Relative-value traders push scrap into Contango
Bullishness from the iron ore market is clearly spreading, with all steel futures trading higher on Monday and LME Scrap futures sustaining an aggresive Contango despite another improvement in spot market prices. This instrument continues to trade to the benefit of physcal cargo accumulators – relative value traders are still happy to pay them much higher prices for their arisings than are yet available in the spot market. Meanwhile, US HRC futures traders are still factoring in a rapid run up in prices over the next 30 to 60 days – anyone in this market with excess inventory has ample opportunity to offload their risk well above the cost of carry.
Exchange Prices at 1630 GMT
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LME SCRAP & REBAR FUTURES
LME EAF complex futures are still trading at a significant premium to the spot market, even though we have seen price levels for physical fixtures progressively rise over the past few trading days. Considering the Carry potential, levels for front end periods look surprisingly high. But, when compared with the iron ore market, these paper levels look more reasonable – Spot iron ore prices have tipped above $100/mt for the first time in 10 months. Through the derivatives market, this competitive pressure between EAFs in Turkey and the Chinese Blast Furnace is incentivising increased obsolete scrap generation.
US HRC FUTURES
Very nearby paper market enthusiasm for recently-announced US steelmaker price hikes has transferred from Jun-20 to Jul-20 US HRC futures, with this prompt trading at a massive premium to spot. This portion of the curve is so far above the Cost of Carry we are surprised there has not been more action around the Jun-20 vs Jul-20 and Jul-20 vs Aug-20 time spreads – particualrly as the balance of the curve remains uninspiring. Paper traders are still not convinced that the recent recovery in spot prices will lead to a sutained revival. But, with mills holding the line on pricing and some service centers covering their forward short exposure, there are few prepared to offer medium- and long-dated periods lower.
US SCRAP FUTURES
The US market for prime scrap is still hot and discussions for June pricing are already forecasting further rises – ranging between up $10/t to up $30/t. The more bullish projections have driven the front end of curve to a considerable Contango and some paper buyers are happy to pay close to these levels for Jul-20 and Aug-20 as well. But confidence for longer-dated periods has been undermined by the lacklustre moves in US HRC and this curve is presenting a clear Backwardation.
With nearby LME Metal Margin futures shifting up a gear, the balance of the curve has runed to Backwardation, with sellers willing to take bids close to the cost of production for mid 2021. Although these periods look a little too well offered to our eyes, the curve sake makes some sense considering the generally bullish sentiment for ferrous commodities on Monday.
CME Metal Margin futures remain extremely depressed, with bullishness for Busheling out shining any margin relief that US EAFs may have found with recent price increase announcements. And longer-dated periods are well offered as well, suffering from poor confidence in HRC spot price sustainability.
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, 1 June (Argus) — This weekend’s news about the safeguard review, as well as anti-dumping and anti-subsidy investigations into Turkey and the push for a review of Severstal’s duty, has deterred buyers from imported hot-rolled coil (HRC). These developments were expected to encourage European producers to try and increase prices in the coming weeks, with contractual talks for the second half of the year about to start, and margins being hit by rising iron ore values.
But mills were still contending with low orders, given the absence of automotive demand, so rollings in the summer months will be sharply reduced if they cannot find new sales. Direct sales from mills to original equipment manufacturers were 40-45pc of normal levels in May, according to sell-side executives. Shipments into the wider automotive supply chain, including service centres and sub-suppliers, were at lower levels, given the excess inventory in the supply chain.
As a result, at least one European producer has sold into China. A Benelux mill sold 30,000t at $425-430/t cfr China, according to traders. Some said the deal was concluded over the weekend, while others said it was 10 days ago. Another European mill said it was bid by a trader looking to sell into China a fortnight ago, but it decided to wait in hope of a firmer price. The mill was hoping to get closer to €400/t fob, up by around €50/t from the above deal, in the expectation that rising iron ore values will filter through into stronger Asian steel prices.
An Italian producer matched the lowest Russian price heard on the market a couple of weeks ago, at €350/t delivered duty paid to a large pipemaker. Some said this could be the bid indication of the buyer, rather than a real price, although the pipe market plummeted last month, with discounts on list prices as high as 50pc in some cases. Should supply from this mill be disrupted, it is likely to impact the market despite its reduced output, as it is making low-priced deals to large buyers.
The producer accumulated large stocks during the peak of the Covid-19 pandemic, as did most participants in Italy, but order cancellations, mostly on galvanised material and service centres, meant it was hungry for orders. At the same time, service centres were expected to have delivered 60pc of the May 2019 volume over last month, which meant their demand was still lacklustre, while some were discounting to generate cash.
Another seller was still managing to achieve €390-400/t ex-works base by focusing on pickled and oiled and thin gauge material, which attract hefty premiums. The mill’s commodity grade offering remained above €400/t ex-works, but it was heard not to be selling much. A third seller was last week still able to achieve €385/t ex-works. The Argus daily Italian HRC index fell by €2.50/t to €380.75/t ex-works today. The benchmark northwest Europe HRC index slipped by €0.75/t to €405.25/t ex-works.
Northern European producers said they intended to target increases in contract talks for July-December supply in the hope of a rollover. Given the collapse in spot prices and demand, buyers will aim for reductions. One major problem for mills was the lack of clarity over the kind of volumes that buyers will need.
Some producers said they would accept half-term fixed-price deals if the market does not firm, but any sign of a strengthening could see them try to shorten terms to avoid locking in contract tonnage close to breakeven levels.
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