US Steel Futures Carry opportunities persist as LME complex edges towards Back
The LME mini-mill futures complex continued to shift higher at the front end on Tuesday, in line with another rally in the spot market for obsolete scrap. But concerns about the lack of corresponding recovery in finished product prices pushed both curves towards Backwardation – a marked contrast to US steel futures markets. Steelmaking capacity curtailments have begun to build some support for futures prices (if not yet spot) and both US HRC and CME Busheling futures are demonstrating pretty confident Contangoes. Considering the economic data points we are tracking, this seems a little optmistic. But there are some excellent opportunities to tie up profitable Carry positions for the second half of the year while this scenario persists.
Exchange Prices at 1630 GMT
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LME SCRAP & REBAR FUTURES
LME EAF futures shifted back towards their more traditional Backwardation (beyond the front month) on Tuesday, when the physical market for obsolete scrap continued to surge higher – reports circulated of fresh cargoes purchased by Turkish mini-mills close to $260/mt CFR. But spot rebar prices are still struggling to find support above $400/mt despite the uptick in raw materials prices. We will almost certainly need to see higher ex-Turkey offer prices for finished products being accepted for these fresh scrap levels to be sustained.
US HRC FUTURES
With another slew of output reductions and furnace closures announced over the past week, US crude steelmaking capacity utilization has now dropped below 60% for the first time in some time. The news provided some further support to US HRC futures on Tuesday and the whole curve moved slightly higher. The gains were most pronounced at the tail end of the Contango as the paper trade continues to price in the impact of the COVID-19 lockdowns in the USA. This provides plenty of opportunity for inventory-focussed businesses to lock in profitable Carry for later this year.
US SCRAP FUTURES
US scrap dealers remained sufficienly confident to withhold some flows from the market at the April settlement, despite a dramatic fall from the usual tonnages bought by domestic mini-mills. And CME Busheling futures are trading in a pattern that supports this move – a clear Contango that is well above the cost of carry, just as LME Scrap futures are moving towards Backwardation. Considering the depth of declines in US steelmaking capacity utilization, these levels look extremly bullish yet more than sufficient to perpetuate Busheling stockholders’ aims.
Even though spot market prices for deep sea cargoes of obsolete scrap cotinue to rally far quicker than Turksih rebar exports, LME Melting Margin futures are moving higher as well – an interesting vote of confidence for steelmakers that once again find themselves struggling to extract a profit at spot levels as the COVID-19 crisis rages. This curve is still Backwadted, which we still believe is counter-intuitive.
CME melting margin futures are trading more in line with our expectations, with longer-dated periods bid at a premium to nearby levels – a period in which US mills are likely to face a two-way battle between constrained prime scrap supply and reduced finished products demand as a result of the COVID-19 lockdown. Still, even at these higher levels, values seem a little light considering how may blast furnaces have now idled.
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