Tight raw materials supply remains at odds with poor finished products demand
Steel futures continue to hover in a holding pattern as the battle between tight raw materials supply and poorly demand for finished products plays out. LME paper traders remain convinced that tightness in supply won’t just push scrap prices higher, but cause higher finished product prices as well. The front end Contango in both underlying instruments looks particualrly pronounced as a result. In the US, bullishness is back in the Busheling market and HRC futures are pushing reluctantly higher as well – albeit with less enthusiasm than in the LME EAF equivalent.
Exchange Prices at 1630 GMT
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LME SCRAP & REBAR FUTURES
As the physical scrap market continues to hold firm, so too does the front end Contango in LME EAF complex futures with the nearby month stubbornly trading at a fairly aggresive premium to spot. But longer-dated periods have been better offered over the past few days and the balance of both curves are starting to more closely resemble their traditional Backwardation.
US HRC FUTURES
US HRC futures continue to edge higher, albeit without much enthusiasm, as what looks like end user hedging orders keep reaching for offers. But it still seems like offers are in plentiful supply and it’s only the sustained nature of this most recent buying wave that has kept them from being more aggressive. With May-20 CME US HRC Futures pricing out, it’s therefore no surprise to see the front month trading realtively lower and the Jun vs Jul time spread shifting further into Contango.
US SCRAP FUTURES
Despite a seriously bullish move at the May-20 settlement, which jumped dramatically on short supply and in the face of a dismal demand outlook, it looks like CME Busheling futures buyers still haven’t had their fill – the front end of the curve is pricing in another jump of $20/t at next month’s settlement.
The front end Contango in the LME Metal Margin futures curve is starting to looking pretty extreme and is pricing in a rapid recovery in EAF conversion margins over the next few days. With no news yet circulating that supports higher finidhed product prices, this period looks like a sell while longer-dated periods look interesting from the buy-side – it seems unlikely Turkish mini-mills will restart idled capacity without a sustained improvement from spot.
CME Metal Margin futures seem to be suffering the most from scepticism on the long-term sustainability of higher spot market finished product prices and the longer-dated curve structure is now tending towards Backwardation. Considering how low these levels are relative to history, this presentation is surprising and may offer some interesting buying opportunities for those prepared to take a view on gradual US steel demand recovery.
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, 27 May (Argus) — The stuffed original equipment manufacturers’ supply chain continued to depress hot-rolled coil prices in Europe today.
Order intake was dismal, and OEMs were not taking any tonnage as they were producing way below capacity and had large stocks to work through. Suppliers into the automotive sector were working at 30pc of capacity, and some OEMs expected their steel buying programme to be at this level for the rest of this year.
Large distributors in talks to buy were targeting around €400/t delivered, benchmarking their prices against recent Russian offers at €380-385/t fca Antwerp. But that Russian mill increased its offer by €30/t today on the back of the firmer Asian trend seen of late – China has been importing HRC, giving mills another outlet and taking CIS tonnes out of Turkey.
A Turkish mill has offered into Asia through a number of traders, and there was even talk today that European mills could consider selling to China as they look to strengthen threadbare order books. This would be a stunning reversal of typical trade flows seen in recent years, should the world’s largest producer continue to display import appetite as large traders book competitive third-country material.
Argus’ daily Italian HRC index fell by €2.50/t to €384.50/t ex-works, while the northwest index slipped by €1.75/t to €404.75/t ex-works, taking the month-to-date average to €413.85/t.
Italian mills had varying strategies, with one targeting large buyers at prices as low as €385-395/t delivered. The seller was seeking €400/t delivered for small and medium-sized buyers, but without delivery guarantees. Another mill was still offering at €410/t ex-works to some traders, and focusing on higher value-added products. Offers for higher gauges netted back to below €400/t ex-works with extras stripped out, but it was relatively firm on commodity grade material given high scrap costs.
Meanwhile, the need to invoice pushed some Italian steel service centres (SSCs) to become more competitive, with some selling into the north at cheap levels. But the SSCs able to offer the largest discounts were processing second-grade HRC, sources suggested. Some of these SSCs believed HRC prices were a long way from the bottom, so were ready to bet that they will be able to cover their costs in the coming weeks.
Although there were production cuts underway in Europe, which could bolster the market over the summer, there is still ample supply given anaemic demand.
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