Daily Futures Update 26/03/2020

US HRC futures keep rising on stimulus enthusiasm, LME Scrap Contango strengthens

HRC futures continued to push higher on Thursday, capitalizing on the newfound enthusiasm that seems to have stemmed from the US stimulus package and supported by reports of steel mill capacity curtailments. But there are some loud alarm bells ringing from the demand side was well, with macro indicators painting a worrying picture even when the COVID-19 crisis has passed. The LME Scrap futures Contango extended as bulk cargo accumulators continued to liquidate inventories at progressively lower prices, seemingly uninterested by or unaware of a forward curve that provides significantly more attractive price levels. Forward EAF conversion margins were split by region, with renewed enthusiasm in the North American market failing to rescue the corresponding LME curve from its doldrums.

Exchange Prices at 1630 GMT

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lThe LME Scrap futures Contango continued to strengthen on Thursday, when news of further physical cargo bookings at progressively lower prices circulated in the market. One of the world’s largest ferrous scrap bulk cargo accumulators extended its UK shutdown to the USA, spooking spot-focused traders while simultaneously increasing the likelihood that supply will be constrained and prices will pinch once the present COVID-19 crisis passes. LME Rebar futures remained well offered with physical market players happy to hedge at a premium compared to what they can achieve for spot. We are surprised to have not seen more bulk scrap shippers taking advantage of this similar dynamic in LME Scrap rather than offering prompt cargoes through last traded levels.


US HRC futures continued to shrug off the impact of the COVID-19 crisis that has rapidly intensified in North America, tracking equity markets higher with some support from reports of steelmaking capacity constrictions at both EAF and BF operators. These curves have now traded significantly higher than the lows they plumbed last week. This rally was all the more surprising on a day that saw further oil price declines and a record 3.3 million Americans filing for unemployment benefits. We remain skeptical that this newfound support to the curve will be sustained.


School disco syndrome continued to paralyze the LME FOB China HRC futures market on Thursday, with neither buyers nor sellers willing to gross wide bid/offer spreads – these have blown out as a result of extreme volatility in the onshore Chinese steel futures markets, which have somehow operated with an intraday polarity without historical precedence. With the outlook for physical spot prices pretty poor, the nearby Backwardation has sustained.


In contrast to US HRC futures, CME Busheling futures trade was mute on Thursday as the paper market tried to digest news of capacity curtailments at both leading EAF steelmakers in the region and at major manufacturers, who are the predominant supplier of this material. Physical dealers are reporting availability of prime scrap grades is tight and is unlikely to loosen. Still, with the depth of the steelmaking capacity reductions being considered, we struggle to see any major up side from here.


With physical inventory holders of rebar leading the charge to hedge their price risk at a premium to spot, LME forward EAF conversion margins continued to trade at an extreme discount to prompt periods, which are back into profit making levels. So far announcements of mini-mill capacity curtailments have been matched by activity reductions at bulk scrap suppliers, keeping paper market players guessing. But we would be surprised to see many EAFs switching back on until they can at least cover the cost of production.

The improvement in forward CME HRC futures prices triggered a similar revival in forward CME EAF conversion margins, with most levels trading back almost in line with levels we have seen since the introduction of Section 232. Considering some fairly stringent capacity reductions apparently being mulled by the larger EAF based steelmakers, it’s not surprising to see this curve demonstrate a more confident posture. But the upcoming availability of prime scrap grades and alternatives will probably continue to be a wild card here.


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