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Daily Futures Update 11/02/2020

Sellers unload on Q2-20 US HRC futures, LME Scrap curve still rising

Scrap futures markets continued to move higher on Tuesday with reports that several EAF steelmakers need to cover shorts, but all other steel futures curves struggled to find a bid. The LME Rebar futures curve continued to lag, while sellers unloaded Q2-20 US HRC futures. As a result, EAF conversion margin futures continue to paint a dismal picture for steelmakers in the first half of the year.

Exchange Prices at 1630 GMT

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LME SCRAP & REBAR FUTURES

LME Scrap futures continued to march higher on Tuesday with reports circulating in the physical market that a large number of Turkish mills are looking to book fresh supply. LME Rebar futures were pressured higher by the move, but by a lesser amount, leaving the curve broadly flat. Whatever one’s view on the forward EAF margin, this should present some interesting time spread trading opportunities in both markets.

US HRC FUTURES

Tuesday saw another dump in the US HRC futures market, with Q2-20 periods sold dramatically lower to levels that seemingly imply a very rapid unwind in domestic market spot pricing. Longer-dated periods were better supported, providing plenty of potential for short position holders to roll their exposure forward at more preferential levels. Considering the depth of these declines, we suspect this curve shape is more about panic than any fundamental shifts in the physical market.

FOB CHINA HRC FUTURES

Chinese onshore steel markets caught a bid on Tuesday and LME FOB China futures followed, with nearby periods trading more in line with spot while the balance of the curve remained in steep Backwardation. There are some interesting lending opportunities here for those confident that China’s steel prices will recover in the medium- to long-term.

US SCRAP FUTURES

The February settlement published today at less than $10/t down, which provided some increased confidence to CME Busheling futures traders and some short covering at the front end of the curve – Mar-20 futures have traded at a fairly extreme discount to the balance of the curve for the past few weeks. This put the curve in a flatter shape that showed signs of longer-term Backwardation with plenty of selling at the back end.

MINI-MILL SPREADS

LME EAF conversion margin futures remain depressed with plenty of selling interest in the $150s keeping punch drunk buyers of this differential on the sidelines. For now, the spot market is supporting this sell-side pressure for futures. But, considering these levels are most likely loss-making for Turkish EAF producers, we struggle to see the differential remaining at these levels for such a sustained period of time.

Q2-20 values for the CME EAF conversion margin futures forward curve plummeted along with HRC on Tuesday, when perceived physical market fundamentals for US prime scrap remained at odds with the souring of sentiment in the paper US HRC market. But the back end of the curve remains well bid – implying a longer-term recovery back to spot market levels. Considering this period will likely coincide with increased EAF utilisation in the States, we struggle to understand the dynamic that is supporting this shape. But, in any event, it represents an excellent hedging opportunity for steel producers.

GLOSSARY

This newsletter references various technical words, phrases acronyms and codes. The following Glossary provides further explanation – please don’t hesitate to reach out and suggest additions.

Calendar Months:

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