Hot Rolled Futures: China Comes Alive!

Chinese and ASEAN HRC prices have rebounded sharply following the sell-off that started in March, which took prices down over 20 percent.

Copper and zinc prices have also rallied in fits and starts recently before breaking to the upside this week.

Chinese rebar inventory has plummeted to its lowest level since the data started being tracked in 2009.

July Dalian rebar futures have made new highs as result.  Iron ore is playing catchup and has rallied $8.13/t or 14.6 percent since just last Friday. 

The SGX iron ore futures curve is below. The histogram at the bottom shows the movement for each month on the curve as the steep backwardation seen earlier in the year is re-emerging.

The dollar is plummeting while the euro has soared to above 1.14. These currency moves are helping to rally commodity prices.

The LME Turkish scrap futures curve, below, has been rallying recently with July trading up to $300/mt today.

The CME Midwest HRC futures continue to rally as the market anticipates an announcement regarding the DOC’s Section 232 investigation into steel. President Trump announced June 12 that his administration would take measures “very soon” to stop unfair steel imports, but still nothing has been announced. Interestingly, the investigation has had a strong influence on the market. June HRC imports look to jump aggressively, most likely as importers try to get tons in before the announcement, while anecdotal reports that buyers are pulling back from ordering internationally sourced tons could have a big effect in Q3.

Rolling 2nd Month CME Midwest HRC Futures

The CME HRC curve has jumped significantly since June 1 with July and August rallying $60/st to $630 from $570.

In addition to the strong fundamental data, the asymmetric upside risk tied to potential government policy resulting from the Section 232 investigation could send HRC prices much higher. This risk has been well known and publicized, however another upside risk is emerging.

Logistical tightness is occurring not only in the railcar, but also in the flatbed trucking market. The chart above shows flatbed truck utilization and rates increasing to disruptive levels. Some forecast it to tighten even further. 

Over the past few years, supply has been culled in response to years of downward pressure on flatbed pricing. Supply is expected to decrease even further due to a December deadline imposed by the Department of Transportation for truckers to adopt an “Electronic Logging Device” or ELD for hours driven to comply with federal trucking laws. It is expected that this new regulation will force some truckers to withdraw from the business altogether.

If this tightness persists or escalates, it could affect availability and lead times in the steel industry. This in turn could force service centers and OEMs to increase their on-hand inventory levels from record lows.  A forced restocking coinciding with government intervention? Asymmetric risk doesn’t get much more palpable than that!

To review, raw materials are in rally mode. Chinese steel prices are in rally mode. Copper and zinc are in rally mode. The euro is spiking. The U.S. dollar is getting crushed. Steel inventory in China and the U.S. are at the lowest levels in years. The domestic flatbed trucking industry is tightening. There’s potential for a restrictive import policy curtailing short- and medium-term import orders, which would affect supply later this year. The 232 investigation results could be announced any day. If that ain’t bullish, I don’t know what is!

The opportunity might present itself in HRC futures at any time, so pay close attention to President Trump’s tweets, keep your local broker on speed dial and remember Ferrous Bueller’s philosophy…

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