,602.25/st on May 25, as prices are up $1,163/st since August 2020, when the recovery began.

Spot prices higher

The market saw risk-on again especially from June through September, with buying coming into the front months and some positions rolled from June to July.

The June/July spread loosened slightly trading between a $25-$30/st backwardation on May 25, from a $45/st backwardation the week prior. It is possible to see this spread move back into a slight 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 continued to tighten during the week. The June/December spread moved to around a $425/st backwardation on May 25, compared with a $370/st backwardation on May 18, as most of June production has sold out, forcing prices higher further down the curve with limited availability even for July domestic production. 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 September as import offers continue to rise.

The December contract continued to bounce back to a high of $1,254/st on May 25. The Q3/Q4 spread moved to around a $260/st backwardation from around $195/st the week prior.

"Fundamentals haven't changed and consumers have been buying the front part of the curve," a trader said.

The first quarter strip continued to see some light volume trading up to $1,181/st on May 25, up $41/st on the week.

Spreads continued to tighten during the week ended May 25, as the backwardation built back up, as is the case in many short supply markets, sources said. The curve continues to steepen 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 during the previous two months but that opportunity has closed with the spreads moving into a steeper backwardation. The June/Q3 spread was little changed trading around $100/st backwardation from around flat two weeks, ago with June/Q4 tightening to around $355/st as evidence of some fresh buying coming into the market in the front of the curve offset any hedge rolls. Trading volumes were spread throughout 2021 during the week. Most of the larger volumes were buying through August or the rolling of positions out of the June contract into July and August.

US mill HRC lead times were unchanged at 8.7 weeks on May 19, 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 duty paid to a port from South Korea at $1,500/st minimum for September/October arrival and at $1,560/st from Vietnam.

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 175,367 mt in April. Imports from Canada were seen around 101,827 mt, down 14% month on month, 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 24 to a $10.50/st premium to CME, from a $15/st premium to LME on May 17.

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

As of the May 18 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased by 1,726 lots to 14,963 lots and spread positions decreased by 612 lots to 2,183 lots, while short positions by commercials increased by 1,481 lots to 11,855 lots and short positions by swap dealers decreased by 123 lots to 2,680 lots.

Electric-arc furnace mill margins rose again week on week on May 24, as HRC prices remained at record highs, with the Platts HRC/busheling spread at $1,082.61/st and the Platts HRC/shredded spread at $1,1190.42/st. Margins were up around 221% since the start of Q4 2020.

Scrap market supported

Busheling scrap futures remained firm during the week ended May 25, with August-December 2021 trading back at $675/lt, up $35/lt on the week. The 2021 curve contango widened slightly with the June/December spread settling around $60/lt, $25/lt wider 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 $100/lt premium to spot on May 24, 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 delivered Midwest spot price held at $575/lt on May 24.

The busheling-to-shredded scrap differential was little changed on the week, dipping slightly to $120.75/lt as busheling prices held $575/lt on May 24. Midwest shredded scrap prices moved slightly higher to $454.25/lt on the same day, ahead of the June buy week. Planned 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.

"Tradable values for shredded scrap for June look around up $40/lt to $50/lt," a Midwest buyer said.

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