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Scrap Futures Collapse

Prime & obsolete scrap futures melt down on increased Metal Margin scrutiny

It didn’t take much to derail the steel futures rally – iron ore dropped back below $100/mt on Wednesday and the raw materials side of the segment collapsed. LME Scrap and CME Busheling futures led the complex lower, with prime futures printing some particularly eyebrow-raising declines. With LME Rebar futures also down, US HRC futures were Wednesday’s outlier when sustained H2-20 buying interest kept these curves sideways. Metal Margins in both regions benefited. But the front end is showing signs of weakening and this could turn contagious absent a recovery for raw materials futures.

Exchange Prices at 1630 GMT

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LME SCRAP & REBAR FUTURES

LME EAF segment futures moved significantly lower on Wednesday, when spot iron ore prices slipped back below $100/mt and kicked out the crutch that has been keeping paper market sentiment particularly bullish over the past few weeks. Although some physical market participants still believe spot has room to the up-side, a lull in new bookings has others more willing to sell at a large premium to spot. But inventory holders need not despair just yet – the front end of the curve still offers hedging potential well above the cost of carry.

US HRC FUTURES

LME and CME US HRC futures are starting to diverge significantly, potentially driven by some extreme differences in the spot market indices that settle each instrument. Both curves sustained in Contango. But the front end of the CME curve is starting to rationalise closer to the cost of carry.

US SCRAP FUTURES

CME Busheling futures have cratered over the past two days, defying broadly supportive spot market sentiment to demonstrate a curve shape that points to a rapid unwind of the tight supply narrative that has dominated over the past month. It seems long position holders are rushing for the exits having been easily scared by softer sentiment for Shredded and international market obsolete scrap. This has been a very rapid turn in sentiment since Monday.

MINI-MILL SPREADS

The fall in the broader LME EAF futures segment was very much to the benefit of LME Metal Margin futures on Wednesday, with this curve jumping to trade back at profit-making levels for steelmakers in Turkey. With a drop in China-oriented futures stimualting the move, it seems paper traders are betting that finished product conversion margins will come to the fore if this move is sustained.

CME Metal Margin futures clawed back lost ground on Tuesday and Wednesday as the Busheling curve collapsed. These new levels are edging closer to historically 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.

There is a feeling the Italian market may have bottomed given reduced import penetration and the slightly perkier economic mood with lockdown easing. The north is not there yet, as domestic mills compete for volume to try and offset the loss of automotive. Latest reported deals were done around €400/t delivered and below for decent tonnages. Economic sentiment in Germany remains weak.

Mills will no doubt try to increase in the north soon, to try and inject momentum into the spot market for contract talks. Any business that starts with a €3 they are also trying to keep quiet. The graph below shows why mills cannot really afford to lock into H2 contracts at current spot levels. Our comms is below.

London, 3 June (Argus) — Northwest European hot-rolled coil (HRC) prices slid further today, as domestic mills fought to sell material in a continued demand vacuum.

Argus‘ benchmark daily northwest EU HRC index slipped by €3/t to €400.25/t ex-works, as distributors reported bookings at €390-400/t delivered from certain producers, some in the Visegrad countries and others in the north. Mills could achieve €400/t and more for smaller volumes, but the few participants with decent tonnage requirements seemed able to break this barrier already.

The month-to-date average of the index was €402.91 today. On the CME contract, July changed hands at €430/t for 1,000 t/month, at a steep contango to spot prices. Some participants saw domestic prices rising on the back of reduced import penetration, firming costs and the fact that mills were approaching breakeven. Others suggested low demand would keep prices under pressure as domestic producers battled for tonnage.

The most competitive import offers were about €390/t cfr Antwerp, for Taiwanese material.

There was still talk of producers readying to announce an increase, but internal competition remained fierce and liquidity low. Before the EU’s safeguard review notification to the World Trade Organization, mills had been telling buyers that prices would rise once it came out, as quotas would be tightened.

But mills see the review, which really affects HRC volumes that can be theoretically offset only by other countries, as disappointing and not accounting for the current crisis.

Economic sentiment in Germany remained pessimistic. Talks over the possibility of assistance to the automotive sector were ongoing, as protesters said only new, environmentally friendly technologies should receive assistance. A scheme that does not help the combustion engine segment of the market, which proliferates in Germany, would likely do little to boost confidence levels.

There was a sense that the Italian market had hit or was nearing bottom, with some sellers more reluctant to discount given reduced import penetration and the gradual restart of economic activity with the lockdown eased.

The Argus daily Italian HRC index slipped by €0.50/t to €380.25/t ex-works.

Import availability was expected to be reduced in the coming months, especially if EU member states approve the changes to the safeguard quotas on 12 June. These amendments would take effect on 1 July, if approved, and see countries that have historically exported significant volumes to the bloc get restricted.

At the same time, Eurofer’s push for an anti-dumping and anti-subsidy investigation into Turkey and a review of Severstal’s duty deterred many buyers’ interest. In any case, offers heard today — as high as $460/t cfr — were largely unworkable compared with domestic prices, even without the associated risk of importing.

In addition, the Italian market was slowly returning to some form of normality. Although this summer is expected to be slower in the country, the restricted import availability and some recovery in demand could be enough to maintain prices, or even raise them a little. Most saw a more tangible increase possible for August deliveries onwards. One mill was recently heard to be working on a two-week lead time, but another one was selling for August, albeit at the risk of not delivering the material. It remains to be seen whether consumption in the automotive and white-goods sectors will support these expectations.

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.

The product codes and prompt date structures we utilize are as follows:

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