Hot Rolled Futures: No Dip to Buy, But Oil Rebound, MSCI and Ore Holding $60 All Good Signs....

The crux of the “buy the dips” theme has been based on the assumption that flat rolled sell-offs will be short lived because buyers will be quick to scoop up discounted tons with inventory levels at historic lows. This week’s MSCI report further confirmed the persistent low inventory levels continue with service center inventory falling 14k tons (to 6.5 year lows) even though April shipments were down 344k tons MoM.  Looking at D.S.R. adjusted M.O.H. at 1.8 and nominal M.O.H. at 2.1, service centers and OEMs leave themselves extremely vulnerable to any demand surprises or supply side shocks.

Another large assumption of the “buy the dips” theme is that we are in a commodity bull market.  Bull markets reward those who buy the dips.  The rebound in oil prices has led to a steady increase in the rig count and resurgence in demand for steel from the energy industry.  Two weeks ago, crude oil was under strong pressure falling to $45.49/bbl from $53.79 in early April.  Oil has seen a solid rebound closing today at $49.34.  Very important for Midwest HRC prices!!

June WTI Crude Oil Futures (May 5^th left side, May 18^th right side)

Iron ore volatility has quieted down, while prices have held above the $60 level.  

June SGX Iron Ore Futures & Curve

There has been some resilience in not only iron ore, but also Chinese rebar and Copper since last week’s disappointing Chinese economic data.  While that might seem illogical, Chinese markets tend to interpret bad news as good news and good news as bad news as it relates to the Chinese government’s policy and stimulus measures.  In fact, the PBOC injected $25b into financial markets this past Monday, the largest one day injection in almost four months.  This could be a sign that the PBOC is backing off its recent campaign to crack down excessive borrowing in real estate investment. 

Today’s price action in these two products was interesting. The chart on the left shows the intraday price action in September Dalian ore futures.  Notice the steep sell-off was immediately met with a sharp rally, holding the 450 (yuan) level and rejecting the attempt by sellers to push prices lower. 

The chart on the right of July CME copper futures, often used as a bellwether for China, saw similar action. This chart is a daily chart and today’s price action produced a “hammer” pattern indicating a capitulation by sellers followed by a sharp rebound as buyers come out to scoop up futures.  The key to the hammer pattern is if we see a confirmation the following day.  So if you see a big rally in copper tomorrow (5/19), it might be indicative that the recent sell off in ore, steel and base metals related to China has found its bottom.

Sept. Dalian Iron Ore Future and July CME Copper Futures

LME Turkish scrap has held up nicely and is up $7 WoW.

June LME Turkish Scrap & Curve

So is it time to buy the dips?  It’s no mistake; the chart on the right has shown no movement WoW.  While physical HRC prices have seen some price declines, HRC futures haven’t seen much of a slide.  So the answer is not yet.  However, if prices fall into the $550s – 560s, barring a severe shock, back up the truck!

June CME Midwest HRC Futures & Curve

The opportunity might present itself in HRC futures at any time, so pay close attention. Keep your local broker on speed dial and remember…

“Life moves pretty fast.  If you don’t stop and take a look around once in a while, you could miss it.”