Hot-rolled coil and busheling scrap futures continue to grind higher during the week ended April 27, as near-term supply constraints still weigh on the market, pushing prices higher for longer, as steel companies report record profits and are expected to remain disciplined with regards to US steel production.
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Trading volumes fell this week; some long hedges have continued to roll further down the curve in order to earn some of what's left of the backwardations, or contangos. The HRC spot market has seen recent spot tradable values of up to $1,500/st this week for June production.
The Platts TSI US HRC index hit a record high $1,429.50/st on April 21 and has held there since, as prices are up $990.25/st since August 2020, when the recovery began.
Higher for Longer
The market saw the rolling of hedges mainly in the second-quarter as shorts looked to take advantage of the May-June contango, which traded around $5-$10/st, as the curve structure loosened significantly on April 27 from the prior week. Some long consumer hedges were rolled from Q3 into Q4.
The April-May spread moved into a wide contango and went out trading around $150/st contango on April 26, from a $33/st backwardation on March 30, as supply remains tighter for a longer period, along with rising producer prices, long lead times and transportation concerns.
The May-December spread has loosened again by another $70/st on the week to around $205/st backwardation on April 27, as May domestic production has sold out, forcing prices higher further down the curve. The rolling of hedges has picked up especially in May-June as that spread has moved into a slight contango and July-December to earn some of the backwardation as the whole curve has loosened as spot prices rallied again. Some fresh buying has come into the curve from June through December. The December contract rallied another $225/st during the past week to a high of $1,315/st before pulling back to around $1,290/st on April 27. The Q3-Q4 spread eased by around $40/st to $130/st, as open interest has continued to increase in H2 2021.
Spreads have loosened during the week 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. Import lead times have also increased. The May-June/Q3 spread eased by just $10/st to around $35/st backwardation, with May-June/Q4 also easing to around $170/st as evidence of some fresh buying coming into the market to offset short hedge rolls. The majority of the trading volumes were seen in H1 during the week. Most of the larger volumes were spread within the second-quarter.
US mill HRC lead times bounced back to 8.9 weeks on April 21, 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 Houston from a Mexican mill in a range from $1,320/st to $1,380/st for August production.
According to preliminary data from the US Department of Commerce, Enforcement and Compliance, imports of hot-rolled sheets are expected at around 195,615 mt in March. Imports from Canada are seen increasing 37.72% month on month to 117,230 mt, while imports from South Korea looked to remained firm from February at 63,535 mt. Imports from South Korea usually feed the USGC region.
The May exchange HRC contract arbitrage loosened on April 26 to a $4.50/st premium to LME, from an $8/st premium to CME on April 20.
The Spot to three-month LME spread moved into contango and held during the previous two weeks as the rest of the curve structure has loosened.
As of the April 20 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money increased 848 lots to 13,381 lots and spread positions increased by 39 lots to 3,077 lots, while short positions by commercials increased by 771 lots to 12,600 lots and short positions by swap dealers increased by 191 lots to 2,499 lots.
Electric-arc furnace mill margins rose week on week on April 26, as HRC prices remained at record highs, with the Platts HRC/busheling spread at $920.57/st and the Platts HRC/shredded spread at $1,045.57/st. Margins are up around 173% since the start of Q4 2020.
Primes versus Obsolete scrap spreads continue to widen
Busheling scrap futures continued to climb during the week ended April 27, with June trading back above $640/lt on April 26. The 2021 curve held its contango as the balance of the year strip moved higher by another $10/lt to around $660/lt. The Q3 strip traded at $680/lt April 27, which was up another $10/lt 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 April 26, 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 spot price held at $570/lt on April 23.
The busheling-to-shredded scrap differential has been unchanged on the week, dipping slightly to $140/lt as busheling prices held at $570/lt on April 23. Midwest shredded scrap prices were steady at $430/lt on the same day. Planned auto 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.
After insight from last week's earnings calls, the market can expect some mills to change the mix of scrap grades they are using in order to take advantage of the historic widening of primes versus obsolete scrap grades, as mentioned by both Steel Dynamics and Nucor.