HR Futures: Awaiting Trump’s 25% tariff

In percentage terms, the 22-day annualized volatility for the rolling 2nd month HRC future has declined from a high of roughly 75% in February 2022 to 17% as of today. Over that same period, the moving 52-week standard deviation for the CRU’s weekly Midwest HRC Index has fallen from roughly $260 in February 2022 to $91 today.

To put this in concrete terms, lets look at this in terms of a normal distribution’s 95% confidence interval. The CRU was $1,057 on Feb 16, 2022. Using February 2022’s price and $258 standard deviation would tell us that two standard deviations on either side would forecast steel prices over the next year would have had a 95% chance of being in a range between $541 and $1,573. Today, 95% of the distribution is covered by a range between $498 to $862.

The key word for you to focus on here is “moving” and the key takeaway here is that the HRC futures have not been moving. The market has ground to a halt. Only the voice brokers are more restless than the futures traders at this point.

Rolling 2nd month CME hot-rolled coil future $/st

You are reading this article, meaning it is safe to assume that you have some interest in steel derivatives. Perhaps you are thinking about taking the SMU’s steel hedging workshop? (Click here for more information.)

Perhaps you have already taken the class or have done some reading on your own. My trading career started in January 2000, working as a clerk on the Chicago Stock Exchange. Over the years, many people have asked me if it is a difficult job, if it is very stressful. They wanted to know what it is like emotionally.

I can tell you it is very intense and sometimes it is like being on an emotional roller coaster. However, since times are always changing, there is a need to constantly adapt. It does keep things fresh and challenging. When people ask me how are things going trading steel, my answer is usually, “Things are up and down.”

There are limits to what can be learned in books or workshops. To learn what it is really like as a trader, one needs to get involved. Put on a position and live through the swings.

Do-it-yourself was a big thing during the Covid-19 pandemic, so I thought of a do-it-yourself exercise you can easily do at home to better understand how it has felt being a steel futures trader over the past six months.

You will need the following materials: 1 can of white paint, 1 large paint brush, 1 stool or chair and 1 wall. Once you have all the materials, put the stool or chair roughly five feet in front of the wall. Open the can of paint and paint a roughly 2-foot by 2-foot square on the wall about three feet from the floor.  Next, go sit on the chair facing the wall and focus on the freshly painted square. Continue to watch the square until the paint has fully dried. After you do this, you will know exactly what it is like to have been a steel futures trader over the past six months.

Let’s get technical. When we zoom in to the chart of the rolling 2nd month Midwest HRC future market, we see a triangle pattern. This pattern is made using a very long-term down trendline (green) that dates back to the 2021 peak and the up trendline (red) that dates back to mid-October. The skinny on the triangle is simple. If the market breaks above the downtrend or below the uptrend on heavy volume, then it is indicative of a reversal pattern in the case it breaks higher or the resumption of the down trend if it trades below the red up trendline. What is most interesting is that the apex of the triangle is roughly six weeks away, indicating an increase in volatility is coming very soon. If only there was some kind of event that could break the market out of its malaise.

Rolling 2nd month CME Midwest hot-rolled coil future $/st

In November, then President-elect Trump announced his plan to place 25% tariffs on imports from Canada and Mexico. Then on the night of his inauguration, President Trump said, “We’re thinking in terms of 25% on Mexico and Canada. I think we will do it on Feb. 1.”

On Thursday, Trump reiterated that the 25% would land on Feb. 1. Earlier in the week, on Monday night, while speaking at a Republican Conference in Miami, President Trump said the following:

Yet, since his election, the Midwest HRC futures curve has declined by $50 and $30 in the February and March futures, with little movement in the months after March.

CME hot-rolled coil futures curve $/st

Thus far, there has been no reaction to his election, no reaction to his comments about 25% tariffs on Canada and Mexico in November and no reaction to his comments on Jan. 20 or on Jan. 27. This is somewhat puzzling. Perhaps the futures market already priced in the tariffs through the contango in the HRC future’s curve? The problem with this line of reasoning is the curve has been in a steep contango since July.

CME hot-rolled coil futures curve $/st

Perhaps the physical steel market is tremendously weak and that is why there hasn’t been a move higher in response to the events listed above? But then why is there a roughly $70 contango from February to May? Maybe there was a majority of market participants that believe Trump’s threats are simply a hollow negotiating tool? (Will they still after what he said in the Oval Office on Thursday?)

The similarities between the 2017 and 2018 HRC futures market and today’s market are remarkable. In 2017, Trump threatened 25% tariffs on steel imports via the power given to the president under Section 232 of the Trade Expansion Act. Physical Midwest HRC indices and futures were rangebound throughout 2017 just as they have been rangebound for the past eight months. In 2017, the threat of tariffs being placed on steel and aluminum was well communicated by Trump. Trump ended up implementing tariffs in March 2018 following the results of the 232 investigation that was released in January 2018, just as he had promised to do. Then, finally, the futures market reacted with a rally from $650 in late December 2017 to almost $950 only 5 months later.

Rolling 2nd month CME HRC future $/st 2017-18

This chart of the AISI Raw Crude Steel Capacity Utilization Rate is worth noting as well. Recall from Trump’s first presidential term what a big deal it was for steel utilization to be at or above 80%. Capacity utilization had been below 80% for almost every week from the financial crisis in 2008 until late 2018. Capacity utilization has been below 80% for almost every week since the middle of 2022.

AISI Raw Crude Steel Capacity Utilization Rate

With Feb. 1 only days away, we will soon find out whether or not Trump will impose tariffs on Canadian and Mexican steel imports. If he does – and he said again on Thursday that he would – will the physical and futures markets finally react? Regardless, the decline seen in flat-rolled imports over the past few months should continue in the months ahead with year-over-year declines throughout the first half organically tightening domestic supply. The moment is almost here and it should bring some much needed volatility to a very sleepy HRC futures market.

The busheling futures market woke up this week as rumors that February’s scrap settlement could jump have pushed futures up aggressively. Today, the February Chicago busheling future traded at $435, indicating a $35 month-over-month increase. This table shows today’s settlements for the AMM Composite busheling futures market seeing notable gains in both price and volatility. Will Midwest HRC futures follow?

US Midwest #1 Busheling futures curve

Disclaimer: The content of this article is for informational purposes only. The views in this article do not represent financial services or advice. Any opinion expressed by Mr. Feldstein should not be treated as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Views and forecasts expressed are as of date indicated, are subject to change without notice, may not come to be and do not represent a recommendation or offer of any particular security, strategy or investment. Strategies mentioned may not be suitable for you. You must make an independent decision regarding investments or strategies mentioned in this article. It is recommended you consider your own particular circumstances and seek the advice from a financial professional before taking action in financial markets.