HRC Futures Shift Into Rally Mode

July CME Hot Rolled Coil Future $/st

Trading in SGX iron ore futures appeared to have bottomed in early May, banged around in the $100-110 area throughout the month before starting its current rally in June. The motivation behind iron ore’s rally is a new round of stimulus ($140 billion) targeting infrastructure spending and China’s residential real estate market. This also appeared to be the driver of Midwest HRC’s move up, which started just after Beijing made headlines on June 2 that it was considering another stimulus package.

Rolling 2nd Month Iron Ore 

Then, U.S. Steel announced a $50-increase to flat-rolled prices yesterday, which resulted in a $20-40 pop in the futures market today.

On June 1, the Midwest HRC futures curve was about flat, ranging between $780-800. Since then, the July future has rallied $83, August $91 and September $83. The October and November futures have gained $70 while the December and Q1’24 months gained somewhere between $50-60. Q3’s outperformance has steepened the futures curve somewhat, with the spread between July and December doubling to $52 from $26.

CME Hot Rolled Coil Futures Curve $/st

How much of June’s rally has been inspired by additional Chinese stimulus lifting all commodity boats, and how much was in anticipation of the rumored price increase announcements is up for debate. However, what I find most interesting is how the futures market largely ignored June’s much-worse-than-expected $56 decline in busheling.

Front Month Busheling $/lt (wh) & Turkish Scrap $/mt (red)

Taking this one step further was today’s surprise decline in July’s busheling future, while the July Midwest HRC future soared, resulting in a $400-425 metal spread in July through September. Which is going to give?  Will busheling rally or will the rally in HRC be short lived?

July Midwest HRC $/st (white) & Busheling $/lt (red)

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By David Feldstein, Rock Trading Advisors