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US HRC futures under pressure as mills hold firm on spot prices

Highlights

December futures supported at current levels

Spot market quiet as import competition looms over US margins

Prime scrap bid down around $20/lt average across US

US hot-rolled coil futures fell under continued pressure Oct. 7, as mills analyzed competition from imports and busheling scrap futures rebounded slightly after consecutive months of lower tonnage buys and falling spot prices.

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Mill offers have remained firm in the Midwest, with slightly lower offers in the South, despite a limited spot market interest and as customers continued to look ahead to 2022 contract negotiations. Some mills were still in no rush to sell any remaining production unless they were to receive higher bids as inventories remained balanced.

Trading volumes were down by 11% week on week, according to CME Group data, as futures continued to sell off from the Sept. 3 highs. The rolling of positions continued as some positions were rolled further into 2021 and into Q1 2022 as customers looked to take advantage of the steepening curve. The market again saw some small fresh buying come into December and through first-quarter 2022 contracts.

The hot-rolled coil spot market has seen recent tradable values between $1,940/st and $1,960/st for November production, with slightly lower prices in the South as competition with imports has picked up. Cold-rolled coil tradable values were from $2,180/st to $2,200/st for November/December domestic production, and hot-dipped galvanized transactions up to $2,260/st pushing out to December.

The Platts TSI US HRC index was assessed at $1,950/st Oct. 7, with prices still up by 93% since the start of the year.

Mills assess import competition

The October/November spread tightened during the week and after the September contract expiration. The market continued to see firm spot offers in the Midwest as mill outages pushed out into December. It settled at a $131/st backwardation Oct. 7 as spot prices remain higher for longer.

The structure of the whole forward curve tightened during the week. Selling has come into the market and rolling out positions further into the first quarter of 2022. The October/December backwardation rose to $282/st, even as the December contract saw continued flows and rolling of positions during the week from November, with October production sold out, pushing prices further down the curve higher, with limited availability even for November domestic production.

"The most recent selloff was sharp, but liquidity was there, and seems to be supported to end the year," a trader said.

The rolling of hedges continued into December and across 2022 contracts. The November/December spread eased to around $150/st as customers looked to balance off inventories. The Q4 2021/Q1 2022 spread tightened slightly, settling around $374/st backwardation. Some fresh smaller buying came into the December contract and in the latter part of Q1 2022 as imports are expected to remain strong and push in to start the new year.

The December contract settled at $1,598/st Oct. 7, down $12/st from the start of the third quarter.

Volumes for 2022 contracts remained steady during the week, as Q1 2022 fell again by around $37/st, trading around $1,370/st Sept. 21, with 1,225 lots trading in the first quarter during the week ended Oct. 7.

The front part of the curve has seen backwardations build as mill delivery lead times decreased and increasing imports helped keep backwardations intact into 2022, as some service centers have been able to fill inventory gaps.

US mill HRC lead times dipped to 7.4 weeks Oct. 6, well above the 10-year average of five weeks.

With rising imports heading into the fourth quarter and lead times pushing into year-end, many participants were less willing to book tons at the end of the year in order to avoid building inventories, putting pressure on December and Q1 contracts. It will be harder to hedge imports from the short side going forward with futures still trading below some import prices.

Logistics remained challenging, but still, traders and service centers were still looking to fill the demand gap from outages and as the import arbitrage has widened by importing cargoes from Canada, Turkey, Vietnam and South Korea, putting pressure on domestic mill margins as they compete for tons during 2022.

An import transaction was heard at $1,490/st DDP Houston from Turkey with a January/February arrival. An offer was heard from a Mexican mill at $1,620/st for December production.

According to the US Census Bureau, August data showed imports of hot-rolled sheets were 344,979 mt, a record. Imports from Canada were seen at 221,039 mt, while imports from South Korea came in at 29,535 mt. and imports from Turkey were 27,343 mt. Imports from South Korea and Turkey usually feed the US Gulf Coast.

As futures continued to fall, the Platts HRC spot/third-month futures spread on the London Metal Exchange tightened during this trading week on light volumes. Fundamentals have not changed as backwardations remain throughout the curve.

As of the Sept. 28 close, the last Commitment of Traders report showed short positions by managed money increased by 2,031 lots to 20,447 lots, a record high as 10 traders hold 50.5% of short open interest and spread positions were down 196 lots at 50 lots. At the same time, commercial short positions increased by 179 lots to 15,262 lots, and swap dealers increased long positions by 638 lots to 6,104 lots.

Electric arc furnace mill margins in the Midwest were mixed during the week ended Oct. 7, as prime scrap was under some continued pressure and buyers commanded their number, and HRC prices pulled back from record highs. The Platts HRC/MW busheling spread rose slightly to $1,432.14/st, and the Platts HRC/shredded spread dipped to $1,534.82/st. Margins have risen 115% and 139%, respectively, since the start of 2021.

Mill buyers get their prime scrap number

Midwest busheling scrap futures found some support during the week ended Oct. 7 as the 2021 curve moved into contango in the front with a larger scrap buy than initial expected. The October/January spread settled at a $6/lt contango as October traded up to $600/lt before settling at $595/lt.

The wide arbitrage between HRC and busheling scrap attracted buying, especially versus Q4 2021/Calendar 2022 HRC short hedges and versus shredded scrap, but market participants remained hesitant to step in front of the momentum.

The November contract settled at a $30/lt contango to spot Oct. 7, as falling prime scrap consumption from planned mill outages and maintenance cut tonnage needed during the month. December prices have fallen from a high of $720/lt June 22, as some recyclers were able to hedge tons above the $680/lt level, market sources have said. The December contract settled at $575/lt Sept. 21.

The prime scrap has market has loosened slightly as market sources have noted the increased availability of primes, but it still remains tough to move tons to different regions. They also have the melting rate of prime over shredded, supporting the spread differential. The Platts busheling scrap, delivered Midwest, spot price fell by $15/lt during the buy week and was last assessed at $580/lt Oct. 7.

The busheling-to-shredded scrap differential contracted during the week to $115/lt Oct. 7, as prime scrap prices were bid lower by the EAF mills, especially in the South, while some integrated mills were out buying primes for basic oxygen furnaces in the Midwest. Mills look at evolving technologies to better utilize obsolete scrap due to the supply availability of shredded scrap, and that has supported the price. Market sources cited possible weakness in prime prices from mill outages, but supply still remains fairly tight.

"Bid for $20/lt from September for October delivery for prime scrap," a Southern mill buyer said.

"Transactions at unchanged from September in the Ohio/Pittsburgh region," a supplier said

Midwest shredded scrap prices rose to $465/lt Oct. 7, as the market has been supported by the current supply-demand situation.

Southern busheling scrap prices fell by $25/lt during the buy week to $570/lt on the same day, as regional shredded prices were unchanged at $465/lt. Southern prime scrap prices were expected to come in lower through this buy week.

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