Daily Futures Update 28/02/2020

Coronavirus news still dominates as steel market sentiment sours, volatility spikes

Steel futures market conditions have been changing constantly and quickly over the past 48 hours, as a global market rout destroyed confidence – volatility has been huge. As a result, our daily marks are less representative than usual. It’s fair to say, the broad market sentiment is bearish. But, in the USA, price increase announcements from US Steel and Nucor confused matters, triggering some interesting moves for CME EAF conversion margin futures. Turkish mini-mills fared less well, with the LME curve being sold back to its recent lows. 

Exchange Prices at 1630 GMT

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LME SCRAP & REBAR FUTURES

LME EAF futures have been sold consistently lower in line with reducing spot market projections for the next round of deep dea scrap purchases and rapidly worsening sentiment on the outlook for finished products. LME Scrap futures are still presenting a front-end Contango, providing a well-need emergency exit for any one holding unsold inventory and concerned about the broad commodities sell-off on Friday.

US HRC FUTURES

While global markets puked on rapidly escalating fears of a global coronavirus pandemic, US HRC futures have been all over the place. Late on Thursday Nucor and US Steel announced fresh price increases, targeting to push up by $40/t. And bullish talk for the rapidly approaching monthly US scrap settlement had some paper traders convinced that mills will fight extremely hard to hang onto their conversion margins. Indeed, the front end of the curve has traded significantly higher on the news. But buyers of medium- to long-dated periods were less convinced and these prompts have operated in a wide trading range. 

FOB CHINA HRC FUTURES

Chinese steel futures markets have for some time sustained a level of confidence that is at odds with the news coming out of the nation, with supply chains seizing and demand frozen. Friday was the day this came to an end, with onshore futures offered aggressively lower before the London open. LME FOB China HRC futures dropped significantly as a result.

US SCRAP FUTURES

CME Busheling futures dropped significantly in Friday trade, with the collapse in US financial markets unsettling steel futures traders. As a result, it looks like this curve is shifting into Backwardation with the outlook for the Mar-20 sideways at the very least. This is an odd presentation, in our humble opinion, for a market in which supply is already fairly tight. Should the bear case on economic activity prove to be the case, manufacturing activity will likely reduce and further tighten available supply of primes. Should the US economy find its feet and return to a more bullish trajectory, mini-mills will likely compete harder for tons.

MINI-MILL SPREADS

The day’s market news proved too much for LME EAF conversion margin futures on Friday, and the curve was offered back below $145/mt – its recent lows. The LME Scrap curve has remained surprisingly firm: if Turkish mills aren’t able to achieve a differential higher than this, we would expect to see capacity utilisation drop quickly and for the deep sea scrap market to fall as a result. LME EAF conversion margin futures retained their support above $150/t on Wednesday with Q2-20 buy-side LME Rebar futures supporting the balance of the curve.

US EAF conversion margin futures surged higher in mixed up trading, with the announcement of finished product price increases somehow triggering a sell-off in raw materials. To our eyes, this curve looks a little overbid. But it takes a brave trader to take significant positions in today’s market conditions.

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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