US ferrous futures retreat from highs as spot market remains at record

US hot-rolled coil futures dip slightly on July 12, as spot prices continued to set record highs and supply options remain limited. Busheling scrap futures also dropped from there recent highs with spot prices rallying during the buy-week.

Demand remained steady as mills and service centers raised offers and were in no rush to sell limited volumes for August and September.

Trading volumes were up week on week, with one less trading day in the prior week in the US due to the Independence Day holiday, according to CME Group data. Some positions continued to roll further down the curve to hedge rising spot prices. the market again saw fresh buying coming into the market, especially for 2022 contracts, as spreads were mixed throughout most of the curve as prices dipped from recent highs.

The HRC spot market has seen recent spot tradable values of up to $1,770/st to $1,880/st for late August and September production. A transaction was heard at $1,840/st from an integrated for late August or early September. Another transaction was heard at $1,870/st ex-works Canadian mill for October. Cold-rolled coil tradable values were seen around $2,000/st.

The Platts TSI US HRC index hit a record high of $1,817.25/st on July 13, as prices have risen by 314% since August 2020, when the recovery began.

Spot market supply remains tight

The July/August spread traded on both sides of backwardation and contango during the week before settling at an $8/st contango on July 12.

The structure of the forward curve continued to loosen slightly during the week but backwardation remained. The July/December backwardation narrowed to around $184/st July 12, from $331/st on June 1, as most of August production sold out, pushing up prices further down the curve with limited availability even for September domestic and Candian production.

The rolling of hedges moved further along the curve into October as the July/October spread traded around a $76/st backwardation on July 12. It will still be hard for the market to hedge imports going forward as the curve has held a steeper backwardation structure into the fourth quarter. Some fresh buying came into the curve, mainly throughout 2022 as imports from Turkey are expected to remain into Q4.

The December contract was unchanged on the week at $1,606/st on July 12 but still up $241/st on the month. The Q3/Q4 spread backwardation tightened slightly to around $120/st, from around $216/st on June 15.

Contracts for 2022 continued to see good trading volumes even as Q1 2022 moved lower by $18/st to $1,464/st on July 12 -- with 1,059 lots trading in 2022 during the week ended July 12.

The curve remained in backwardation on the back of long domestic mill delivery lead times and limited imports available before the end of the year, though a large shipment is expected from Turkey in the fourth quarter to help fill tons lost from outages.

Import lead times had helped to flatten the curve during April and May, but that opportunity remains tight looking into the fourth quarter with spreads holding the backwardation and lead times now pushing to year's end. Many participants are less willing to book tons.

US mill HRC lead times were unchanged at 8.5 weeks on July 7, well above the 10-year average of 4.8 weeks.

The July/Q4 backwardation narrowed to around $127/st with some fresh hedging further down the curve. Most of the larger volumes were rolling out of July into August and October, and with backwardations narrowing during the week, short hedges looked to take advantage, along with some fresh buying across 2022 contracts.

Rising transportation costs from Houston, especially by truck, made imports even more unattractive in the Midwest. Still, traders were looking to fill the demand gap from recent shutdowns by importing cargoes from Turkey. Import deals were heard in a range of $1,600/st to $1,660/st DDP Houston from Turkey for October and November arrival by a trader.

As futures continue to rally, the spot/third-month LME spread slipped into a slight contango on June 24 which last until July 6 when the spread flipped again, backwardations have remained intact for the rest of the curve. Fundamentals have not changed and spot prices continued to rise.

As of the July 6 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money decreased by 1,304 lots to 12,476 lots and spread positions decreased by 310 lots to 1,551 lots. At the same time, commercial short positions decreased by 1,370 lots to 11,319 lots and swap dealers decreased long positions by 435 lots to 1,920 lots.

Electric arc furnace mill margins in the Midwest continued to expand week on week July 12, even as prime scrap prices rallied during the July buy-week and with HRC prices hit new record highs. The Platts HRC/MW busheling spread rallying to $1,236.14/st and the Platts HRC/shredded spread increased to $1,367.62/st, margins have risen 267% since the start of Q4 2020.

Prime scrap firm during July buy-week

Midwest busheling scrap September through December futures contracts dropped by $45/lt from the June 29 highs, with August trading down to $660/lt and December trading down to $675/lt on July 12, as the spread moved to a $15/lt contango from flat on June 15. The widening arbitrage between HRC and busheling scrap attracted buying, especially versus Q3-Q4 HRC short hedges.

The September contract settled at a $25/lt premium to spot on July 12, as the market eyed forward prime scrap consumption from additional EAF capacity and strong mill demand. The Platts busheling scrap delivered Midwest spot price ticked up to $650/lt on July 12.

The busheling-to-shredded scrap differential rose to $147.25/lt as of July 12, as Midwest prime scrap prices were firm during the week.

Midwest shredded scrap prices held $502.75/lt on the same day and have held that level as obsolete grades were expected to trade sideways for July.

Market tightness has been supported by the auto sector shutdowns on the back of semiconductor chip shortages. The logistical issues on the trucking side are starting to ease market sources have mentioned.

The Southern US busheling scrap price was the strongest during the buy-week settling at $650/lt, while Southern shredded price dropped slightly to $505/lt on July 12.

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