Daily Futures Update 20/02/2020

Steel futures rally continues as LME Scrap Contango strengthens and US HRC shorts seek cover

Steel futures market confidence continued to build on Thursday, with a resurgence in buy-side interest for nearby LME Scrap futures coinciding with increased short covering interest for US HRC futures. LME FOB China HRC futures posted even more significant gains, with buyers baking on a wave of economic stimulus from the Chinese government to counteract the ongoing effects of the Coronavirus outbreak. We remain cautious considering surging finished product inventory in China and reports that the crisis could be more severe than is being publicly acknowledged. But hedgers once again find themselves sitting pretty, with a nearby scrap Contango providing plenty of opportunity to lock in the latest gains (and more) without having to shift a physical cargo.

Exchange Prices at 1630 GMT

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LME Scrap futures resumed their surge higher on Thursday, shrugging off a sideways print for the spot market index that settles the instrument and reaching towards $290/t. The rally also pushed the LME Rebar futures curve higher, although to a lesser extent – perhaps surprising since the spot market index for this market has continued to print higher. Relative value traders seeking to arbitrage with iron ore were almost certainly a crucial part of the rally that now offers sizeable opportunities for inventory holders to offset their long exposure.


US HRC futures continued to edge higher on Thursday, when Q2-20 became the new focus for short coverers wishing to take profit and hedge forward sales at attractive levels. The curve has rapidly flattened out but there were few sellers in the paper market for any period, suggesting we might see more gains in the next few days if nothing changes.


LME FOB China HRC futures surged higher on Thursday, in line with iron ore swaps and the onshore steel futures markets, when paper market traders speculated that the Chinese government will release a powerful wave of stimulus once the Coronavirus outbreak is brought under control. Still, with worrying reports of a fresh spike in diagnoses in Beijing and reports that Chinese steel warehouses are full-to-bursting, a resolution to the crisis may prove to be further off than some people think.


Thursday was a lull for CME Busheling futures trading and this market was largely rangebound, although the Backwardation became slightly more pronounced thanks to more aggressive offers for long-dated periods. Time spread traders have seemingly lost faith that the curve could return to Contango, with most periods bid on.


LME EAF conversion margin futures continued to stabilise on Thursday, despite a nearby rally for scrap futures. The forward curve is now pricing in a fairly sudden and severe contraction in this differential, with the front month trading at a discount of as much as $15/t to the pricing month.

USA EAF conversion margins also continued to rise on Thursday, when Q2-20 US HRC futures short covering broadened the gap between scrap and finished products to levels much closer to spot.


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