US ferrous futures forward curve tightens as imports continue to rise

US hot-rolled coil futures forward curve tightened on the week ended Aug. 10 as spot prices continued to reach record highs, even with rising HRC imports and auto demand slowing. Busheling scrap futures continued to see light pressure as spot prices remained steady.

Demand remained steady as mills held spot offers. Consumers were willing to pay the price for spot tons as import arrival times are way off. Some mills were in no rush to sell any remaining production unless they were to receive higher bids.

Trading volumes were down around 50% week on week, according to CME Group data. The rolling of positions continued as some positions were rolled from September into Q4 and Q1 2022 to combat rising spot prices. The market again saw fresh buying coming in for the Q1 2022 contracts.

The hot-rolled coil spot market has seen recent spot tradable values up to $1,900/st for September/early October production, with indicative bids around $1,880/st. Cold-rolled coil tradable values remained firm and above $2,100/st for October domestic production, with offers as high as $2,300/st.

The Platts TSI US HRC index remained at a record high of $1,895.75/st on Aug.10, with prices up by 332% since August 2020, when the recovery began.

Domestic supply tight even as imports rise

The August/September spread moved back into backwardation after rising spot prices, settling at $5/st on Aug. 10, but backwardations eased as prices remain higher for longer.

The structure of the forward curve tightened during the week as backwardations increased into year-end with the August/December spread tightened to $258/st as the December contract saw a slight increase on lighter volumes. The spread is tighter by $28/st from the start of the third quarter, as August production sold out, pushing prices further down the curve higher with limited availability even for September domestic production.

The rolling of hedges moved further along the curve, especially from September to October around $100/st backwardation and from Q4 2021 to Q1 2022, at around a $150/st to $160/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 in Q1 2022 as imports are expected to remain strong into Q4.

Market sources expect tight conditions through October ahead of planned mill maintenance.

The December contract rose by $10/st to $1,625/st on Aug. 10, up $15/st from the start of July. The August-September/Q4 spread backwardation tightened to around $191/st, as producer offers remained firm.

Contracts for 2022 continued to see good trading volumes, even as Q1 2022 moved lower by $50/st to around $1,495/st on Aug. 10 -- with 1,935 lots trading in the quarter during the week ended Aug. 10.

The front part of the curve tightened on the back of long domestic mill delivery lead times but increasing imports kept backwardations rising against the latter part of the year, with large shipments from Turkey expected to continue into the fourth quarter to help fill tons lost from outages. Some mills are still running behind on deliveries verse orders, as some service center inventories have improved closer to historic levels.

Import lead times 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 held steady at 8.3 weeks on Aug. 4, well above the 10-year average of 4.8 weeks.

The August/Q4 backwardation tightened to around $194/st with some smaller fresh buying came into September through November. Most of the larger volumes were seen in the first quarter of 2022.

Rising transportation costs, especially by truck, made imports even more unattractive in the Midwest from the Gulf. Still, traders were looking to fill the demand gap from recent and planned outages by importing cargoes from Turkey, Vietnam and Korea. Import transactions were heard at $1,600/st DDP Houston and Great Lakes from Turkey for November arrival, and at $1,500/st from Vietnam by a Service center. An offer from a Canadian mill was heard at $1,880/st to $1,900/st for October/November production. Tradable values from Mexican mills were seen around $1,775/st for the same time period.

According to US Census data for June, imports of hot-rolled sheets were up 52% to 319,668 mt. July's preliminary data shows imports tracking around 216,928 mt. Imports from Canada are seen at 98,551 mt, while imports from South Korea are expected to be 55,997 mt. Imports from South Korea usually feed the US Gulf Coast. Imports from Turkey look to be 37,754 mt.

As futures continue to rally, the spot/third-month LME spread slipped into a slight contango on June 24, which lasted until July 6 when the spread flipped again. Fundamentals have not changed as backwardations have tightened on rising spot prices.

As of the Aug. 3 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money decreased by 1,559 lots to 13,462 lots, as the July contracted expired and spread positions decreased by 106 lots to 1,138 lots. At the same time, commercial short positions decreased by 1,411 lots to 10,381 lots and swap dealers decreased long positions by 210 lots to 2,300 lots.

Electric arc furnace mill margins in the Midwest rose again during the week ended Aug. 9, as prime scrap prices remained steady and with HRC prices hitting record highs. The Platts HRC/MW busheling spread was at $1,315.39/st and the Platts HRC/shredded spread also rose to $1,464.28/st. Margins have risen 290% since the start of Q4 2020.

Primes remain tight as other grades are more supplied

Midwest busheling scrap futures moved slightly during the week ended Aug. 10, as the 2021 contango continued to narrow, the August/December spread settled at a $26/lt contango, as December traded down to $672/lt.

The widening arbitrage between HRC and busheling scrap attracted buying, especially versus Q4/Q1 2022 HRC short hedges.

The December contract settled at a $22/lt premium to spot on Aug. 10, as the market eyed forward prime scrap consumption from additional electric-arc furnace capacity and strong mill demand ahead of auto coming back strong after the chip shortages are resolved. The Platts busheling scrap delivered Midwest spot price was unchanged at $650/lt on Aug. 10.

The busheling-to-shredded scrap differential ticked higher to $166.75/lt on Aug. 9, as the August scrap buy-week wrapped, as Midwest prime scrap prices were steady during the week but mini-mills look at evolving technologies to better utilize obsolete scrap due to supply availability of shredded scrap.

Midwest shredded scrap prices dropped to $483.25/lt on the same day, down around $20/lt.

Market tightness was 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 said.

The Southern US busheling scrap prices declined slightly $637/lt on Aug. 9, while Southern shredded prices fell to $489/lt, both were expected to see some pressure during the buy-week.

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