Hot Rolled Futures: Egads Hot Rolled Too!

Today’s hot rolled, ferrous scrap and iron ore futures article comes to us from Andre Marshall, CEO of Crunch Risk LLC and the instructor for Steel Market Update’s Managing Price Risk I and Managing Price Risk II workshops. Along with HRC, iron ore and BUS trading.  Andre also discusses the S&P 500, copper and crude oil markets as all have been very interesting as of late.

Financial Markets:

In the S&P 500 and other U.S. equity markets, it has been a bit tumultuous the last few days. We are last 2029 off from the highs of 2079 on December 5th. Global news continues to disappoint while domestic economic news continues to surprise causing more volatility in equities.

Crude oil meanwhile continues to be under serious attack. We have dipped below $60/bbl, last $59.19/bbl. Crude took a big dive on the Friday after Thanksgiving dropping from $73.38/bl Friday close to $66.15/bbl that Monday’s close. This was on the back of OPEC’s news that they wouldn’t curtail production. The OPEC nations appear determined to compete with the world on price. Maybe the revenues are just too critical for them at this juncture with ailing economies. Debate rages on as to what the effect will be on the U.S economy. Certainly this author is interested in the effect on the Houston market.  

Copper meanwhile followed Crude down on that black Monday dropping 10 cts/lb to $2.86/lb., we are since $2.9320/lb. As if Iron Ore is no reminder, all these markets look structurally depressed. At this juncture, we need some good old fashioned Economics 101 supply correction to mend prices.

Steel:

Egads, there goes steel too. Five weeks ago people were still pretty optimistic, now people are just downright bearish, and I mean everyone I talk with. Makes a trader pause however. Like a customer said today, “when everyone is this depressed, it’s usually when the markets about to turn”. Hard to say, I think we’ll see more spot price pain before it gets better, maybe a lot more, as lead times just aren’t where the mills need them to be going into winter. I’m guessing sub $600 CRU before it’s done.

However, on futures, we are down to the $617-618/ST zone again, and I simply remind folks, we are headed into winter, scrap is steady, steel demand is still decent as manufacturing is still pretty healthy, employment is very good, and these are the lowest far forward prices we have seen since 2009! Factor in Index contract discounts and folks are locking in $590/ST fixed price far forwards or better. Not bad even compared to lower spot sceanrios. Futures have been very modest this week with 2840 ST trading for the week. CRU came in at $614/ST, down $9/ST.  

Below is an interactive graph of the HRC Futures Forward Curve. The graph can only be seen when reading this article while logged into our Steel Market Update website:

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

Iron Ore:

The index is back down to $68/MT and the futures are right around there through February 2015. Starting March the curve starts to backwardate slightly reaching down to low $65/MT range by June and running flat through 2015. Way too much capacity with an OPEC like attitude coming from the big producers with no curtailment in production in sight. With so much capacity, it won’t go up, but with a lot of bearish interest already in the market it has a tough time going down as well –everyone’s already short, no one left to sell it. It’s a stagnant price direction for now, but likely the spot eventually drops further. I am not expecting the forwards to drop much from here however as the Contango needs to come back into the market to signal an end to this cycle, at least temporarily. Caveat would be if spot drops a lot further.

Scrap:

Middle East is still dead, demand is anemic due to all the issues in the region, and the pressures from Chinese and Russian imports. That said the winter buys have stabilized scrap as we bounced off the lows at $300/MT CFR Turk to $310/MT only to now start to drop back down, last $307/MT. Meanwhile domestic busheling looks poised to be flat to slightly up as maybe mini mills inventories weren’t that high, or maybe Mini’s would like to have healthier inventories heading into what may be another rough winter. Plenty of room in the metal margin for scrap to remain stable and for steel to come down further.

Another one of those pesky interactive graphs is below with the BUS (CME Busheling Scrap or BUS) forward curve.

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