Scrap Contango continues to shine, despite some selling

Front month edges down but still plenty of Carry available

Once again LME Scrap futures dominated the attention of the paper trade on Wednesday, with an initial extension in the nearby Contango turning into a small sell-off as the market approached close. Although the front month finished the trade down on the day, tradeable value still represents a fairly massive premium to spot considering how close we are to the period.

Exchange Prices at 1630 GMT

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LME SCRAP & REBAR FUTURES

Early steel futures trading on Wednesday saw the front month LME Scrap Futures Contango edge even higher, proferring a huge premium for a period that begins pricing in just 7 business days. So no wonder sellers were finally tempted as the day proceeded with values dropping back down to yesterday’s closing levels. The final few trades before close were lower again, with several fresh cargo purchases reported at sideways levels.

US HRC FUTURES

US HRC futures conntinued to vassilate between mild Contango and Backwardation on Wednesday, when the weekly index print moved up in line with most traders’ expectations – no clues yet on subsequent direction from the physical market after the recent round of price hikes. Some physical market players continue to expect mills to push further price increases, particularly if prime scrap prices in the USA remain firm. But others are concerned about likely depressed demand for steel for the forseeable future as a result of COVID-related lockdowns.

US SCRAP FUTURES

More cautious sentimnet turned into forward selling in the CME Busheling futures market on Wednesday, with all periods shifting lower as paper traders anticipated physical market supply improving in line with auto and other manufacturing restarts over the next few weeks. However, at least one leading mill buyer is signalling strong demand for scrap in the months ahead – we may see higher levels again yet.

MINI-MILL SPREADS

LME Metal Margin futures initially spiked firmly above $160/mt on Wednesday morning, when Tuesday’s ebulliance spilled over and LME Rebar futures lead the complex higher. But this leg higher proved a step to far and this differential closed in line with yesterday’s levels.

CME Metal Margin traders started to be more bold on Wednesday when Busheling confidence sagged – this curve is moving more in line with historical norms.

EU HRC FUTURES

Argus, the provider of the settlement index for this instrument, has kindly allowed us to republish their daily spot market EU HRC commentary here while we gear up for more specific paper market coverage.

London, 20 May (Argus) — Some European steelmakers said they withdrew from the market today as they hoped firming Asia-Pacific prices, and the impending safeguard announcement from the European Commission, would prevent prices sliding further.

Asia-Pacific prices have risen on the back of China importing slab and hot-rolled coil (HRC), diverting CIS tonnes that would otherwise have been destined for Turkey or Europe. Some mills outside of Europe have increased their offers as a result.

But Europe was insulated from this purported uptick, as demand remained extremely low, with service centres buying little as their customers whittled away stocks rather than replenishing. Service centre sales varied widely, which made it hard for procurement departments to ascertain how much tonnage they will need to buy going forward.

Argus‘ benchmark daily northwest European HRC index slipped by €1.50/t today to €408/t ex-works, its lowest level since inception in November 2018. This took the month-to-date average to €416.25/t.

Mills also had little transparency into customer demand going forward, but appeared to be budgeting for 70pc of normal volume.

Buyers in the automotive supply chain apportioned as little as possible of their contractual volumes — in some instances, taking nothing — with original equipment manufacturers (OEMs) not taking deliveries from their sub-suppliers, reducing demand across the whole supply chain. Mills had to turn to spot as a result and compete among themselves in a seeming demand vacuum.

Two OEMs told Argus they will be buying 30-40pc of their normal volume over the rest of this year. Some suggested this was probably accurate, while others hoped it was too low, given the dramatic impact on the supply chain; should auto demand average out at this level, even the “significant” quota cut for which Eurofer lobbied the commission would be insignificant.

Given the continent-wide lockdown of recent weeks, car demand has been tepid at best. In some European countries, registrations fell by almost 100pc in April. The question for mills, and the entire steel supply chain, is how car sales and production develop going forward, given the enormous battering that consumer-confidence has taken from the Covid-19 crisis.

Turkish hot-dip galvanised remains competitive, with Z275, 3mm, offered into Antwerp at €501/t fca effective. Indian cold-rolled coil (CRC) was offered at €470/t cfr, but Brazil has withdrawn — after being competitive on CRC and hot-dipped galvanised — on the back of rising iron ore and firmer Asia-Pacific sentiment.

Argus‘ headline daily Italian index nudged down by €1/t to €389.50/t ex-works, taking the month-to-date average to €399.40/t.

Steel service centres and pipe producers in Italy, many of which had been running at about half capacity in May, were watching the market and trying to gauge consumer demand levels for June and July. Some small buyers have filed for bankruptcy, affecting the smaller steel service centres supplying them.

Most Italian buyers had sufficient inventories, so purchasing remained scarce and only in small lots to fill gaps, mostly relying on European material amid concerns about the safeguard review. Reduced quotas were widely expected, and market talk suggested the reduction will be 10-50pc and likely temporarily. In its latest submission to the commission, Eurofer asked for a “significant” cut, and not the 75pc initially requested.

Mill sources suggested that, with quotas unlikely to be fully utilised by the end of the period, and given low demand, a 30pc cut would be insufficient.

A re-roller was understood to be on short lead times and actively looking for orders at competitive prices. Hot-dipped galvanised was heard to have been offered at €480/t ex-works.

Given the news of potential additional import restrictions, Turkish mills appeared not to be pressuring the market and were offering HRC at $390-400/t fob. One eastern Europe mill has been fairly competitive recently and has June-availability material.

Some Italian mills focused on value-added material and offered commodity-grade at a seemingly uncompetitive price. But one mill on the market was offering as low as €380/t ex-works.

GLOSSARY

This newsletter references various technical words, phrases acronyms and codes.

You can find explanations for many of these terms in The Board Report glossary.

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