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US hot-rolled coil futures make new highs ahead of mill outages

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US hot-rolled coil futures make new highs ahead of mill outages

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Fresh hedging seen by traders in fourth quarter

Service center inventories said to improve slightly but remain lean

Prime scrap expected to finally fall verse obsoletes in September

US hot-rolled coil futures forward curve loosened during the week ended Aug. 17, as prices reached new highs and spot prices sit just below the record highs reach earlier in the week. Busheling scrap futures continue to decline ahead of the September buy-week on the back of weakening mill demand from outages.

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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 up just over 10% week on week, according to CME Group data. The rolling of positions continued as some positions were rolled further into 2021 from September into Q2 2022 to combat rising spot prices and as customers looked to hedge tons against the planned mill outages. The market again saw fresh buying coming in for the Q4 2021 contracts.

"The balance of the year seem to rally on consumer buying on the outage news," a trader said.

The hot-rolled coil spot market has seen recent spot tradable values up to $1,940/st for September-October production, with indicative bids rising to around $1,900/st. Cold-rolled coil tradable values remained firm and above $2,100/st for October domestic production.

The Platts TSI US HRC index sat just below the record high at $1,900/st on Aug.17, with prices now up by 333% since August 2020, when the recovery began.

Service center inventories remain lean

The August/September spread moved back into contango as the market continues to see rising spot offers ahead of planned mill outages, settling at $42/st contango on Aug. 17 as backwardations eased further down the curve as prices remain higher for longer.

The structure of the forward curve loosened during the week as backwardations eased into year-end as price rallied across the entire curve with the August/December spread easing to $218/st as the December contract recovered on stronger week on week volumes from consumer hedging. The spread is tighter by $28/st from the start of the third quarter, as much of September production has sold out, pushing prices further down the curve higher with limited availability even for October domestic production.

The rolling of hedges moved further along the curve, especially from September further into the fourth quarter. The September/October spread remained steady trading around a $90/st backwardation and from Q4 2021 to Q1 2022, at around a $190/st backwardation. As prices have now rallied to new highs it will be easier for the market to hedge imports going forward even with the backwardation structure into the fourth quarter. Some fresh buying came into the curve, mainly in Q4 2021 as imports are expected to remain strong into Q4.

Market sources expect tight conditions through October ahead of planned mill maintenance. Some outages now extending out longer than expected such as US Steel's Gary, Indiana, No. 6 blast furnace which is now planned at a 38-day outage.

The December contract rose by just over $40/st to $1,667/st on Aug. 17, up $57/st from the start of the third quarter. The August-September/Q4 spread backwardation loosened to around $154/st, as producer offers remained firm.

Contracts for 2022 continued to see good trading volumes, as Q1 2022 moved higher by $85/st , trading up to $1,580/st on Aug. 17 -- with 859 lots trading in the quarter during the week ended Aug. 17.

The front part of the curve widened on the back of long domestic mill delivery lead times but increasing imports helped keep backwardations intact in the latter part of the year. Some mills are still running behind on deliveries verse orders, as some service center inventories have improved closer to historic levels but still remain lean.

With rising imports heading into the fourth quarter and lead times pushing into year's end many participants are less willing to book tons at the very end of the year.

US mill HRC lead times dipped slightly to 8.2 weeks on Aug. 11, well above the 10-year average of 4.8 weeks.

The August/Q4 backwardation loosened significantly to around $133/st with some smaller fresh buying came through December.

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 this week at $1,660/st ex-works from a Mexican mill for October production and at $1,880/st to $1,900/st from a Canadian mill delivered inland for October/November production

According to US Census, July preliminary data shows imports tracking around 225,342 mt. Imports from Canada are seen at 106,852mt, 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. 10 close, the last Commitment of Traders report showed short positions by managed money increased by 1,438 lots to 14,900 lots and spread positions decreased by 35 lots to 1,103 lots. At the same time, commercial short positions increased by 457 lots to 10,838 lots and swap dealers increased long positions by 1,050 lots to 3,350 lots.

Electric arc furnace mill margins in the Midwest rose again during the week ended Aug. 17, as prime scrap prices remained steady and with HRC prices hitting record highs. The Platts HRC/MW busheling spread was at $1,319.64/st and the Platts HRC/shredded spread also rose to $1,469.20/st. Margins have risen 98% since the start of 2021.

Some pressure is expected on prime/obsolete spread

Midwest busheling scrap futures fell under pressure again during the week ended Aug. 17, as the August contract expired and the 2021 contango continued to narrow, the September/December spread settled at a $3/lt contango, as December traded down to $645/lt.

The widening arbitrage between HRC and busheling scrap attracted buying, especially versus Q4 2021/Calendar 2022 HRC short hedges.

The December contract settled at a $5/lt backwardation to spot on Aug. 17, as the market looked at possible falling prime scrap consumption this fall from planned mill outages and maintenance. December prices have fallen from a high of $720/lt hit on June 2022, as some recyclers were able to hedge tons above the $680/lt level. The prime scrap has market has started to loosen even with the slow down in the auto sector due to chip shortages. Market participants have noted the increased availability of prime. They have also the melting rate of prime over shredded supporting the spread differential. The Platts busheling scrap delivered Midwest spot price was unchanged at $650/lt on Aug. 17.

The busheling-to-shredded scrap differential ticked higher to $167.50/lt as of Aug. 17, 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. Market sources cited weakening prime scrap primes looking ahead to the September buy week on the availability of material and expected mill outages in September.

"Tradable value of down $50/lt on prime scrap from August for September delivery," a Midwest broker said.

Midwest shredded scrap prices dropped to $482.50/lt on the same day, down around $20/lt during the month..

Southern busheling scrap prices were steady at $637/lt on Aug. 16, while regional shredded prices fell to $488/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.