Futures

CME Midwest HRC Futures - Buy 'Em and Bid 'Em!!!
Written by David Feldstein
September 7, 2017
The following article on the hot rolled coil (HRC) futures markets was written by David Feldstein. As the Flack Global Metals Director of Risk Management, Dave is an active participant in the hot rolled futures market, and we believe he provides insightful commentary and trading ideas to our readers. Besides writing futures articles for Steel Market Update, Dave produces articles that our readers may find interesting under the heading “The Feldstein” on the Flack Global Metals website, www.FlackGlobalMetals.com.
Let’s say you wake up tomorrow, get ready for work and before you leave you look out the window and see this:
Would you grab an umbrella?
The chart below is the ISM Manufacturing PMI Producer and Customer Inventory sub-indexes. Something strange happened on the way home from the SMU conference. The producer inventory sub-index jumped to 55.5, while the customer inventory sub-index plummeted to 41.
ISM Manufacturing PMI Producer (white) and Customers’ Inventories (orange)
This divergence seemed so strange to me that I had to investigate. I found this month’s ISM Manufacturing PMI conference call and listened to it. The jump in the producer inventory sub-index was due to raw material inventory expansion on the producer side, the strongest since September 2010. In other words, producers are seeing increased demand and are stocking up in preparation.
ISM Chairman Timothy Fiore said the following during the call:
“Given other strong numbers in the overall indexes, the expansion in the raw material area is considered a very positive move as it is likely due to stocking up effects where industries are calling for more deliveries from suppliers. The customer inventory sub-index saw major contraction likely due to end user demand expansion; the strongest contraction we’ve seen since May 2011. This was due to a 5 point drop in “too high” and an 11 point gain in “too low.” What that means to me is that the ultimate customers have depleted their available inventory and are looking for more material to be delivered to them from (producers’) production facilities.”
So I created this chart, which subtracts the customer inventory sub-index from the producer inventory sub-index every month back to 1997. This month’s 14.5 differential is the second highest going back 20 years. The last time the differential was this large was in 2010.
ISM Manufacturing PMI Producer Inventory Minus Customer Inventory
The years 2010 and 2011 kept getting thrown around on the call. I looked at 2009 through 2012 and saw some similar behavior, then to the past couple years where the customer inventory sub-index remained in contraction for an extended period of time (contraction is indicated below the red line), resulting in persistently low inventory levels.
ISM Manufacturing PMI Producer (white) and Customers’ Inventories (orange)
2009 – 2012 2014 – 2017
The chart below again shows the producer/customer inventory differential from above, now with the TSI Daily Midwest HRC Index overlaid. The last time the differential was this high was in 2010. What followed were two $300 rallies in the Midwest HRC price. The first was from $400 to $700 and the second from $550 to $875.
So, you might want to consider buying an umbrella!
ISM Prod. Inv. – Cust. Inv. Differential (white) vs. TSI Daily HRC Index (orange)
And if you haven’t figured it out yet, the umbrella is a metaphor for hedging upside price risk through HRC futures.
To be clear, I am not saying HRC prices are going to rally $300 over the next couple months. I have no idea. Rather, due to the similar market dynamics, this is a possibility that should be considered, and if you have upside price risk due to a fixed price supply agreement, you might want to discuss how much of this risk you are willing to accept considering the “weather.”
As of today, the CME Midwest HRC futures curve sits flat around $640 through 2018. A relatively high price based on the past couple years, but a heck of a bargain if spot prices breech $800!
CME Midwest HRC Futures Curve
Global raw material prices and finished steel prices continue to rally with U.S. prices being the laggards since June 1.
Below are the SGX iron ore and LME Turkish Scrap futures curves with the front month at multi-month highs.
SGX Iron Ore Futures Curve (Left) and LME Turkish Scrap Curve (right)
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.” –

David Feldstein
Read more from David FeldsteinLatest in Futures

HR Futures: Correction in market after big rally
Another eventful week in the physical and financial steel markets is coming to a close, but with a markedly different tone than the last update at the end of February.

HR Futures: Market drifts lower on light volume
Over the past couple of weeks, Midwest HRC futures have been drifting lower on light volume. This begs the question if the rally has run out of steam, or is it catching its breath after ripping roughly $150 in less than two weeks? The April CME Midwest HRC future made an intraday high at $976 […]

HR Futures: Uncertainty hangs over the steel market
Uncertainty has remained a dominant theme in the US ferrous derivatives markets over the past month. And the Trump administration's tariffs on steel and aluminum are still top of mind for market participants.

HR Futures: Major trade developments lift the ferrous complex
Headline risk has returned to the ferrous complex, with both hot-rolled coil (HRC) and busheling ferrous scrap (BCH) markets surging in response to fresh trade restrictions.

HR Futures: Midwest ferrous futures consolidate gains, market anxiously awaits next move
Four weeks have passed since the last article from Rock Trading Advisors on January 30. The paint has dried, and Midwest HRC futures have exploded higher in response to President Trump’s declaration of impending 25% tariffs on all imported steel products. The rolling 2nd month CME Midwest HRC future erupted through the top end of its downtrend, one that dates back to the peak of the winter 2022 rally. It also broke out of its narrow range seen dating back to June of last year.