US ferrous futures continue to rally following spot prices

Hot-rolled coil and busheling scrap futures continued higher, following spot prices, in the week ended June 1, as supply constraints remained, while long lead times and rising transportation costs in the US continued to support both markets.

Trading volumes were relatively flat week on week; some hedges have continued to roll further down the curve in order to combat the rising spot prices but spreads have loosened throughout the curve this week. 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.

The Platts TSI US HRC index held at a record high of $1,616/st on May 28, as prices are up $1,176.75/st since August 2020, when the recovery began.

Spot market fundamentals still in place

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

The June/July spread loosened trading around flat on June 1, from a $45/st backwardation the two weeks 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 loosened during the week. The June/December spread moved to around a $335/st backwardation on June 1, compared with a $422/st backwardation on May 25, 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 $1,322/st on June 1. The Q3/Q4 spread moved to around a $235/st backwardation from around $255/st the week prior.

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

2022 contracts continued to see some light volume with a position rolled from June 2021 to June 2022 at a $660/st backwardation.

Spreads loosened during the week ended June 1, as the backwardations have eased but still remain, 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 loosened trading around $45/st backwardation as June becomes the front-month contract, from around flat three weeks ago. The June/Q4 loosened to around $280/st as evidence of some rolling out of the front of the curve along with some fresh hedging further down the curve. Trading volumes were spread throughout 2021 during the week with spread activity picking up out of June. Most of the larger volumes were buying through year-end or the rolling of positions out of the June contract into July and the rest of the third quarter.

US mill HRC lead times dipped slightly to 8.6 weeks on May 16, 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 Vietnam at $1,560/st and at $1,540 delivered Houston from France with September arrival. Offers from Canadian mills were around $1,580/st to $1,600/st ex-works for September production.

According to preliminary census data from the US Department of Commerce's Office of Enforcement and Compliance, imports of hot-rolled sheets are expected at around 205,128 mt in April. Imports from Canada were seen around 104,324 mt, down 12% month on month, while imports from South Korea looked to rise to 50,529 mt. Imports from South Korea usually feed the USGC region.

The June exchange HRC contract arbitrage was fairly unchanged on May 28 with a $10/st premium to CME, from a $10.50/st premium to CME on May 24.

As futures continue to rebound, the spot to three-month LME spread has held the backwardation and the rest of the curve steepened significantly. Fundamentals have not changed and spot prices continue to rise.

As of the May 25 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased by 875 lots to 15,838 lots and spread positions decreased by 255 lots to 1,928 lots, while short positions by commercials increased by 380 lots to 12,235 lots and short positions by swap dealers increased by 94 lots to 2,774 lots.

Electric-arc furnace mill margins rose again week on week slightly on May 28, as HRC prices remained at record highs, with the Platts HRC/busheling spread at $1,098.14/st and the Platts HRC/shredded spread decreased to $1,173.59/st. Margins were up around 226% since the start of Q4 2020.

Scrap market supported

Busheling scrap futures remained firm during the week ended June 1, with the July and September 2021 contracts up $12/lt to $660/lt and $680/lt respectively. The 2021 curve contango tightened slightly with the June/December spread settling around $50/lt, $10/lt tighter 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 $105/lt premium to spot on June 1, 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 ticked up to $580/lt on May 28.

The busheling-to-shredded scrap differential loosened as Midwest shredded prices firmed during the week ending May 28, dropping to $84.50/lt as busheling prices were up slightly to $580/lt on May 28, Midwest shredded scrap prices spiked to $495.50/lt on the same day, as mill demand has been strong, this 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.

"People are looking to supplement with obsoletes to keep from paying $120/lt more," said a Midwest supplier.

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