US ferrous futures curve continues to loosen as imports rise

US hot-rolled futures were up slightly on the week ended July 20, as spot prices remained just below record highs with rising import offers. Busheling scrap futures dipped on the week as the 2021 contango widened.

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 down slightly week on week, according to CME Group data. The rolling of positions was subdued during the week ended July 20 as some fresh hedges entered the market from September through December to combat rising spot prices. The market again saw fresh buying coming into the market again for the first half 2022 contracts, as spreads loosened.

The hot-rolled coil spot market has seen recent spot offers of $1,875/st for August production. An import transaction was heard at $1,720/st DDP Houston for August production from a Mexican mill. While import offers were heard from a Canadian mill at $1,580 DDP Great Lakes for October/November arrival. Cold-rolled coil tradable values remain firm up to $2,080/st for October domestic production.

The Platts TSI US HRC index hit a record high of $1,839.25/st on July 19 and dropped to $1829.75/st on July 20, as prices have risen by 317% since August 2020, when the recovery began.

Imports continue to rise on domestic outages

The July/August spread traded back into contango settling at $32/st on July 20.

The structure of the forward curve continued to loosen slightly during the week but backwardations remained. The July/December backwardation narrowed to $128/st on July 20, 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 Canadian production for October.

The rolling of hedges moved further along the curve into September and Q4 as the July/October spread settled at a $64/st backwardation. As prices have fallen from recent highs it will be hard for the market to hedge imports going forward unless the materials remain close to the ports as the curve has held the backwardation structure into the fourth quarter. Some fresh buying came into the curve, mainly throughout 2022 even as imports are expected to remain strong into Q4.

The December contract was up $46/st on the week at $1,652/st on July 20 and up $250/st from June 20. The Q3/Q4 spread backwardation eased slightly to around $101/st, from around $216/st on June 15.

Contracts for 2022 continued to see good trading volumes even as Q1 2022 moved higher by $50/st to $1,514/st on July 20 -- with 953 lots trading in 2022 during the week ended July 20.

The curve backwardation eased on the back of long domestic mill delivery lead times but increasing imports, with a large shipment, expected from Turkey in the fourth quarter to help fill tons lost from outages. Market sources cited rising imports as the reasoning behind cautious spot market buying.

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 14, well above the 10-year average of 4.8 weeks.

The July/Q4 backwardation narrowed to around $95/st with some fresh hedging further down the curve. Most of the larger volumes were positioning in Q4 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 $1,520/st to $1,610/st DDP Houston from Vietnam and Serbia for November arrival by a Service Center. Worsening global logistics issues and arrival delays were also cited.

According to US Department of Commerce's enforcement and compliance license data for June, imports of hot-rolled sheets are expected at 263,524 mt. Imports from Canada look to be around 119,369 mt, down 8,743 mt month on month, while imports from South Korea look up to 51,070 mt. Imports from South Korea usually feed the US Gulf Coast. Imports from Turkey look to be up by 7,440 mt to 31,002 mt.

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 eased in the latter part of the curve but remained intact. Fundamentals have not changed and spot prices continued to rise.

As of the July 13 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money increased by 747 lots to 13,223 lots and spread positions decreased by 90 lots to 1,461 lots. At the same time, commercial short positions increased by 264 lots to 11,583 lots and swap dealers increased long positions by 306 lots to 2,226 lots.

Electric arc furnace mill margins in the Midwest continued to expand week on week July 19, as prime scrap prices remained steady and with HRC prices hit new record highs. The Platts HRC/MW busheling spread rallying to $1,258.89/st and the Platts HRC/shredded spread increased to $1,390.37/st, margins have risen 273% since the start of Q4 2020.

Prime scrap supply remains tight

Midwest busheling scrap futures traded lower during the week ended July 20, as the 2021 contango widened after the July contract expiration. The August/December spread settled $42/lt contango, as December traded up to $692/lt on the same day.

The widening arbitrage between HRC and busheling scrap attracted buying, especially versus Q3-Q4 HRC short hedges.

The December contract settled at a $42/lt premium to spot on July 20, as the market eyed forward prime scrap consumption from additional electric-arc furnace capacity and strong mill demand. The Platts busheling scrap delivered Midwest spot price was unchanged at $650/lt on July 20

The busheling-to-shredded scrap differential remained flat at $147.25/lt during the week ended July 20, 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 traded 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 dipped slightly to $647.50/lt on July 13 and has held since, while Southern shredded prices were steady at $505/lt.

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