Daily Futures Update 31/03/2020

LME Scrap Contango provides even more incentive not to sell physical cargoes, Metal Margin futures sag amidst wider market sell-off

LME Scrap futures were a contrarian and fairly spectacular mover among steel futures markets on Tuesday, shifting even further into a Contango that so dramatically exceeds the cost of carry we are left wondering why anyone would consider a prompt physical sale. In the US, CME Busheling futures were pulled higher by the move as well – longer-dated periods look like at a steal when priced at only a minimal premium to HMS 1&2. But this exerted downwards pressure on US EAF conversion margin futures, even more so when nearby support for the HRC curve all but disappeared amidst another crash in financial markets. LME EAF conversion margin futures ended the day lower as well, battered lower by the surge in the scrap Contango. If you are looking to put on some trades at attractive levels there are a multitude of fairly prominent options available.

Exchange Prices at 1630 GMT

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Buyers came into the LME Scrap futures market hard on Tuesday, pushing the curve into a fairly spectacular Contango that presents a frankly unbeatable alternative option for anyone holding inventory and considering a spot market sale. Cargo sellers take note – this curve has never offered more incentive to hold onto your stock. While feedback from the physical market was that some recent sales represent accumulators going short, anticipating that prices will remain depressed for the foreseeable future, this curve shape presents a violently different counter-narrative. If you can pick up scrap now at depleted prices, why not take at least some risk off the table at a $50/mt premium? There is no reasonable answer to that question… So far, LME Rebar futures have been less well bid. But we are sticking to our projection that mills will not continue to produce with loss-making conversion margins. So we expect further support here.


Support for US HRC futures waned on Tuesday, when the wider marketplace recorded some dismal results – WTI extended its losses on entirely expected inventory gains and the Dow closed lower again, on track for its worst quarterly performance since 1981. Q2-20 bore the brunt of the sell-off, although longer-dated periods were offered lower as well. In our view, the only potential savior for spot market prices in this sector is if capacity closures outweigh the already violent unwind of demand.


Surprisingly, CME Busheling futures traded positively on Tuesday while almost all other US-focussed markets dropped. It looks like relative value traders hinging off the run up in the LME Scrap futures curve have supported this move. But this could be a dangerous approach – according to the latest scrap market reports, prices for inbound shredder feeds have plunged and its unlikely that prices for prime grades will be entirely shielded from the broader collapse in demand.


Someone was apparently unhappy with the LME EAF conversion margin forward curve returning towards profit-making levels on Tuesday and smacked this market lower, well into loss-making territory again. To our eyes, this makes one of the only interesting medium- to long-dated buying opportunities out there in steel futures at the moment – with the added appeal that the trade is only exposed to relative value and can be captured over a long period of time.

Steelmaking margins were back under pressure in the USA as well on Tuesday, with the market betting that the integrated steelmaking route will be faster to shed output than mini-mills, creating a competitive quandry for those exposed to the scrap-fed supply chain. Since the impact of BF closures (which seem fairly certain) is likely to present as a steep gradient relative to similar measures taken by mini-mills, this could be overdone.


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