Hot Rolled Futures: Expect HRC Spot to Follow Forward Curve Downward

The U.S. markets are starting to rethink the island mentality. Whereas before bad news was good for U.S. stocks because it deferred any move by the Fed to ease rates, now global bad news is starting to make bad news bad for U.S. stocks. The market still appears confused in this regard. On the back of almost no data to speak of we rallied 41 points in the S&P 500 yesterday to 1961, only to fail 44 points today to end up last 1917. It’s important to note that one of the traits required for a market to change its trend is increased volatility. That is, a period of swift moves up and down as liquidity and direction are less certain. It was always clear that troubles in China and the emerging market were never going to be positive for U.S. growth and thus its market. We are finally to see that relationship start to come back into play as the island mentality erodes. Just like in commodities, you should expect increased volatility here.

In Copper, the market is positioned very short expecting a further correction in a market that still hasn’t broken $3.00/lb in earnest. The trigger for a further sell off will be increased stocks and Chinese selling forward. Both of these are likely to ensue in the coming weeks. We are last $3.0285/lb. on the December future after having touched briefly as low as $2..98/lb. Crude had a big drop today of almost $3.00/bbl, with about $1.50/bbl of that happening after hours.  Same story here, global growth worries. The market is catching up to this notion.

Steel: Another Busy Week

This has been another busy week in steel futures with 1275 lots or 25,500 short tons (ST) trading. We traded Nov/Jan @ $626/ST initially Tuesday late and then yesterday Calendar  ’15 months @ $625/ST. I expect more transactions to go through at these levels in the coming days. This is down $5/ST from last week’s lowest levels. To put into perspective, in October of 2010 when the spot CRU was $545/ST, the following Calendar 2011 strip was never offered below $625/ST. We have only seen the far forwards offered lower since then last fall when we saw that $620/ST selling. On an historical forward basis we are certainly on the low end of the range at this juncture. On a technical chart basis, I would expect the spot to follow the forwards downward, and even pass them by smartly. The CRU meanwhile came in at $651/ST down $5/ST, while CR was down $6/ST to $777/ST.

Below is an interactive graph of the HRC Futures Forward Curve. The graph can only be seen when reading this article while logged into our Steel Market Update website:

{amchart id=”73″ HRC Futures Forward Curve}

Iron Ore: Expect Further Spot Erosion

We had a holiday last week in China so the market was quiet and slightly off its lows just under $80/MT. We have since dropped post holiday to just above $78/MT on spot index and the futures curve. I expect further erosion here in Iron Ore, at least on the spot. The forward curve may hold up as a contango tends to come back into the curve in a more normal or even depressed supplied market. We would have to see producer forward selling here, and below, for that not to be the case. Asean HR has broken $500/MT and is last $498/MT as exports continue to flood out of China looking for a home, said homes which are quickly becoming saturated.

Scrap: Turkish Mills Have Lost Their Appetite

CFR Turkey index has had an impressive slide, last $342/MT, as producers in the region have all but lost their appetite in this declining growth and Chinese over supplied markets. As a reference we were $385/MT just 2 months back in this shred/HMS mix index. We have seen the spillover of little appetite and lower trading cargoes off our shores. We appear prepared to settle down either side of $20 for October as the early $15 downs have been offset by ever declining trades since. Scrap probably struggles in the coming month or two as lead times come in. In futures in CFR Turkey, we can offer $365/MT for Cal. ’15, and for Domestic BUS futures we can offer $380/GT for Cal ’15.

Another one of those pesky interactive graphs is below with the BUS (CME Busheling Scrap or BUS) forward curve.

{amchart id=”74″ BUS Futures Forward Curve}