HRC futures: Changing futures dynamics

While the physical market looked to shore up pricing levels in these first few weeks of the year, apparent demand failed to materialize as inventories began to be reported as higher than expected. In addition, lead times appeared not to be as solidly far out as it seemed before the holidays. It was a case of the tail wagging the dog with futures prices plummeting driving negative sentiment in the cash market.

Chatter in the paper market during this time indicated a split market with many in the industry not seeing physical as bad as futures prices started to suggest, while some financial players seemed to be more skeptical. As the curve moved into a strong backwardation from spot into the next few trading months, a familiar refrain of “while prices may be softening, the curve is undervalued” could be heard mumbled throughout the market. This sets up a classic trap in trading.

It seems now that physical and futures sentiment are converging as the price action in futures over the past week has stabilized. It feels like we are back to the physical market dictating where paper goes from here, the dog wagging the tail, for the time being. Interesting to note, if we look over the past five years, the peak-to-trough price movements throughout the cycles has fallen a minimum of a $450/st move.

If the spot peaked around $1,100 a few weeks ago, and history repeats itself, the curve might not be as undervalued as some believe.

About Flack Global Metals

In 2010, Flack Global Metals (FGM) was founded with the mission to reinvent how metal is bought and sold. Over 13 years later, the company has evolved into a hybrid organization combining an innovative domestic flat-rolled metals distributor and supply chain manager, a hedging and risk management group supported by the most sophisticated ferrous trading desk in the industry known as Flack Metal Bank (FMB), and an investment platform focused on steel-consuming OEMs called Flack Manufacturing Investments (FMI). Together, these entities deliver certainty and provide optionality to control commodity price risk in the volatile steel industry.

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