Steel Products

HRC Futures Mixed Ahead of UAW Deadline
Written by Logan Davis
September 14, 2023
Hot-rolled coil (HRC) futures prices fell after our last column published Aug. 17, putting in recent lows around $25-30 per ton lower than the week prior.

In the SMU Column from Aug. 24, written by Daniel Doderer and John Medich of Flack Global Metals, the authors pointed to healthy volume and open interest prevalent in the marketplace while we established spot lows. Speculative traders closing longs and adding to short positions contributed to this price decline. Conversely, physical participants were expected to begin locking in lower futures prices as contracting season begins, which may have contributed to the support in the back of the curve, as you can see above.

As Jack Marshall of Crunch Risk wrote about in his Sept. 7 column, the HR forward curve had rebounded after the Labor Day weekend, with the index remaining above $750/ton, and surprising some by not reflecting rumored lower prices for larger volume deals. Historically, the December HRC Futures contract remains high relative to spot prices. Today could be an opportune time to place protection on either the buy-side or sell-side.

Interest rates are likely to remain elevated after a higher-than-expected CPI print on Sept. 13, leaving the carrying cost of inventory high. Another factor that has not changed since our last column is the threat of the United Auto Workers (UAW) strike ahead of the 11:59 pm deadline on Thursday.

With deferred prices showing cautious optimism but several risks remaining, low-cost insurance may be desired. Leveraging a slight bump in implied volatility (above), one might consider a 3-way option strategy that will cost less than $5/ton for either buyers or sellers. This strategy would provide both a range of protection as well as opportunity for prices to move in one’s favor, as described below.
For Buyers:
A 3-way would allow buyers to capture the benefit of recent falling price at a very low cost, while leaving some room for further downside while the labor negotiations and other fundamental factors continue to be resolved. Steel buyers may choose to buy a $750 call option for ~$43/ton. To reduce that cost, they could sell a $680 put option and an $880 call option, collecting a total of ~$38.50 ($27.50 and $10.50, respectively). Net, the strategy would cost about $4.50/ton and provide protection from $750 to the high prices we saw in June. The put sold below the market would limit the trader’s participation at $680, a price we haven’t seen since the end of 2022. The theoretical net cost comes in a an attractive 3.5% of the range of protection.

For Sellers:
Given the commentary summarized above, sellers may have concerns about further downside in the event on an extended strike. That said, prices have already fallen precipitously. The 3-way strategy described below is a low-cost way to avoid further potential losses, while leaving room for improvement should the market begin to pick back up. Purchasing a $725 put for ~$43.50/ton, and simultaneously selling both the $650 put and $820 call would result in a net cost of ~$4.00/ton ($19.75 and $19.75 respectively). For reference, the 2019 General Motors strike resulted in futures falling ~$50/ton (~10%) from mid-September to the end of October when the dispute was resolved. This strategy would provide protection for a similar drop for under $5.00/ton cost.

There is risk in futures and options trading.
- Both strategies would carry potential margin risk (capital call).
- Both strategies involve limitations to protection and participation.
- Offsetting either strategy before expiration will change the cost and P/L
When trading options, positions should be managed as the market changes and time passes.
Options pricing above based on theoretical values. There is a risk of loss in futures trading. Past performance is not indicative of future results. © 2023 Commodity & Ingredient Hedging, LLC. All rights reserved.

Logan Davis
Read more from Logan DavisLatest in Steel Products

SMU flat-rolled market survey results now available
SMU’s latest steel buyers market survey results are now available on our website to all premium members. After logging in at steelmarketupdate.com, visit the pricing and analysis tab and look under the “survey results” section for “latest survey results.” Past survey results are also available under that selection. If you need help accessing the survey results, or if […]

CRU tariff webinar replay now available
CRU’s latest webinar replay on how Trump’s tariffs affect the global steel market is now available on our website to all members. After logging in at steelmarketupdate.com, visit the community tab and look under the “previous webinars” section of the dropdown menu. You’ll find not only this special CRU webinar but also all past Community […]

US, offshore CRC prices diverge
US cold-rolled (CR) coil prices declined this week, slipping for the first time since early February. Most offshore markets deviated, moving higher this week.

Construction growth slowed in March on tariff woes: Dodge
The decline comes after reaching a record high in January to kickstart the year.

Return of S232 zapped gap between US and EU HR prices, Asian HR remains cheaper
Domestic hot-rolled (HR) coil prices declined this week for a third straight week. Most offshore markets bucked the trend and gained ground. Uncertainty in the US market around tariffs, especially after “Liberation Day,” caused US prices to slip as buyers moved to the sidelines. It’s unclear to date whether the 90-day pause on the more […]