Daily Futures Update 24/03/2020

Slated US stimulus package sparks some hope in futures markets while forward EAF margins are offered hard

Many apologies to our readers for our prolonged absence over the past few weeks – the COVID-19 crisis and its resulting impact on markets has made it difficult to maintain our normal level of service. We aim to be sending out updates more regularly from now on.

Our best wishes go out to all our readers and their loved ones at this difficult time. 

A great deal has changed since our last update: Around 1.7 billion people around the world now find themselves under Quarantine or Quarantine ‘Light’, with social distancing measures having become the norm for every day life.

And the impact on steel markets has been dramatic – volatility has spiked with extremely wide trading ranges for steel futures each day. There are few clues, if any, from the physical market.

The consensus remains that demand will be severely limited by the measures being taken around the world to defend us from the impact of the virus. And most steel futures curves demonstrate extreme Backwardation as a reflection of the anticipated free fall in spot pricing.

But supply is starting to be heavily constrained as well – particularly in Europe, where many steelmakers are already downing tools. And ArcelorMittal has been the first of presumably many mills to announce capacity curtailments in North America.

Tuesday trading was more positive than we have seen over the past few weeks, with US HRC and Busheling futures responding positively to the $2.5 trillion stimulus package which looks likely to be approved in the next few hours. Both markets clawed back a small portion of the ground they have ceded over the past few weeks.

The LME mini-mill complex shifted further into Contango, with first news and then rumours of progressively lower cargo bookings keeping the front end of the curve well offered.

But EAF conversion margin futures remain well below the cost of production, suggesting we are far from out of the woods just yet.

Exchange Prices at 1630 GMT

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The recently-established LME mini mill futures Contango continued to extend on Tuesday, when reports of lower-priced physical market bookings gave sellers increased confidence to cross the bid/offer spread. But, at the same time, it’s clear that in-flows to most quayside operators have been severely constrained and there is a widely-held expectation that spot prices could reverse direction once the crisis has cleared and steel demand starts to return. The physical market fundamentals do seem to support this new curve shape. However, considering the LME Scrap market tendency to Backwardation, we do see potential for some interesting time spreads that will prove profitable for those with impeccable timing.


The slated $2.5 trillion US stimulus package dominated market news on Tuesday, with some forecasting the deal will be approved in the next few hours. This hope was enough to bring US HRC futures buyers off the sidelines with buy-side interest focused on Q4-20. Screen trading lead the voice market higher, with some periods even testing $500/t. Nearby periods remained well offered but large volumes changed hands, indicating a bottom may be starting to form. However, even if passed, it remains as yet unclear how effective even such an epic stimulus package will be in stimulating steel demand while large portions of the country remain sequestered.


You can’t blame LME FOB China HRC futures traders for being confused on Tuesday, when Chinese onshore steel futures markets erased all of yesterday’s significant declines, seemingly finding support from the overnight improvement in US markets. Little wonder this curve was particularly confused and volumes were thin – traders remain fearful of being runover by a market revival or catching a falling knife.


Last week’s extreme pessimism for the US domestic scrap market has started to dissipate in the past few days with reports that some mills are in the market early trying to secure April supply. This despite reports last week that one major mill purchasing group was targeting as much as $100/t down! So on Tuesday CME Busheling short coverers were out in force. Apr-20 traded an astonishing $17/t higher on the day and the balance of Q2 followed suit. Indeed, with manufacturing likely to be very limited over the next few months, Busheling supply will probably be tight. However, some longer-dated periods trading well above the cost of carry jar with corresponding forward values for finished products.


LME EAF conversion margin futures remained very depressed on Tuesday with concerns about the outlook for rebar pricing dominating traders’ minds. While physical fundamentals support an LME Scrap Contango this will likely remain the case. But medium- to long-term periods remain offered well below the cost of production. We feel it’s unlikely steel mills will continue to operate for such a long period of time without any financial incentive to do so. A possible opportunity here for those willing to think beyond the short term.

Although spot US EAF conversion margins remain comfortably in profit-making territory, CME steel futures markets are expecting a rapid reversal. Q2-20 and Q3-20 periods are now trading at some of the lowest levels we have witnessed for some time, even before the introduction of Section 232. These levels could be feasible if US mini-mills continue to operate at full capacity without regard for profit margins in order to win more market share from their compatriot BFs. But we suspect the already well-offered steel equity markets will have something to say about that.


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.

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