HR futures: Bottom to prices?

This makes it even more important to consider that as July futures have fallen as low as $665/st as of July 11, the premium for just two months forward from July to September is still ~$80/st at $745/st being the last traded September price as of the writing of this article. Go a little further to December and we add on another $70/st to $815/st last traded, making the total premium from July to December a healthy looking $150/st premium. This is the part where we remind readers that this is not a predictive mechanism. The futures are not a forecast pricing in the imminent reversal of fortune for steel pricing. If they were, I remind readers the market was paying a lot more for July and August steel futures a month ago, so if it were a predictive effort it would have been another rough month. No, the reversal in prices is a more cold and calculating reflection of market forces and, I think particularly, interest rates than some have assumed.

This is in part because as we all know, the steel industry benefited from a very long stretch of essentially zero cost money that allowed factors like borrowing costs to go neglected in the overall measure of inventory financing. That oversight has been corrected for years now and the forward premiums are reflective of that reality. The years of flattish and often dramatic backwardations have been more a legacy of low interest rates, or are they? Certainly if you look at spot vs. six-month futures in the last year, the market only slipped into discount briefly and this was a function of spot prices reaching over $1000/st in December. Those kinds of highs usually spark expectations of mean reversion unless there is strong fundamental rationale otherwise. A recession might be one such rationale, just speaking hypothetically, so while a higher interest rate environment will structurally continue to favor higher forward pricing, hedgers cannot ignore the still present risk that a major reversal in growth will make the current rate environment a poor measure for costs in even 9-12 months.

None of this changes the truth that the market IS still paying inventory carriers to hold steel today, and the number is about $150/st to hold it for 4-5 months here. Now the question will persist on whether that is attractive offer for service centers or not. If it is not attractive enough, it is not impossible to see a run to more of a $200/st premium in our mind, but as spot price weakness persists the willingness to carry for less may also increase.

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