Daily Futures Update 07/04/2020

Did you get some? LME Contango softens as spot market rallies dramatically, time spread trader focus shifts to US HRC

Last week’s extreme Contango for LME Scrap futures has softened significantly as physical market reports come in of more cargoes sold at $240/mt CFR Turkey – a remarkable rally from the spot market lows we saw last week and testament to the power than the use of steel futures can bring to a business. Those that neglected to sell at much lower prices and hedge using LME Scrap futures have secured an additional $20-30/t over their less disciplined competition. Enough said. Now US HRC futures are moving into a strong Contango beyond the very front end of the curve, and some interesting time spread trading opportunities appearing here. Melting Margin futures remain pretty depressed, in the meantime – although further capacity curtailment announcements in the US have helped to push this curve also into Contango.

Exchange Prices at 1630 GMT

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LME SCRAP & REBAR FUTURES

The spot market for deep sea scrap continued to storm higher on Tuesday with more reports of cargoes purchased by Turkish steel mills above $240/mt – a dramatic reversal of fortunes from the beginning of the previous week. It appears as if the Turks are gambling that overseas rebar buyers will pay higher prices for fresh export consignments, with market reports indicating they have elevated their offer prices above $400/mt FOB. While the paper market waits to see whether they are succesful, both curves sustained a mild Contango.

US HRC FUTURES

US HRC futures have been hovering at a similar level for several days now, despite some efforts to trigger another freefall on screen, with paper traders unable to reconcile concerns about steel demand with further drops in US domestic steelmaking capacity utilization. As a result, this market now demonstrates a very pronounced Contango beyond the very front of the curve. Inventory-focussed businesses would do well to take note – trading time spreads between the front months and longer-dated periods will unlock windfall profit margins regardless of the subsequent spot market direction.

US SCRAP FUTURES

Surprisingly, CME Busheling futures traded positively on Tuesday while Reductions in US spot market demand for finished products have become more and more apparent over the past few days and CME Busheling futures traders were happy to offset any long-side exposure they have been The extreme Contango in CME Busheling futures softened slightly on Tuesday, when news circulated that a leading EAF producer has shelved its planned steelmaking capacity expansion through the addition of another furnace and paper buyers began to wonder what impact falling capacity utilization figures would have on demand for prime scrap. Traders say the domestic Busheling market is tight, what with a series of idlings in the manufacturing sector. But steelmakers are reacting aggresively to dwindling demand for finished products.

MINI-MILL SPREADS

The slight recovery in LME Rebar futures trading conditions helped to Nearby LME Melting Margin futures found themselves under renewed pressure on Tuesday, when it seemed clear Turkish EAFs were taking a gamble on paying higher prices for scrap before establishing a clear floor for billet or rebar. Longer-dated prompts recovered slightly but they are still offered at loss-making levels.

It’s been a week of role reversal, with the CME melting margin futures curve being offered aggresively lower to trade below an almost record-breaking $200/t as the paper markets wrangled over tight prime scrap supply and dismal demand for finished products. This curve now finds itself in Contango as well, which makes some sense. The key question is whether the nearby periods have overshot.

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:

Instruments:

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