Forward EAF margin squeeze continues on poor finished products outlook
LME Scrap futures continued to rise on Monday, despite more concerning news about the still escalating Coronavirus outbreak over the weekend and some very pessimistic moves from other financial markets. Reports of a series of new deep sea scrap bookngs by Turkish mills has paper traders convinced we are back in a rally. But sentiment for finished product prices is much more sour and the front end US HRC futures Backwardation became even more extreme while LME Rebar prompts presented almost flat with spot. As a result, forward EAF margins are trading even lower than they did last week, when they already had dropped to historically very low levels.
Exchange Prices at 1630 GMT
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LME SCRAP & REBAR FUTURES
LME Scrap futures were bid through their opening marks again on Monday, putting the entire curve structure at a large premium to the latest spot cargoes – a diverse collection were reported over the weekend. Although the spot market trend presently seems to be higher, forward prices are running up faster and continue to incentivise additional supply generation. LME Rebar futures, in the meantime, remained well offered and trading on par with the lastest spot market index. It will be interesting to see whether Turkish mills continue to swallow higher raw materials prices if they fail to get any traction on finished products.
US HRC FUTURES
US HRC futures were still on ‘risk-off’ mode as paper traders returned from the weekend and Q2-20 periods were pummeled back below $550/t by sellers who remain convinced the domestic spot market is about to plummet. But the tail end of the curve remains well supported. Beyond a fairly precise forecast of physical price evolution, we struggle to see much logic in this curve shape and spy some interesting time spread opportunities.
FOB CHINA HRC FUTURES
It increasingly looks like the impact of the Coronavirus will be much more serious than originally hoped and that China’s mass return to work on Monday has only been partially executed. Onshore markets were broadly unchanged but LME FOB China HRC futures traders didn’t share their confidence, peppering nearby bids in early morning trade. But, with demand likely to recover quickly when the outbreak is finally under control, longer-dated periods remained well supported and the curve presented a much flatter posture than is its usual trademark.
US SCRAP FUTURES
The front end of the CME Busheling futures curve is finally starting to trade closer to spot, with the February spot index due to publish tomorrow. The somewhat glaring Mar-20 valuation is the result of a struggle between paper market forecasts for the US steel mill conversion margin, a dismal outlook for finished products and relatively tight physical market fundamentals for prime scrap. Something looks mis-priced here.
Spot market dynamics continued to have a severe impact on the entire LME EAF conversion margin forward curve as scrap prices pushed back higher while rebar export bookings were still subdued. Once again, it’s possible to lock in these levels all the way through 2020 and into Calendar 2021.
Monday’s Q2-20 US HRC futures dump also had a fairly extreme impact on the CME EAF conversion margin forward curve, with Q2-20 plummeting to the $250/t level we were more accustomed to prior to the introduction of Section 232. Again, like HRC, longer-dated periods were better supported and offer some Carry potential.
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