US ferrous futures supported by scarcity, low inventories to meet demand

US hot-rolled coil and busheling scrap futures continued pushing new highs on June 29, following record high spot prices in the week on the back of outages and demand remaining strong.

Market participants have mentioned continued concerns for rising freight costs both inside the US and ocean freights for imports, along with continued bottlenecking as possible factors.

Trading volumes were up 143% week on week, according to CME Group. Some positions have continued to roll further down the curve in order to hedge rising spot prices. Fresh buying has been seen coming in around the fourth quarter and also through year-end 2022, as spreads have continued to loosen throughout the curve this week.

The HRC spot market has seen recent spot tradable values of up to $1,780/st for August production. Offers were heard up to $1,860/st ex-works West Coast mill with a September lead time and an offer at $2,080/st ex-works West Coast mill for cold-rolled. Offers were also heard from Service Centers with a September lead time.

The Platts TSI US HRC index hit a record high of $1,740.25/st on June 28, as prices have risen $1,301/st since August 2020, when the recovery began.

Supply remains tight in the near term

The June/July spread closed at a $136/st contango June 28, having flipped from a $40/st backwardation on May 18. The July/August spread flipped into a near-$20/st contango on June 29.

The structure of the forward curve continued to flatten during the week but backwardation still remains. The July/December backwardation narrowed to around $215/st June 29, in from $331/st June 1, as most of August production has sold out, forcing prices higher further down the curve with limited availability even for August/September domestic production.

The rolling of hedges moved further down the curve, as it will be harder for the market to hedge imports going forward with the steepening structure. Some fresh buying came into the curve, mainly in Q4 2021-Q4 2022 as import offers have slowed toward the year's end.

The December contract made new highs of $1,602/st on June 29. The Q3/Q4 spread backwardation narrowed to around $150/st, in from around $216/st over the past two weeks.

Contracts for 2022 continued to see volumes -- with Q1 2022 trading $120 higher around $1,465/st on June 29 -- with just over 12,000 st traded in 2022 during the week ended June 25.

The curve continues to remain steep on the back of long domestic mill delivery lead times and limited imports available before the end of the year.

Previously, import lead times have helped to flatten the curve during the previous April and May but that opportunity has faded. With spreads moving into a steeper backwardation and lead times now pushing to year's end, many participants are less willing to book tons.

US mill HRC lead times decreased slightly to 8.3 weeks on June 23, well above the 10-year average of 4.8 weeks.

The July/Q4 backwardation narrowed to around $133/st backwardation with some fresh hedging further down the curve. Most of the larger volumes were rolling out of July into August and September, and with backwardations narrowing during the week, short hedges looked to take advantage, along with some fresh buying in October and December.

Rising transportation costs from Houston especially by truck are making imports even more unattractive. Still, traders have been looking to fill the demand gap from recent shutdowns by importing cargoes from Turkey. A bid of $1,595/st DDP Houston for approximately 2,000 mt was heard by a trader from Turkey for Q4 2021 arrival. An import transaction was heard at $1,580/st DDP Houston for late September/early October arrival by a trader.

As futures continue to rally, the spot/3rd-month LME spread has slipped into a slight contango as backwardations have remained intact for the rest of the curve. Fundamentals have not changed and spot prices continue to rise.

As of the June 22 close, the last Commitment of Traders report from the Commodity Futures Trading Commission showed short positions by managed money increased by 442 lots to 14,206 lots and spread positions decreased by 29 lots to 1,691 lots. At the same time, commercial short positions increased by 372 lots to 12,449 lots and swap dealers shorts decreased by 953 lots to 1,320 lots.

Electric-arc furnace mill margins in the Midwest continued to expand week on week June 28, as prime scrap prices remained firm ahead of the July buy-week and HRC prices hit new record highs. With the Platts HRC/busheling spread rallying to $1,168.82/st and the Platts HRC/shredded spread increased to $1,291.37/st, margins have risen 247% since the start of Q4 2020.

Scrap holds steady ahead of July buy-week

Midwest busheling scrap futures hit fresh highs during the week ended June 29, with August through December bid above $710/lt. The July/December spread moved out to around a $47/lt contango from flat on June 15, as spot prices look steady ahead of the July buy-week. The widening arbitrage between HRC and busheling scrap has attracted buying especially versus Q3-Q4 HRC short hedges.

The September contract traded to an $80/lt premium to spot on June 29, 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 held at $640/lt on June 28.

The busheling-to-shredded scrap differential held steady at 137.25/lt on June 28, as Midwest prime scrap prices remained flat during the week. Busheling prices were unchanged at $640/lt,

Midwest shredded scrap prices were also unchanged at $502.75/lt on June 28, as prices in the for obsolete grades are expected to trade sideways for July even with auto sector demand coming back online following semiconductor chip shortages.

Market tightness has been supported as some mills and scrap dealers have faced staffing troubles in melting and moving scrap to meet demand. Labor on the trucking side continues to create logistical issues in the market.

The Southern US busheling scrap prices held at $625/lt while Southern shredded prices held at $510/lt June 28.

"Tradable value for prime scrap looks up $20/lt for July," said a Midwest broker. "While obsolete scrap prices looked sideways in the Midwest."

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