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Mill margins continue to strengthen as HRC futures rally

Hot-rolled coil futures continued their march higher during the week ended March 23, as margins continued to increase, with busheling scrap futures taking a breather.

The market remains susceptible to large price swings as short interest continues to hold, with bank analysts forecasting that mill margins will correct in the medium term but the strength in steel prices will support rising margins in the near term as lead times remain elevated. Looking forward scrap prices holding recent high levels along with capacity coming back online will put pressure on margins. Rising transportation costs and the competition for ships to haul scrap containers were also adding some fuel to the fire.

Supply constraints for the first quarter have now moved into the second and third quarters even as more import offers have come into the market but will have limited impact in the near term due to long arrival times.

Bank analysts have forecast that HRC prices will fall in the second half on the back of China easing production as they focus on longer-term carbon emissions. Goldman Sachs analysts forecast US HRC prices to average $850/st and $750/st for the third and fourth quarters, respectively. These levels are still significantly higher than the 10-year average of $640/st.

Long hedges have continued to roll further down the curve in order to earn some of the backwardations. The HRC market has seen spot tradable values ranging from $1,300/st to $1,350/st this week for May production.

The Platts TSI US HRC index hit a record of $1,321.50/st on March 23. Prices have risen $882.25/st since August 2020, when the recovery began.

The market saw continued but smaller short-covering in Q3, as the curve structure held relativity flat from March 16 levels.

The March/April spread continued to widen during the week ended March 23, trading at around $90/st contango, out from around a $90/st backwardation just over one month ago. As supply remains tighter for a longer period, along with rising producer prices, long lead times and transportation concerns, it is possible to see the spread move further and into contango before expiration.

The April/December spread loosened slightly by $5/st to around a $365/st backwardation on March 23, as April domestic production has sold out, forcing prices higher and as short position hedges were rolled out to Q4 locking in contract highs above $1,000/st, with the Q3/Q4 spread tightening to around $220/st.

The Q1 2022 strip was supported and continued to see activity around $920/st, up $120/st from March 2. The Calendar 2022 strip traded $880/st on March 23, as the market is starting to factor in prices could start 2022 at higher levels than 2021.

HRC spreads were looser to flat this week. The Q2/Q3 spread loosened up by $25/st to around $90/st, with Q2/Q4 sitting around $305/st as evidence of short hedges being rolled into year-end, matched with slight buying appetite further into 2021 and 2022. The majority of the trading volumes were seen in H2 during the week.

Some of the larger size buying that was seen during last week in Q2 was not seen this week thus far, as mills have been scrambling to secure tons even at a much higher level than anticipated.

The spreads have been mixed on the back of long domestic mill delivery lead times as physical market participants looked to hedge for imports to help fill the void in US demand.

Some Q3/Q4 buying was around during the week preceding March 23, as the rolling of positions further down the curve was subdued. The Q4 strip showed continued support, trading around the $1,040/st, as some market participants saw value at these levels down the curve, especially versus busheling prices and Q2/Q3 hedges.

US mill HRC lead times increased slightly to 9 weeks on March 17, an increase of 131% since mid-July and well above the 10-year average of 4.8 weeks.

Import offers continued to come into the market as domestic supply remained tight. HRC import offers were heard on March 19 from Turkey at $1,180/st for July arrival, with a transaction at that level. Offers from South Korea were heard from $1,140/st for August arrival and $970/st for Q4 arrival by a trader.

According to the US Department of Commerce, Enforcement and Compliance, imports of hot-rolled coil sheets are expected to increase by almost 40% month over month in February to 198,808 mt, with large increases coming from Korea and Japan, which would usually feed the Gulf and West Coast.

"June production from Canada is already being offered at $1,400/st," a service center source said.

The April exchange HRC contract arbitrage increased on March 22 to $10/st premium for LME over CME, from a $17.50/st premium to CME on March 15.

The futures contracts trade on CME Group and the London Metal Exchange.

As of March 16 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money decreased by 565 lots to 10,213 lots, while short positions by commercials decreased by 179 lots to 13,026 lots.

"Some of that short positioning could be offset by OTC trades banks are holding," a trader said.

Electric-arc furnace mill margins increased on March 23 as HRC prices continued to strengthen, with the Platts HRC/busheling spread at $812.57/st and the Platts HRC/shredded spread at $923.06/st. Margins are up around 141% since the start of Q4 2020.

Prime scrap better positioned

Busheling scrap futures have seen some slight pressure during the week ended March 23, with the May and June contracts holding the $615/lt levels. The curve has flattened back up on the day as the H2 2021 strip traded at $590/lt on March 19, which was down $35/lt on the week. The widening arbitrage between HRC and busheling scrap has attracted buying as the H2 2021 HRC/Busheling spread.

The HRC/busheling inter-commodity spread continued moving higher on the strength in HRC, higher for longer, as the spread was bid $725 and $710 for May and June on CME Group on March 23. There was continued interest in mill margins compressing but the question remains when it will occur.

The May contract last traded at a $45/lt premium to spot on March 23, as the market eyes forward prime scrap consumption from additional electric arc furnace capacity, the semiconductor storage in auto production and strong mill demand.

The Platts busheling scrap spot prices held $570/lt on March 19.

The busheling-to-shredded scrap differential rose slightly to $123.75/lt as busheling prices held at $570/lt on March 19. Midwest shredded scrap prices declined to $446.25/lt on the same day. Planned auto shutdowns are expected to continue to keep prime scrap tight.

"Indications are for prime scrap to be unchanged from the March buy week," a supplier said.

The arbitrage between Platts HMS 1/2 80:20 CFR Turkey minus freight to the Shredded Delivered Midwest scrap spread tightened to a $50.95/mt premium to US MW Shredded on March 23, as transportation costs continue to rise along with tightening supply in the Midwest. The Shredded FOB East Coast price was $398.50/mt the same day, down $9/mt from the previous week.

The IODEX 62% Fe/US Shredded MW scrap ratio continued to hold above 2.5, with the ratio at 2.74 on March 23, as IODEX Fe 62% was at $160.50/mt. China has imposed strict environmental controls in Tangshan, the top steel-producing region, slowing the production of steel and Goldman Sachs analysts forecast iron ore prices to decline faster than scrap prices.

Both Platts HRC EXW Indiana and Shredded Scrap Delivered Midwest index futures trade on CME Clearport and CME Globex.

Source: S&P Platts

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