Hot Rolled Futures: Unsettling Times!

Holy roofer Batman! Seriously if you were to look at an S+P 500 chart from the March crisis low the market looks every bit poised to go even higher basis the chart. The last major support in the upward trend is the Feb. ’16 low we put in at approx. 1880; I say approximately because sometimes we cite S+P 500 index and sometimes the respective active future at the time, currently  the March future. In fact, basis the chart, the market could pull back to almost 2080 zone basis S+P 500 index, and still be in the current bull trend.

This latest round of bullish moves is mostly attributed to the Trump election, daily tweets notwithstanding, Republican sweep/Business friendly and all that. To look at the glass half empty, it would only take an 8% retracement to breach 2080 zone, current trend support, to send the market into a much more significant pullback. That larger pull-back would likely be a test of that Feb. ‘16 low, or say a 17-20% retracement. Maybe the recent Fed increase yesterday of 25 points, and the “possible promise” of three more rate hikes this year, will be what sends the market lower?

Crude meanwhile has been very volatile over the past year while still establishing a positive trend from the low on January 19th of @ $53.50/bbl zone. For a market with a trailing glut of inventory, recent developments, like an OPEC agreement in November, have sent this market back to the top of its range it established since June. We have literally sea-sawed up and down in crude between $42/bbl and $53/bbl. for the last 6 months. The current rally needs to breach that Feb. high of $53.42/bbl. to head to a lot higher still.

It used to be that I would mention Crude levels as Crude represented global economic health, and I would also talk about Copper because it was an industrial metal outside our ferrous world that represented China health and prosperity (w/ Copper going into their infrastructure and product growth). Well today the reality is that, in this Post China de-leverage world, the commodity markets representing the China health component are really ferrous markets now, Met Coke and Iron Ore.

It may be that they reflect an upcoming optimism about the China economy in ferrous, which is relevant in both infrastructure and consumer products. One reason for this is that domestic exchanges have allowed domestic investors/speculators to trade in these  industrial commodities and they may well serve as that vehicle of optimism for improvement in  the China economy.
There’s the whole pollution-control-production-limitation by government story we’ve all heard, but in the end it’s just the trigger for the “hope bet” that appears in some form in every cycle. Regardless, the health of these markets is undisputed with Iron Last just above $80/MT, and Met-coke hovering around $250/MT, having come catapulting off even loftier highs (this one is being watched attentively). I don’t think anyone’s really sure what to make of the interest these markets have generated except that, as upstream as they are, they may represent the best signal one can look at for future economic improvement in a place like China and Asia overall.

To wrap up, I would like to address the Errant Trade that happened earlier this week. For those of you asleep at the switch, Mar/Apr/May futures was entered in as an offer on the screen at $527/$530/$530. Even now, some of you may be saying “so?”. I confuse the big handles all the time too! Should have been entered in as $627/$630/$630.

Well, needless to say they were scooped up quickly on 500 ST/mo.. I’ve been in communication with the seller, clearly a total Fat Finger issue, and really a tough time of year to make such an awful mistake. The seller has been a proponent of, and trader of, steel futures and supports the efforts being done in this space. They’ll survive the mistake, but in the end, they really can’t afford it.  The seller has advised me they’d like to negotiate a settlement on the trade with the buyer should they be willing to come forward. We are prepared to negotiate between the parties if need be, commission free.  As always is the case when dealing through Crunch Risk, this would be done in total anonymity, and the CME has offered to help in any mechanics needed to facilitate this settlement.

Now, in a liquid market, this would not even be news as the next bid would simply have absorbed the fat-finger price level at the next bid below, at some modest difference. However, with HR, where there are many days where there are no bids below, like this one, the result was disastrous for the seller and the exchange. In the end, the Buyer may not be that thrilled either with the position they’re in. Any time you have an off market event it’s bad for any market, when you have an off market event in a fledgling market like HR its frankly terrible, really undermines confidence in a market where we’re still trying to convince some sectors of the market to get on board. As for the screen, I think it has scared anyone who was thinking of doing more screen business to re-think that. As the de-facto Poobah of HR futures, in this Season of Merry and Celebration, I hope that level heads and hearts prevail, and we get resolution to this unfortunate chapter. 

Steel

Futures markets appear to be consolidating of late in spite of chatter that HR prices are headed higher and that the spot index has picked up velocity again.  While decent volume bids remain for all periods in 2017, offers while not scarce, have been at higher levels which has translated into more modest futures volume earlier this week but increasing volumes in the latter half of this week. Given there has been no change in near term demand expectations the HR futures has been driven by market sentiment especially as regards increasing scrap price expectations driven by anticipated short-cover supply constraints. MSCI inventory data reflects order book uncertainty as does recent erratic futures pricing for periods in mid 2017. We are seeing more offers due to a  market sentiment shift which is perhaps due to reduced upward pressure on steel lead times from mills and declines in daily ship rates of steel from service centers.

The current shape of the futures curve shows prices peaking sometime in Q1’17 with approximately a $10 backwardation going into Q2’17 and a more modest $2 backwardation between Q2’17,Q3’17 and Q4’17. Settlements currently reflect a Cal’17 value between $608 and $610 per ST.

Indicative HR futures curve:

Spot month $575
Cash $580/$590
Q1’17 $619
Q2’17 $610
Q3’17 $606
Q4’17 $604

HR futures trades since last week’s index release:( does not include mis-priced trades done early this week which were due to clerical entry error)

Q1’17 $615, 300 ST/mo
Q2’17 $609, 800 ST/mo
Jul’17 $608, 800 ST
Apr/May’17 $607, 300 ST/mo
Q2+Q3’17 $611, 700 ST/mo
Apr/May’17 $609, 600 ST/mo
Jun’17 $609 and $608 , 200 ST/mo each
Mar/May’17 $614, 500 ST/mo
Q3’17 $605, 2,420 ST ttl
Q4’17 $605 3,040 ST ttl

14,160 ST traded this past week not including the 1,500 ST traded at the off market futures price.

Current open interest is 15,092 contracts or 301,840 ST.

Scrap

Finally the Turkish mills are buying export scrap cargoes again after a pause the last few weeks. Spot is hovering around $273/MT. With January traditionally a strong export month for HMS scrap and current market sentiment driven by anticipated short-cover supply constraints  futures markets point to CFR Turkish scrap prices potentially hitting $300/MT. Current market interests have 2H’17 offered at $290/MT.   

Domestic BUS (busheling scrap) markets are also being pulled higher due to similar market sentiment. Announced projects which will increase steel production in the Q1’17 could potentially push BUS futures prices higher along with concern that high auto inventories might hit supply of prime scrap in Q1’17 as production slow downs might follow. With December index coming in at $273 and early chatter suggesting January could be up $20/$30 GT futures offers in 1H’17 have been scarce.

SMU Note: Hot rolled futures are priced based on short tons (or net tons) which is 2,000 pounds per short ton. Ferrous scrap is sold in the U.S. market based on gross tons. One gross ton is 2,240 pounds. Ferrous scrap exported to Turkey or elsewhere around the globe are priced in Metric Tons (MT). One metric ton is 2,204.62 pounds.