Hot Rolled Futures: No Relief in Sight

The following report was prepared by Andre Marshall, CEO of Crunch Risk, LLC which is a company specializing in hot rolled, ferrous scrap and other “futures” contracts or financial derivatives. Today he discusses the broader financial markets, hot rolled steel futures (HRC), iron ore and ferrous scrap futures (BUS) trading on the CME. Andre Marshall is also the SMU instructor for Managing Price Risk I and Managing Price Risk II workshops.

Financial Markets:

On the S&P 500, we finished 1984 on Friday on the September future which continues the downward trend since the beginning of the month when we put in a new high on September 4th. However, this downward move is even very modest by August rally standards whereby we went from 1900 up to the 2000 zone. We may be in for a further dip to finish off a 40-50 point re-tracement here, but more than likely we are still headed to that 2080 near term target. All that said, it is important to note that the US dollar is getting stronger against a number of currencies especially the Euro, and a strong dollar is not good for the U.S. economy, or, in turn, for equities (SMU Note: we will publish a Premium Level article on currencies on Monday of this week).

In Copper, we have seen failure again as the news out of China has not been sufficient to allay fears and pressure mounts as metal deliveries in global warehouses continue daily. Further CTA’s are still primarily long, and now just starting to stop out of their length as the December future flirts with lower lows daily. We are last $3.1030/lb. on the Dec future. There is nothing below on the chart to stop the market from testing the June 12th low of $3.0095/lb.  In Crude, a similar story as we are in a downward trend since June 24th high at $104.79/bbl on the WTI. We are last $92.15/bbl on the Oct. future. Again here too there is nothing below on the chart for us not to expect a retest of the Jan 10th low of $88.83/bbl., and fundamentals do not look sufficient to break the bearish direction.

Steel:

We had an excellent week in Hot Rolled futures with 1600 lots or 35,000 short tons (ST) trading. I did most of this on Thursday when 30,500 ST went through the system. Essentially the offers got down to a level where buyers were prepared to engage. The Q4 period went through just shy of $643/ST and the Q2 through Q4 2015 period traded right about $641/ST. The CRU came in flat at $665/ST again. The spot market appears to be in waiting mode for long awaited trade case on finished products and indications of impending imports.

Below is our interactive graph indicating the forward curve for hot rolled coil futures. You will need to be logged into the website in order to access the graph.

{amchart id=”73″ HRC Futures Forward Curve}

Iron Ore:

Miserable in a word. We are last $82.00/MT on the index and worse is that the forwards are still not any better coming off almost dollar for dollar. One can buy through Calendar 2015 at just below $83/MT. Seems like the industry is expecting the spot to reach $75/MT before any sort of rally. This apparently is the cash cost level of the Chinese producers, not their cost, but their cash cost; we’re already way below their overall cost to produce. The forwards are going to have to start to show some signs of life if a rally is really forthcoming at some point. Any forward buyers out there?

Scrap:

The scrap market can be described as disappointing, where everyone expected us to be up $10/GT this month, we are flat again. This puts us at $365-398/GT (gross ton) on Shred depending on the region and $395-400/GT on primes (#1 busheling and bundles) depending on zone. Worse, the Turkey index is slipping as the headwinds from the political fallout around Ukraine, Gaza, and ISIS are too much for the markets and demand suffers. The CFR Index has just come off $3/MT, we are last $382/MT CFR and forward demand is not expected to be good, particularly with the USD strength.

Below is the forward curve for the #1 busheling futures contract on the CME. As with HRC above, you will need to be logged into the website in order to see and interact with the graphic.

{amchart id=”74″ BUS Futures Forward Curve}