Hot Rolled Futures: Some Profit Taking

Liquidation has led to some near-term retracement of hot rolled futures prices after a very long runup.

The first week in May left HR markets breathless as Q3’21 HR futures values were up $137/ST as of the settlement on May 10 and up $110/ST in Q4’21 and up $173/ST in Q1’22. 

Today HR markets appear to have been influenced by global financial market concerns over U.S. inflation numbers and the subsequent liquidation by investors and traders. HR futures were limit down in a number of months across the curve by the end of the trading day and Q3’21 HR futures had given back 45% of the value they had gained from May 3 to May 10. And Q4’21 and Q1’22 HR futures gave back 58% and 47% of their settlement value gains from May 3 to May 10.  

Until today, sellers have been relatively scarce, forcing buyers to pay up. In spite of today’s brisk selling, HR futures are still up on the month. Lead times have changed little, and while near-term auto demand is hampered by global supply chain issues, recent memos from major auto companies suggest that demand will pick up briskly as the issues resolve. 

Activity in HR futures has continued to pick up. This month open interest is up to almost 32,000 contracts, which is the equivalent of two hedging/trading counterparties having open HR futures positions of 640,000 ST each. About 90% of that HR future open interest lies in the spot month through Dec’21 futures months. This month’s HR futures volume has been fairly brisk with almost 9,000 contracts trading through today. So buyers of 180,000 ST and sellers of 180,000 ST of HR futures so far this month.

Scrap

BUS settled sideways for May at $564.07. For some an unexpected surprise. For much of the last month, May was trading at $600 or above as strong HR futures prices were expected to pull up the BUS futures via the metal margin spread. While the Apr’21 metal margin settled at (1365 HR-565 BUS = 800 MM) current implied May metal margin looks likely to be (1500/1510-564=936/946). Up until today’s HR selloff, expectations so far have not been met as the metal margin spread has continued to widen in the nearby months. Recent price increases in pig iron and 80/20 export scrap could buoy BUS price expectations. Today Q4’21 BUS traded at $675/GT, a healthy $111/GT over May’21 BUS settle.