Hot Rolled Futures: World in Turmoil

Today’s hot rolled coil futures (HRC) article comes to us from Andre Marshall, CEO of Crunchrisk, LLC and our Managing Price Risk I & II instructor. In his article he will review the S&P 500, copper pricing, crude oil pricing, steel, iron ore and ferrous scrap futures trading:

Well the S&P 500 reached its high at 1985.75 on July 24th only to lose 4 percent since. One could say it is due to the escalating conflict between Russia and Ukraine, or the war in Gaza, or the lackluster performance of crude oil prices and natural gas prices, considered a benchmark of economic health. Or, it’s more like the market was looking for an excuse to pare back positions amidst altogether too good economic data at home.

Huh? What was that? Yeah that’s right, too good economic data is bad for the stock market because it means that the Fed will need to taper its efforts earlier rather than later and maybe even more aggressively than they’re letting on. One thing is clear and consistent in reporting, people not only have jobs again, albeit crummier ones, companies are finding it hard to find people to employ. This is likely increasing wage inflation even as we speak, at least in certain sectors of the market. This will not be good for companies earnings. And so it starts. “Will we reach 2000 S&P or even higher?”, sure we probably will, but the cycle is such that companies earnings will start to face more headwinds. The Fed can control interest rates. But that can’t control wage inflation, and its coming.

In Copper, the other important metal, you might recall that it tested $3.00/lb zone, even a bit lower, when concerns over China’s economy were prevalent in the market earlier in the year, only to then rebound to the $3.14-3.18/lb zone shortly after, and to then rally further to $3.22-$3.28/lb zone in early July. Well, the China “relief recovery rally” appears to have come to an end, and we have headed back to the $3.16-$3.17/lb. zone in Copper. We are likely to continue down at least to the $3.12/lb area which would be the halfway point between the low and high of the upward move. Metal continues to trickle back into warehouses as demand in Asia is just not what it was before, and production continues to improve from its disruptions.

Crude’s story is not a lot different, having put in its high in mid-June at $106.01/bbl, probably on the back of Mideast turmoil, this market has since dropped to a low of $96.65/bbl. We are last either side of $97.50/bbl. Fundamentals in crude are what’s catching up with crude, it just doesn’t have the same robust demand globally it had before. Short term rallies on geo-political matters are fine, but with production being much more a global thing than in the past, particularly with the Americas contributing so much more, the Middle East political impacts just can’t sustain prices on fear alone. Just think where crude would be if we didn’t have all this turmoil in the Middle East. Meanwhile the Russian situation isn’t bullish for the European economy or the world’s. At a minimum Russia’s buying power just about went away, and the financial ramifications of this crisis could have a far reaching impact into a lot of other economic zones. Europe, in particular, didn’t need this.

Steel:

We have had a very quiet week in futures, trading 205 Lots or 4100 ST. Most of this in the nearby 3 months where short-cover, or fresh buying, takes place as the spot price has crept up. We have risen approximately $3-5/ST higher on September and $2-3/ST higher on October. The rest of the curve is either side of $642/ST through end 2015. This is up a couple dollars. The CRU price came in $675/ST on what appears to be very little spot activity as inventories remain steady to slightly higher as deliveries from mills are very healthy.

Everyone’s abuzz about impending trade case rumors. As incredulous as it seems that one would argue a case with this healthy a steel environment here in the U.S. (an almost $660/ST avg steel price for the year, very wide spread between scrap and steel for most of the year, and very good ship rates) there certainly are quite a few who believe a case is coming. Regardless, the threat of a case is having its effect, and will show up in late Q4 import levels. As well, there’s plenty of talk about Russian imports, and although it looks unlikely that the Suspension agreement will be changed, Putin’s actions are having the same effect anyway. Meanwhile imports came in 3.7 million tons in July, and will likely come in slightly lower than that in August and September, but healthy still. Many have healthy ship rates as most industries are performing, and those ship rates will need to maintain over the next two months for us not to see a price correction of some sort.

If you are reading this article online you will know that there is an interactive graph located just below showing the HRC Forward Curve:

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

Iron Ore:

It’s been quiet in Iron Ore for some weeks now. We appear to be stuck on spot around $95-96/MT with the forward curve in the slightest backwardation just either side of $94.50/MT through the end of 2015. Volume here too has been anemic, summer effect just like here, with as little as 300,000 MT trading in a day versus 1 million plus that this market is used to. Coking Coal has slid further shedding a couple more dollars as fundamentals in this market really start to weigh, last $114/MT on spot.

Scrap:

On the domestic front scrap has gone sideways again in what some could describe as a very healthy demand steel market, hmm. The Ohio Valley once again seems higher than the balance of the country due to certain mills actions. The balance of the country is just north of $400/GT. East coast sales had improved and then died down again for the month of Ramadan, which just wrapped up end July. The lack of Asian scrap has helped the world markets, we’ll see what the Turks appetite is when they return. The Ukrainian situation isn’t adding confidence to the region. CFR Turkey had risen to $381/MT on that last round of buying, but has stagnated there the last few weeks.

Another one of those pesky interactive graphs is located at the end of this article but, you must be logged into the website in order to view (and interact) with the data.

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