Hot Rolled Futures: The Other Shoe Drops

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:

Well the stock market is healthy, isn’t it always?! We are last 2050 ish on the S&P 500, pretty much the high. We tried to test a bearish market about a month back and news of Europe easing and decent economic data here sent the market soaring in a swift short cover rally. Our target is still 2090 on this last rally and we are almost assuredly going to get there. However, we may see a 40-50 point correction first.

In Copper, we are range-bound since the beginning of November between $2.98/lb and $3.05/lb. The data coming out from China has not been great, however stocks are still pretty low at exchanges from the last two years supply issues and it looks like some are needing some further units to cover the annual contracts they have committed to the Chinese. The fact that the stocks are in the hands of a few players and the market still hasn’t been able to break out to the upside is really quite bearish and, from a technical standpoint, we have been forming a bearish flag since the beginning of the month on the charts. Probably headed lower here in Copper.

In Crude (oil), it’s a similar story as we have been forming a bearish flag since Nov. 13th as crude has been range-bound between $74.00/bbl and $76.30/bbl. We are probably headed lower in crude as well.

Ferrous markets certainly don’t lend any bullishness to the picture either.

Steel:

We have had a healthy week in steel futures this week trading 2648 Lots or 52,960 Short Tons (ST), and over the last two weeks we have traded over 95K ST. Open in Hot Rolled steel is now 22,371 lots or 447,420 ST. Today I traded Jul/Nov ’15 strip @ $628/ST, this was $2/ST higher then where I traded Q2/4 strip on Tuesday at $626/ST, but it’s $2/ST lower than where May/Sep ‘15 strip traded $630/ST yesterday on the screen (CME). And that’s been pretty much the range this week in trades depending on the period. Q1 has been the strongest with Q2 a good $5/ST lower, and Q3/4 slightly stronger from there. The CRU came in $634/ST as the pause in price erosion appears over despite mill increase attempts. With Bush at $350/GT range this leaves plenty of room for mills to reach for volume, particular as lead times don’t appear as robust as once thought.

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:

And the other shoe has dropped! Long expected to worsen, Iron Ore has. We are now down to $70/Metric Ton (MT) on the index having breached the $75/MT support we were enjoying. All along however the forwards have been warning of further trouble, i.e. not good to see a back-wardated market when the spot price is already depressed. Well the forwards have proved right and the spot price has caved. The bad news is that the market is still back-wardated. Overnight we had Dec either side of $69.75/MT, Q1 either side of $69.00/MT, Q2 either side of $66.50/MT and Cal ’15 either side of $67/MT. The forward curve is likely right again, and we are headed lower on spot as Chinese steel prices in country also fall.

Scrap:

The dramatic slide in CFR Turkey ended at $300/Gross Ton (GT) about a week back, and we have since had an $8/MT rebound as Turks re-entered the market for a number of cargos. The market has since slid a $1/MT, last $307/MT. Meanwhile expectations on the domestic front are for a flat to slightly up market in December from our $353/GT Nov. settle as Nucor’s DRI facility puts them back in the market in a more significant way. The caveat will be lead times and minis’ appetite which might not be as strong as once thought. If mills reach on price to get orders then scrap likely will have a slight increase, if not then we’re headed lower again.

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}