Hot Rolled Futures: Island Living

Andre Marshall, CEO of Crunchrisk and our Managing Price Risk I & II workshops instructor writes about the financial and futures markets, including hot rolled futures and busheling scrap futures trading over the past week. You will also be able to see Andre speak at our Steel Summit Conference in September (3 & 4) in Atlanta.

Financial Markets:

OK it’s official, we are enjoying Island Living, the mood is bright, the stock market is stellar, business is good. For a technical trader, these are all warning signs. New highs on the S&P this week, aren’t there always?! You might recall 1963 was our target, we hit 1957.5 on the June future last week, we are last 1930 area now with a downward bias. We should be in a 30-40 point correction move, but, oh yeah, this market doesn’t do corrections, hmm, another warning sign. I see us correcting to 1850 zone anyway, and because the bullishness has been so relentless, breaking through 1850 would mean a much bigger correction was in store, and maybe…

In commodities, Copper has become a little depressed. We are testing $3.00/lb. again in part on malaise around concerns coming out of China, and in part on metal being delivered into all three global exchanges, albeit modest. A story about investigations into finance schemes in Copper and Aluminum in Chinese port warehouses hasn’t helped. You might recall in my last writing that we were enjoying a rebound in Copper from its March 19th $2.872/lb. low, however, that support line was broken on June 4th around $3.10/lb and we have since declined further. We are likely headed to test that $2.872/lb level and probably set to put in a “lower low”.  If so, we are headed to $2.50/lb. Gold may be trying to tell us something here as well regarding our stock market. You might recall that we were breaking down technically two weeks back, and headed lower. Well, Gold reacts inversely to the S&P, as the nervous hedge, and so we appear to have caught some enthusiasm in this market, not really a good sign for stocks. All that said, Crude is robust at $107.46/bbl last on the July future, a recent high. It could be enjoying a bid as the political turmoil fear trade (can you say Iraq, or ISIS?), but it also might be showing us that demand is decent, hmm. Crude definitely the contrarian market right now.

Steel:

Really a bit boring frankly with buyers waiting, as attractive offers on futures have not enticed them. Appears to be a similar story in the spot market where lower offers have received a tepid response. Looks like most are focusing on the business and shipments at hand and not looking for more supply. The futures activity has been pretty anemic at 325 Lots or 6500 short trades traded in the week. This was mostly July short-cover around $650/ST and a Q1 trading at $633/ST. The whole curve has risen approx. $5/ST from last week. Plenty of buyer inquiries for various periods through the end of 2015, but offers not willing, at present, to reach.

In the white space below is an interactive graph on the hot rolled futures forward curve. The graph can only be seen when reading the newsletter online.

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

Iron Ore:
 
Iron Ore, like Copper, is showing fatigue. Important in that these are the two major industrial metals consumed in China that are representative of this colossal industrial machine. You might remember that we put in a low of, I think, $91.50/MT on the index as the last low and then rallied again to $98-99/MT zone. Well we have since given back that rebound and are last $91.50/MT area on the spot index. The story, as I hear it, is that steel demand is lower, and steel production lower still (worryingly so for some), so steel mills have let their iron ore inventories drop as their steel inventories have declined as future demand is not as clear. Meanwhile port stocks have risen, last 130 million MT and counting. Further the finance of inventories scheme in base metals has also affected Iron Ore, and there are apparently stocks being liquidated by as much as $4-5/MT below spot shipments deals. This is putting pressure on the index. The forwards are looking depressed and still slightly backwardated (lower than spot) through Q3, despite the spot price coming down pretty hard. The forward curve today was approx $90.00/$90.75/MT here through Q3, $90.50/91.25/MT for Q4 and $91.75/$92.75/MT for Cal ’15.  The forward curve is starting to show a little more contango in the back end so maybe we have finally found our eventual mean revert level. Looks like that might be around $92/MT. However, expect the spot to drop further, probably test the $87/MT past low, so that more contango is in the market before we see a rebound, temporary or otherwise.

Scrap:

The scrap market is generally under pressure except for busheling, which managed to go sideways when shred came off $10-20/GT, depending on region. This is probably due in part to minis’ need for units as they benefitted from Ashland, Gary and Ecorse issues and sought more primes. Exports off Turkey have  been close to non-existent, and when a cargo did go, it was lower. Last index levels in that market are now $371/MT CFR Turkey, not helping the situation and likely to continue to weigh on shred as East Coast material ships west. Despite price  effect and hopes of a rebound in July, it’s hard to see where the positive driver comes from to provide that result. Secondary pressure from a depressed Turkey appetite not likely to change, and any temporary lift to Bush from Minis is likely played out. Further, the spread between bush and secondary is now over $30/GT which is getting rich. If secondary does hold, would think Bush will correct down to close the spread as minis start to question the premium over shred. Let’s call it just sub $400/GT for primary and a healthy mid 300’s for shred, and a likely poorer demand climate ahead. Nucor continues to crank out 2 million tons of DRI, just sayin!

The second of our pesky interactive graphics – this time showing the busheling scrap forward curve. If you are looking at white space its because you need to read the newsletter on the website… Need help? We are here to do just that – contact us at 800-432-3475 or by email: info@SteelMarketUpdate.com.

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