As steel prices continue to fall and demand remains low, a critical resource is becoming increasingly important - scrap.
But with concerns over maintaining the supply of scrap, the scrap market is seeing significant volatility and a shift towards a contango environment.
Will anyone be able to lock in profits and manage their cash flows amidst this perfect storm?
Find out in this week's episode of Freight Up! from FIS.
Fuel Market Update
The fuel market bears significance to the steel industry due to geopolitical tensions in shaping the oil sector. Investors in the steel domain should be aware of events like the crackdown on imports of Indian fuel refined from Russian crude or America's plan to refill the Strategic Petroleum Reserve.
Archie Smith shares his observations on the fuel market and its interplay with the steel industry.
He discusses the EU's measures against Indian fuel imports from Russia and emphasizes the significance of the Sing 0.5 spread, high sulphur fuel oil cracks, and the resulting market squeeze.
Steel Market Update
Aspects of the steel market like demand from OEMs and interest rates have the power to drive changes in the physical markets.
The industry has recently witnessed a shift in sentiment around scrap, making it an essential input for investors to track.
The scrap curve moving into a contango environment and the overall volatility calls for investors to stay vigilant, lock in margins, and manage their cash flows in the face of these challenges.
Joshua Stern offers his valuable insight on the steel market and talks about mis-pricings or opportunities arising from the ongoing challenges.
Ferrous Complex Update
Changes in global demand, supply chain disruptions, and environmental concerns can impact commodity markets, which in turn, affect the steel industry. Keeping an eye on the state of the commodity market provides crucial insights to investors for timely decision-making. One notable example is the recent spike in commodity prices, attributed to various factors such as Chinese demand, supply chain hiccups, and environmental considerations. This awareness of market movements can help steel investors make strategic moves and navigate through uncertainty. Hao Pei delves into the issues affecting the commodity market and its influence.Ask Hao Pei for his FIS Macro report by contacting him via LinkedIn
USDA Predicts Increase in Chinese Corn Imports
Kerry Deal shares his thoughts on the potential growth opportunities in the Panamax market, backed by the USDA's optimistic predictions about Chinese imports.
He talks about his stance on Capes from a macro perspective, and highlights how he believes that the positive outlook for grain imports to China can result in a brighter path for the Panamax market in Q3.
The key moments in this episode are:
00:00:00 - Introduction
00:01:01 - Fuel Market Update
00:05:15 - Ferrous Complex Update
00:09:20 - Steel Market Update
00:14:45 - Opportunities in Mispricings
00:16:31 - Shocking Week for Cape Rates
00:18:03 - Panamaxes Present a Grim Picture
00:19:16 - USDA Predicts Increase in Chinese Corn Imports
Freight Up podcast episode transcript
On this week's episode, we'll cover why the investment market may see a recovery in risk tolerance. And we'll also delve into scraps growing importance in the steel market. All this and more on freight up. Hello, and welcome to freight up. My name is Fernanda, and I'll be your host as we navigate through the seas of freight and commodities markets.
And if you haven't already, make sure to check up our website, freightuppodcast.com, where you can follow our show, see show notes, and contact us now onto the show.
First up, your favorite fuel, oil broker, Archie Smith.
One of the kind of big stories at the minute in the broader oil market is that the EU are really trying to crack down on imports of Indian fuel that has been refined from Russian crude. Russian oil exports are back up to pre invasion levels. So the same kind of levels I was exporting before they invaded Ukraine, those backups those levels in April, with 80% of those exports going to India and China.
What's happening is India and China are buying so much of this discounted crude, refining it into products, and then the west is buying it back. So effectively, it's almost like a loophole. So the EU are currently kind of in talks of how to crack down on this, what to do in kind of an explicit criticism towards India for this loophole, and the way that Russian oil is, in a way, finding its way into the west via being refined in these other countries and then getting shipped off as exports of products. So that's happening at the minute. America also talking about refilling the SPR, which they drained by about 200 million barrels, something like that, in 2021.
So they're looking at buying barrels back for that starting maybe next month. I mean, who knows? What impact would that have on the market? It offers support to the market. Because if a massive buyer like America are coming in, the American government are coming in saying, right, we're going to start buying back oil for our Freight Investor Services next month, people are going to be like, Right, okay.
There's going to be a lot of buyside demand, so find some support this week. We've been pretty range bound in the Brent crude futures. Specifically, we've kind of just sat between 74 and $76 per barrel. It's really not doing much. There's been no massive movements as such of late.
But I can imagine had America not come out saying, right, we're going to refill the SBR, we might have seen that the prices continue to drop down below that 74 mark. But like I said, we've been pretty range bound past few days. That's pretty interesting. I guess we'll have to keep an eye on what Uncle Sam does. Looking more specifically at the fuel or markets, the Sing .5 spreads are really, really pushing the time spreads beginning of the week, the front, June versus July sing .5 spread was trading around $6.
When I left my desk just now, it was getting traded at $9. So those spreads are widening, especially in the front. The high sulfur fuel oil spreads really haven't been doing much of late. The 380 CST is kind of around the four and a half dollars mark in the front months on the time spread, that is. But, yeah, we're not seeing a lot happening in the high sulfur fuel oil apart from the crack, the Euro high sulfur crack staying at these strong levels that we've been seeing for the past kind of couple of weeks, around the negative $12 mark today.
We've actually broken through that trading around minus $1160 per metric ton. And that's really just the European market kind of realizing this squeeze from the lack of Russian supply. Russia used to export a lot of high sulfur fuel oil to Europe. So since February, those sanctions came in, there's been a squeeze in the market, and that's therefore pushing that high sulfur fuel oil crack stronger in the euro, which it has been for a couple of weeks now, and therefore keeping that high five spread that we love to mention on here. Pretty narrow.
Yeah. So the euro high five is still pretty narrow as it was last week, but brown about 83 in the front month, June. That's what's going on in the fuel or market at the minute. Also seeing some strength in the sink, .5 crack. We were speaking to a few traders today.
Why are we seeing so much strength in the low self esteem complex in the spreads and the crack? They said that there was no real kind of macro reasons that they can come up with. No major headlines, no big players kind of coming in doing anything. It just seems to be market behavior at the minute. Seeing a lot of strength in that in that low sulfur Sing complex.
What would you advise our listeners to keep an eye out for? Just keep your eye on that low sulfur Sing complex. The cracks been pushing. Trading 860 last week, that was kind of around, like, the $7 mark, $7.50 mark. So that's really been pushing as well as the time spreads, they've been really widening.
That's good, especially in the front month. If you've got exposure to roll from the rest of this month to June or from June to July, you're going to be rolling that bigger premium. So definitely, yeah, just keep your eye on the low selfseeing complex because it's pushing at the minute. Well, I guess that's it from a Smith Seven. We'll see you next week.
See you next week. Been a pleasure as always. Thank you so much, Archie. Thank you very much. Thank you.
And now an update on the Ferris complex with Hao Pei.
So it looks like this past week, steel mills in China locked in, rebar prices. How's this going to impact the steel and iron ore market? Chinese steel mills started several rounds of production curve in late April which result in a big drop on the finished steels. The steel mills saw sufficient orders in May, they locked the price and finished the steel price in particular rebars indifferent with rebars however the maintenance is over, the demand of iron ore has come back.
That's why iron ore started to started the growth over last week, late last week and early this week. Moreover, as we mentioned from last week the farmhouse contract in DCE market of iron ore has once closed to the cost line of small minus which also supported from the coffee line. So that brings up the question how is it trading? There were quite a few trades between the traders in the secondary market. We haven't really seen secondary market trades for three or four weeks.
In addition, the premium league PBF, Newman, Fines, Me, F and Vrbf were sold actively during current two weeks. As a result the physical market has seen some real demand even when futures market has bearish sentiment. Last week obviously if we trace back our weekly report from last week we believe that the market was oversold and there should be a rebound. And there it is. However, we maintain the long run target as the price is still in the high range which means we will see lower price than the current level in June because of the long term sales.
When they come there will be a lot of supply in the market which will resist the price of iron ore. So this Monday it looks like there was general improvement on major commodity products. What happened? The investment market started to enter new cycle risk off period for the current month because it will naturally take more months to confirm easier deflation in China or recession US or Europe. That should be a Quarterlands project.
So basically even if there are numbers we can't see it from now, there are just not enough hypertension indicators to prove the fact. So before any big news happened we potentially will see a risk tolerance recovery in the short run. The push was more mixed with a financial stabilization meet in China on Wednesday as well which support a huge growth on Shanghai. Equities on Monday once spiked from a negative 1% to 1% gain which means a net 2% of increase within one trading hours that must have impact on all industrial commodities. If you interested, don't hesitate to follow our weekly publish the FIS Macro reports which have more details on how risks are valued or why the risks are off during the current period of time on investment market and more insights related to the credit crunch.
We'll make sure to link Hao's contact info on our website freightuppodcast.com if you're interested in finding out more about those technical reports or his insights on the future of the market. So how for those of us keeping an eye on the market, what should we look out for this coming week. I think it's a safe level for buyers from now on. Well, the only thing the buyers may pay is not the numbers. The only thing they need is to be patient for the price level picked up.
I think in short, the second thing I think it's worth noticing is the spread. Although we think the spread level is promising and everyone is going to buy the front month spread, for example, June, July, we also mentioned in the report that spread has a lot of room to grow. We support the spread. It's grown up from the past two weeks, but now it's already growing. And we think we need to keep an eye on the long term contract.
If they become crowded in the market or if they start to emerge in the market, it's maybe timing for us to think the spread level is overvalued. As we mentioned, the spread goes up during the past two weeks. And I think it's worth noticing that if we ever saw the long term contract in the market, maybe some point in June, then we need to think about the other side of the spread, which means if we bought spread before, we may think of offset the positions. By then that's how pay. Everyone.
Thank you so much for joining us. Up next, an update on the steel market with Joshua Stern. It's been another pretty weird week here, especially after a lot of conferences over the last couple of weeks. Both the irifas had made in steel conferences. At this point, the physical markets have been pretty quiet because people expect pen consumers essentially are kind of expecting the prices continue to fall in the steel markets and there's not a ton of demand out there, especially from your OEMs and such.
So your car producers, your BMWs, your Daimlers of the world, they're not exactly interested in buying right now because they see essentially further pressure coming into the steel markets. Yeah, not exactly a lot of activity going on in the physical space at the moment. There seems to be an evolving sentiment around scrap. Can you go into what that might look like? It was very fast paced at the beginning and exciting, but then as you kind of started to get towards the end of the week and towards the end of the conferences, we really saw that kind of interest starting to really die down as markets quieted up.
There was also one big kind of takeaway from the made and steel event as well. And that was actually really kind of the looking at scrap as a critical resource, I would say is the correct way to put it. Scrap is going to become an increasingly important well, it's an important input into any steel making process. So it's also very important for the European Union, for the United States, for China, et cetera, to maintain their scrap supply and not have that being outsourced elsewhere. So this has brought up some pretty interesting opinions and kind of, I would say almost worries, actually, in the scrap market that we don't, A, have enough scrap here for the future, but B, how are we going to maintain that, especially in Europe.
How are we going to maintain this supply of scrap that we need to feed our arc furnaces, our electric arc furnaces and such? So that is definitely one interesting development there. On that note, we've actually started to see scrap trade up quite a bit this week as well. Back end of the curves are trading up pretty heavily. I think that this also has something to do with the interest rate environment out in Europe at the moment.
At three and a half percent, cost of carries are going to be increasing. It would only make sense then that you start to get into kind of a contango environment where spot is going to be less expensive than anything further down the curve. Yeah, essentially, Spot is going to be trading at a discount because, of course, right now, if you have to store things, say that you have to store HRC until whatever, December of 2023, well, you used to basically be getting kind of paid to do that in a negative interest rate environment, or almost at that point, it was backwardated. Right. The Spot demand was there as well.
So interest rates were essentially not making it expensive for you to hold material over the long term. You were essentially getting paid to hold that material. Now with interest rates rising, it costs you cash, it costs you opportunity cost to actually hold that material for the long run. So therefore, we're starting to see kind of the back end of the curve trade up. At one point today, deck 23 traded up to $400 on scrap.
Even OC 23 was trading at 400 and now it's trading 387 and a half on screen. So there's quite a bit of volatility out there as well. Very interesting to note here that, yeah, there is significant volatility out there but also I believe that the scrap curve is really going to be the first mover into kind of this contango environment after having been in a backward aid environment for so long over the last couple of years in low interest rate environments post COVID as well. So all in all, yeah, I think we're really kind of starting to see kind of a perfect storm actually, for anybody really, who's kind of looking at hedging or at looking at using the markets to go ahead and lock in margins, lock in profits, and then generally just better manage your cash flows. So as quiet as the market is, that doesn't necessarily mean that there's no opportunities.
Right. Rebar minus scrap was trading down to 210. We're now at around 230, just edging up back up to about 250. I believe the October 1 was like 233 and a half, 232 and a half as of so it eased a bit this week. It came from 237 and a half on Monday to 232 and a half as we speak right now.
So, interesting stuff out there. So what's your big takeaway looking at the coming weeks, josh, it's time to. Be very vigilant out there as well. Look for any mispricings, look for any opportunities that are out of whack. So if you're looking at kind of spreading two products against each other, look at your spreads, look at mill margins, look at Arc spreads, see if there's anything that one can use to express a view there.
Yeah, the Arc spread has been pretty hot topic over the last couple of days here as well. So be vigilant, look at what's going on in the physical markets and then yeah. All right, that's Joshua Stern for you all. Now for your freight update with our head of Business Development, Kerry Deal. Welcome back, Kerry.
How was Istanbul? It was fantastic, fantastic. What an interesting place. Returned from the exotic Orient, I guess you'd say. Yeah.
And back into beautiful Blighty. Exactly. Beautiful cloudy Britain. Exactly.
Thank you so much for my Turkish delight. No problem at all. No trip will be complete without it. Right. I refuse to eat it.
That's how special it is. Still sitting on my counter. And I will absolutely just decimate my husband if he eats it.
First things first, what is going on with cape rates? Well, look, the cape market has had, to put it simply, a shocking week in terms of rates. All that optimism that had been creeping in about rates during the previous week was dashed as excess tonnage in the Pacific allowed those miners to drive rates on C Five. That's the West Australia China route, down from nearly nine and a half dollars per ton to 870 yesterday. And we're hearing rumors even 860 being done floating around for end May early June loading dates.
That drop in rates was also reflected on the C Three route. That's Brazil China with iron ore that shed over a dollar, falling from over 22 and a half dollars last week to the low twenty one s today. A product both of excess balusters and relatively slow inquiry out of Brazil. Sentiment has, of course, played a role with the much lower than expected Chinese industrial growth figures. That is, they came out at 5.6 year on year percent growth rather than 10.6% consensus forecast having spooked that market.
And this has been an ongoing topic for us for some weeks now. You hit the nail on the head. I mean, it's worth noting, we have been warning for weeks that Chinese blast furnace utilization was effectively maxed out, that is, at the 92% to 93% range. And therefore there was no room for sustained growth in iron ore imports, but there was substantial downside risk from that macro perspective in terms of iron ore and coking coal imports. So it may be we are seeing the early signs of this with some decreases.
We've seen slight decreases in pig iron output from Chinese mills for the last couple of weeks consecutively. That's potentially indicating a gradual decrease in production run rates for steel. On paper, it has been a continuous drop from last Wednesday onwards with the front month Cape five TC paper falling from 23 one two five last Wednesday to value on FIS Live today. That Q3 also dropped from 22 three seven five to 18 six seven five today. Please tell me the Panamaxes are doing better.
I wish I could. Oh, no. The Panamaxes have also presented a rather grim picture lately, and I think actually this is more surprising. I think this has befuddled quite a few people in the market, including myself to a degree, who had higher hopes for this market. That is, given we are just towards the end of the South American grain export season, one might have expected better support for the Panamaxes now, even with those big ships looking negative.
But alas, on both physical and paper, that has just not come about. The five TC average dropped by a further 15% over the past week to 11,003 four three today. This drop has been pretty consistent across all basins, with the Pacific remaining very heavy on tonnage. Lacking much inquiry for the past week, the Atlantic has also followed suit. And despite a few more transatlantic mineral cargoes hitting the market, we're hearing in the past two days, we're just not seeing enough to move that dial yet.
East Coast South America has been quiet as well, with rates headed towards their lows of Jan and Feb. Do we. Have any positivity to impart on our audience this week? You know, there is one thing interestingly. We should note that the USDA has actually just increased their predictions for China's corn imports by 28%.
They also gave a forecast that increases their expectation of Chinese soybean, wheat and sorghum imports. So this would be a massive positive for Panamaxes. I should explain, the vast majority of Chinese grain imports do get carried on Panamaxes. And so look for this, especially in Q three as the US grain season, the Northern Hemisphere grain season starts to kick in. But for now, that is about all the bulls can latch onto.
Paper also negative for the past week with the front month Panamax four, TC paper dropping from 14,003 two five at the peak last Wednesday to eleven one two five value today on FIS Live, although we do seem to be finding some cautious support with those levels. On June, in line with the current spot index, q three has fallen from one 5300 to twelve six seven five. All right, Carrie, given that giant chunk of information we've just dropped on our audience yeah. What's your big takeaway for them for this week? On a personal level, I'm more bearish on the Capes from a macro perspective.
I do think that those USDA figures should lead to some light at the end of the tunnel for the Panamax market as we get into Q Three, but let's see. Well, we'll keep an eye on that. Thank you so much. Kerry! Thanks a lot, Fernanda!
Well, that's it for us this week.
Thank you so much for joining and we'll make sure to see you next time on Freight Up. If you have any comments, questions or feedback for the show, make sure to click the microphone icon on our website, freightuppodcast.com to leave us voice note. We'll see you next week.
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