Delayed Drop – Contangoes tested by Complex sell-off

Steel Futures dropped on Tuesday in line with the upside down WTI market

Having defied the late collapse in oil prices at Monday’s close, steel futures staged a delayed catch up on Tuesday with all ferrous markets moving sharply lower. A dearth of fresh purchases from Turkish mills saw more inventory-holders move in and hedge their exposure, pushing the LME Scrap curve into Backwardation on Wednesday morning. US EAF complex futures sold off hard, with much of the available Carry taken out of the HRC and Busheling futures Contangoes.

Exchange Prices at 1630 GMT

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Physical scrap market participants have become more nervous since the weekend, while Turkish exporters’ finished product offer prices have sagged and it looks increasingly unlikely that EAF buyers will make fresh cargo purchases at sideways levels. Both Scrap and Rebar curves sagged during Tuesday trade, with nearby scrap values being sold at a discount to the spot market index on Wednesday morning (although longer-dated periods remain better supported).


The collapse in the oil market has taken its toll on the US HRC futures complex, albeit with a delayed drop with both curves having shrugged off the catachlysmic WTI move on Monday evening. The Contango is holding but at weaker levels – it looks like physical market players have finally moved off the sideliness to offset inventory position risk at ‘better-than-Carry cost’ levels.


CME Busheling futures were not impervious to the wider sell-off in the commodities sector in Tuesday, although some paper traders are clearly convinced that even a sideways move for the next 3-4 months pays insufficient justice to the perceived shortage of material.


Despite a softer day for outright futures, the LME Metal Margin curve traded sideways on Monday levels with paper traders contuing to postulate that capacity cuts will continue if conversion differentials are not sufficient to guarantee at least break even.

The CME Metal Margin curve moved firmly out of Contango on Tuesday, broadly in line with our expectations. However, it was a surprise that this came as a result of declines at the back end – we would have expected greater support for nearby periods. Presently-trading levels mark historical levels and we remain sceptical that US mills will continue to melt at loss-making levels.


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