Hot Rolled Futures: Back to Value

The following article on the financial, hot rolled coil futures, busheling scrap futures and iron ore markets is written by Andre Marshall, CEO of Crunchrisk, LLC and our Managing Price Risk 1 and 2 instructor.

Financial Markets:

Today was not a good one, a repeat of last week when the market retraced on the back of Russian aggression in the Crimea. Nothing has changed, maybe even a bit more intense as Putin clearly didn’t get enough attention at Sochi and has now decided that more bold advertising is required, tightening its grip on the Crimea and the pushing forward with the referendum on Crimea switching to Russia. In all fairness to the Russians, we are talking about what amounts to one of their most important naval bases, and approximately half the populous of the Ukraine and Crimea consider themselves Russian.

Nonetheless, it’s a boiling cauldron, and I don’t know about you, but outcomes don’t look great if Putin has indeed backed himself into a corner. And the market agrees, despite Jobless claims dropping to 315K rate in the week, it’s best performance in 5 months, and retail sales climbing 0.3%, the S+P 500 dropped along with most world indexes, reflecting the fear of this potential conflict. Today we closed 1846.50, or down 1.5% from today’s high of 1875. However, to put into perspective, this is only 2% off the S+P all time high, in a market that went up 30% last year alone.

So, despite the world’s global economic issues, i.e. China just releasing the slowest factory output and retail sales figures in January and February since 2004, and despite the world’s political issues boiling up, our market here looks bullish still, rightly or wrongly. The rally to 1900 resistance level is still intact until  we’re apprised otherwise. Putin is going to have to try a lot harder if he wants to derail this freight train. One European hatchback taken out at the railroad crossing here, and we’re headed down the line!

This decent U.S. labor and retail sales data will most certainly mean the Fed’s expected move of further “tapering of the easing” should be a shoe in.  It’s ok to scratch your head here. Let’s say they pare back another $10bln/month on the bond buyback program that will, in turn, continue to support the USD against the world’s currencies, which will not be good for commodities as they will come under further pressure in a rising dollar environment. This could be what the market is showing us in Copper, which is down about 12% in three days, last trading $2.98/lb area on March. Crude as well is under pressure having come off 6.6% from its highs on March 3rd, last $98.25/bbl. Gold bugs get to keep their hopes alive as Gold is about to take out its Sep. 19th highs at $1375/oz plus, a further sign of uncertainty – Iron Ore could be showing us the next step as hopes rise the Chinese Government will stimulate again.

HRC Steel:

We are back to Value on the futures as the market has traded $620 for Q3 and Q4. As you’ve heard me say, the outcome is not a surprise, just the length of the cycle. In this case, the retracement back down in steel was delayed by a quarter from normal seasonality. This week we have come off another $5/ST on the forward curve to $620/ST, Q2 ’14 and beyond. The forward curve usually leads first and so we are not expecting much more downside on this back end as the spot move still appears in full swing.

You might recall in May of last year when we were at $560/ST on spot the back end of the curve in futures got as low as $615/ST and only briefly. Now, whether the forwards go much further or, as I suspect, start to find a bottom here, will depend one’s outlook. If you’re in the camp that China’s woes are the sign of the end of the commodity super-cycle, a la, the USD is going back up on tapering of the easing, then going below $600/ST and staying there for a period is in the cards as global steel demand and scrap demand fail to absorb supply. If, however, you’re in the camp that China will stimulate, Europe will recover, the emerging markets will re-ignite, or Japan will start to grow in earnest after 20 years, or any combination, then we are likely headed for a repeat of the cycle where we see a further dip on spot somewhere below $600/ST, and a stabilizing of the forwards near here.

In futures, we had a decent week with 1300 lots trading, or 26K ST. The CRU index came in down $5/ST to $627/ST. The curve in HR is pretty much flat $620/ST through the balance of 2014 and $633/ST for Cal ‘2015.

Below is the interactive graph for HRC futures. You will only see a blank white space where the graphic is located as it has to be viewed when reading the newsletter on our website (and being logged into the website). If you need help logging into or navigating our website please contact us at: info@SteelMarketUpdate.com and we will assist you in the process.

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

Ferrous Scrap:

A tale of two cities here: In Turkey, the market had a big rally off the bottom of $353/MT to $368/MT, $12/MT in one day alone. This was attributed in part to the Ukraine which supplies 20% plus of the world’s billet. As a result, billet prices climbed and the spread between the two got too wide. Meanwhile the domestic prices have cratered as weak demand from minis, excess inventory, and no East Coast bid led to lower prices in March. In the Midwest, that worked out to $17/GT down on the index to $391/GT in a market that was $20/GT down trading until the last days and over $30/GT in the South.

So where does this leave us for next month? Well a lot of uncertainty. Speculation builds that the next CFR Turkey deals will go at $370/GT or higher as supplies out of the Baltic and Europe will not likely suffice in the rebuilding period ahead of their rebar season. As for domestic, the picture is even muddier as steel imports, questions around scrap export and steel appetite weigh. If we see exports again soon then we will likely see stability in scrap in April, if not flows may continue to drown confidence.

As mentioned above – the reason you are seeing a big blank white space here is because there is an interactive graphic in the spot – or at least there is when viewing the newsletter on the website. Contact us at 800-432-3475 if you need help.

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

Iron Ore:

It’s been a wild ride in Iron Ore. We dropped 8.3% in one day to just under $104/MT end week last week, only to rally strongly this week back to just under $113.5/MT on the index. Short-cover could explain a sharp retracement like that, but it’s impressive. Maybe traders there are already anticipating an easing by the Chinese government on the back of their poor economic growth data. Despite the Premier’s advice today in a speech that the government would likely tolerate some slowing of growth, the market speculation is building that some sort of easing on lending restrictions and capital investment is in the works. Let’s call April either side of $111.50/MT, Q2’’14 either side of $110.75/MT, Q3 ’14 either side of $109.25/MT, Q4 ’14 either side of $108.25/MT and Cal ’15 either side of $106.25/MT.