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Daily Futures Update 30/03/2020

EAF conversion margins defy Contango trend amongst outright steel futures, LME diff moves off recent lows

Steel futures trading continued to be characterised by widespread Contango curve shapes amidst further weakness at the prompt end on Monday, while paper traders were happy to pay higher prices for far-dated periods. But EAF conversion margin futures remained in Backwardation, suggesting a consensus that any post-pandemic price rises will be first stimulated at the supply end. Despite this, LME EAF conversion margin futures moved off their recent lows and back towards profit-making territory – more in line with our view on the evolution of spot market levels. 

Exchange Prices at 1630 GMT

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The physical spot market for bulk obsolete scrap continued to slide on Monday, with reports of new bookings close to $200/mt. This brought the entire LME Scrap curve lower, although the Contango remained well supported. While LME Rebar futures traded sideways, the curve shape was more bearish and showed potential for another leg lower – paper traders are very cautious on long exposure amidst reports that most Turkish production is against existing orders, with almost no fresh sales.


The US HRC futures Contango continued to elongate on Monday, with longer-term periods being lifted progressively higher while Q2-20 was held down by reports of lower physical market bookings. Daily spot market indices are now printing within a hair’s breadth of front few tradeable periods. Considering prompt pricing shows little sign of bottoming, we expect to see more sell-side pressure here.


Paper traders remain convinced that the US Busheling market will quickly find support and start to move higher, happily buying Q3-20 and Q4-20 at close to last month’s levels. Although the front end of the curve is still pricing in discounts for the April and May settlements, this curve now once again commands a sizeable premium to LME Scrap futures.


Finally LME EAF conversion margin futures found some support on Monday, with most of the forward curve trading back above $140/mt and the front end reaching towards the $160/mt being registered in the spot market. Indeed, although fractured demand is unlikely to support spot market pricing in the weeks and months ahead, we see more support for this key differential than we do for spot market pricing.

As the LME EAF conversion margin market found some support, the CME equivalent for US mini-mills gave back some of its recent gains driven largely by more back-end buying for CME Busheling futures. Considering this curve continues to trade at a good premium to the cost of production, although far lower than spot levels in recent memory, we aren’t surprised to see little sell-side pressure here.


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