Volatility and Trends in US HRC Futures

Hello and welcome back to freight up. I'm Jess, your host for today, and we

will be exploring the major freight and bulk commodity markets. We have some of

our usual guests, such as Ben Clang on the freight update, and we'll also be

joined by Katherine Wang and Martin Vera from the us office to discuss

us steel and scrap, an area we haven't covered before on this

podcast. Finally, we have Halpay back to provide us the

latest updates in Ferris. Before we bring on our guests, let's take a quick look

at the latest news and index movement since our last episode.

The annual inflation rate in the UK was steady at 2%

in June 2024, the same as in May, and holding

at 2021 lows, although forecasts were pointing to

1.9%. Also in the UK, the unemployment rate stood

at 4.4% from March to May 2024,

unchanged from the previous three month period. Aligning with market

expectations, the US economy expanded by an annualized

2.8% in Q two, up from 1.4% in Q

one and above the forecast of 2%. The advanced estimate

shows the bank of Japan raised its key short term

interest rate at its July 2024 meeting to around

0.25% from the prior range of zero to

0.1% it set in March. Lastly,

keep an eye out for the Fed interest rate decision, which will be released this

evening, Wednesday the 31st. It is currently forecast at

5.5%, a reading that is stronger than this forecast is generally

supportive of the us dollar and vice versa.

As for our market movements, freight markets have generally been flat over

the past two weeks, with only the Cape index recording any

movement of note moving down around 5000 a day

over the period to

$20,729. P five.

TC closed yesterday

at

TC at 15,147 and the handysize

index at 13,687, barely moving

across the last fortnight. The iron ore

index dropped about $100, closing at $99

yesterday before a spike in trading today. More on that

later with how crude prices have continued

their slide that we've seen for the last month. This has dragged down

fuel oil prices, with the Singh HSFO now

prating at 475 and

0.5% at 580.

Our first guest today is Ben Kang. He'll be giving us a rundown on the

freight market. Thanks for joining us, Ben, and we have our

usual question for you. Could you please talk me through what has been

happening in the last week for the dry FFA market across all vessel segments?

Well, the Cape market experienced a continual decline of the last

week, with August dropping by

$3,700 and sinking to the lowest

value in four months on Monday. Last week there

was some early bid support, with August trading at 24

500 and September reaching at 26

750. However, following the negative

index of

minus,

market basically lost ground. The Cape size market

seems to be impacted by a decline in global cargo order

volumes and here you see particularly coal which has dropped

to a two month low. By Thursday, sellers

flooded the market, pushing August down to a low of

$22,000 and September down to

24,750. Friday

saw a similar trend closing just off the

days and weeks low, with August trade

as low as $21,000.

Turning to the Panamaxes, rates increased in the

first half of the week, peaking on Wednesday before

declining. Ultimately, the week closed with August

rates only $200 off Monday's opening

on Monday, August and September traded up to

15,000 and 15,800 respectively.

By Wednesday, rates hit their high, supported by a

better than expected index of plus

$336 to

$14,549, with

August and September reaching

$15,650

and

$16,150 respectively.

Q four had broken the 16,000 level

resistance the previous day, continued to push up and

printed 16,150, while Cal

25 traded back up to

13,850 by Friday.

The weak cape market and slowdown in

momentum in the underlying led to

mostly range bound trading, with August hitting lows of

14,625. And further out,

cal 25 traded down to

13,650. And

lastly for the supermaxes,

they followed a similar pattern to the Panamaxes, peaking on

last Wednesday before correcting. Last week

opened and closed approximately flat. Monday was a

quiet one with most trading volumes from

the prompt contracts, August and September traded up to a high

of 15,000 415,850

respectively, and on the index was

actually the flattest we've seen in a while at $1

down to 15,116.

A comparatively energetic day

on Wednesday with August and September reaching highs of

15,000

716,150 respectively.

Though this energy was mainly on the prompt, contracts with no

trades reported on the Cal contracts Thursday and Friday

did not maintain the positive sentiment, and by the end of

the week, August and September, we're both back, trading

at 15,150 and 15,500.

Thank you so much for that update. Unfortunately, that's all we have time for

today, but Ben, you'll be back in the autumn to give

us your regular freight update. I sure am. Thank you

very much, Jess. Thank you, Ben. On today's

episode we also have Martin Vera and Kathryn Wang calling in from the

US. Martin is a senior commodities broker and branch

manager of our Stanford office and he offers a range of freight,

ferrous and metals contracts. Meanwhile, Catherine is a broker on the steel desk,

but has recently started dabbling in aluminium premiums.

She is also based in New York. Stanford we will be

discussing the state of the steel market in the US and what we can expect

looking forward. Hi Martin, it's good to have you on the podcast.

Thank you so much for joining us today. It would be great

if we could start with a little bit of an introduction into

us steel. So my first question would be what is

US HRC futures and how long have

they been trading for us? HRC futures are

cleared monthly future contracts. They clear on

the CME, the Chicago Mercantile Exchange. They

were introduced in 2009. We have been

involved since the beginning. It basically is a

cash settled contract. It settles against the CRU Midwest

HRC index every month. That index is

out every Wednesday of every week. And who

has predominantly been using this contract and why? This

contract was championed by a few companies early

on to help them facilitate their business,

which can get pretty intricate. In 2000, 920

ten, the contract started to grow. It

is used by a wealth

of different types of

players in the market today. So whereas we

maybe even to 2015, I think we were still

2016, we were still hovering around 1 million

futures funds per year. We've

reached over 6.5. That's not even included options. Wow. Massive

growth there. The participants and depending on where you are, you know, if you're

a producer or importer, you can use the

futures to basically sell the futures proxy for your future

sales. If the levels are where

you think is fair

and if you are an end user or service

center, you can buy the future as a proxy for your

future purchases. It

also can be used, obviously if you're

warehousing stock, you can hedge your

inventory. Whether you're cash carry type

model or an importer with warehouses and

facilities or something along those lines sitting

on steel, you can use future obviously to hedge

that position. So Martin, you've mentioned the physical players

in the market. Are there any financials? There's

obviously quite a bit of activity coming from

financial intermediaries, primarily banks,

and there lately has been more activity coming

from fund types with different

strategies. So there is a, a certain amount of

speculation in the market these days, which is a nice, it

balances things to a certain degree, adds liquidity

and gives us another. Generally when youre

talking about just physical folks, sometimes the market used

to get a little one sided. As you add more

breath and more participants, it becomes a little more balanced. Theres

certainly volatility that

going to mainstay but it's easier to

navigate when you have more participants obviously. So what is unique about the

US steel industry? The US steel industry is

the fourth largest crude steel producer in the world

with a little bit over 80 million tons per year.

The industry has gone through changes let's say the last 50 years

where it was mainly integrated steel mills

that produce most of the steel. Now we have electric arc furnaces

that have pretty much taken over we're up

to about 70% is what I keep reading of

production in the US is from electric arc furnaces so

that is a big difference compared to the rest of the world whereas the world

is I think around 28% roughly

from electric arc furnaces. So we've taking on

this type of model which uses more

scrap in the process and that

has really changed

the landscape here in the US versus

the rest of the world. I would say the capacity

utilization is around 80% it tends to go a little bit

under depending on business cycle a little bit

of seasonality excluding the

pandemic it's gone from let's say

70% I think in December 22 or rather

it was 85% August 21 and that was close

to the peak that we had seen recently and

70% utilization in December of 22.

Okay as things started to normalize. So what is

volatility on us HRC futures now and what

drives this? That's a very good question.

Implied volatility on the front end let's say like October

November contracts right now roughly around 25%.

That has steadily come down to this point

from post Covid when it was

roughly 35% to 40%

regularly it's certainly come down but we've gone through this

period of normalization, price normalization and

obviously that price has come down. The volatility has come down a little bit

but it's certainly not at levels that were pre Covid.

As far as volatility there are still jolts in the market

and supply and demand jolts,

tariffs involved and all that produces a

great deal of price risk in the simplest form

what produces volatility of course is demand and supply

fluctuations. Right we know this. Production utilization

imports the state of the economy, the business

cycle, seasonality, government stimulus or

regulations tariffs and of course supply jolts

all influence fiscal price. So any perceived change in any

of those factors will have if not immediate

pretty close effect on the futures curve. So

I mean just to give you an example there was a lot of

imports scheduled for this

summer, this spring summer which was getting a lot

of chatter in the market as that information

spread throughout the market that had an effect on the

curve, flattened it at first, and then went

into a backward issue. So that's something that happens

pretty quickly, that type of information that comes out

as folks are doing the math, they figure, well,

prices aren't going to hold up under that pressure.

So we have examples like that.

We had an example back in 2021, on November

2021, when there was a fire in the

plant in Michigan that caused, it

was a, a fairly big mill that caused

supply disruptions. Right. They had to shut it down. They didn't know when it was

going to come back to speed. Like I mentioned, it's very difficult to shut things

down and start to back up. It takes time. So as soon as that

happened, that had immediate effect. It happened overnight. By the time

we were rolling in early morning, the curve had

already changed. People's appetites had changed for

periods. Prices, obviously, that puts a lot of pressure,

upward pressure on prices if you're going to have less supply in

the market. And then I

think another great example of this is the elections this fall as well.

So now we're anticipating elections this fall

to result in somewhat favorable

or pro business type of party, which

will lead to pro business policy. Props on possibly, which is going

to help prices. And we see this premium in Q one and Q two relative

to Q four. Granted, spot is lower

and we're already in a contango, but there's

definitely optimism for Q one and Q two. Just

based on the information that's available, the

polling and what the results may be from the elections here in the.

US, how does the market look now, given all this

turmoil, all this volatility that you've been talking about over the. Past five years,

maybe back up a little bit. From 2009 to 2019,

the spot range was from roughly, this is quarterly number

from 400 to 900 per ton.

From 2019 to 2024, that range

went from 500 per ton to almost

a 1000, 2000 per ton. So it's quite a

difference. Obviously, the pandemic was a major factor

causing supply

disruptions here in the states. It was, demand

was obviously disrupted, especially during the lockdown,

but it pretty much snapped back in many sectors.

It was really the supply side. It was just a shortage. It's very

difficult to stop and then start steel

production on a national scale. And no matter how

fast you want to do it, it's going to

take longer. So we saw this drag out quite a bit,

and we never could really catch up with demand because

they could not ramp up fast enough, and that caused

massive spikes in price. And since

2021, where it peaked, we've seen

things normalize down to the level.

Roughly October 2019, we were

$500 a ton. We have now

tested 700 or lower three times since

2022. So with that said, I don't foresee

us getting back down to that level. I think these levels now

could look very attractive to the market to

end users, to service centers. We'll see how it goes. The

mills have now taken a step in just this

week, started to pull back on prices, so we'll see

where it goes, but it looks like you're going to see a little bit more

volatility, probably to the upside at this point.

Thank you, Martin. That was very comprehensive overview of the us steel

market. It's always good to have different topics on the

podcast, so we really appreciate it. Thank you for your time.

You're very welcome. Hi Catherine, welcome to your first podcast.

It's great to have you with us. First things first,

can you give us an update on the current state of the us domestic raw

steel production and how it has been trending recently? For the week

ending July 27, us domestic raw steel

production experienced a slight fluctuation, so it

decreased by 0.6% from last week, but showed a

2.4% increase year over year, with capacity

utilization sitting at 77.9%.

However, if we look at the year to date numbers, domestic

production is down by 2.3% compared to last

year, and lead time for flat row steel mills have been steady at

about 4.5 weeks over the past month. According to

Steel Market update, Steel service center inventories edged up

2% month over month to 2.2 million tons as of

June 2020, which translates to around 61

shipping days of supply. So that being said, what are you hearing and

seeing which might indicate the future trends as we move

into h two of 2024? That is a great question. So

several us steel producers have reported their q two results in the

past two weeks, and the management commentary points to possible drivers

of price recovery in the second half of 2024.

For instance, Cliffs mentioned that end user

demand for steel is healthy, but some service centers are drawing down to

inventory to below basement levels and are not buying at low

replacement costs. They believe that even a small catalyst

like a rate cut, certainly around the us presidential election

results or trade enforcement, could spark a rebound in sale

prices. Speaking of rate cuts, it seems likely given

that the us headline Pcette was 2.5% in

June, down slightly from 2.6% in May, and Fed

funds futures are indicating three rate cuts by the end of year.

Nucor also pointed out that several end markets, including

construction for semiconductors, advanced manufacturing

facilities, data centers, healthcare facilities, and energy and

infrastructure products, are still looking healthy. Okay, so I've also been

hearing some discussions about the impact of mexican steel

imports on the us market. Can you please explain some

recent developments to me? So both cliffs and Nucor have flags

in Mexico as a significant issue. Mexico has been

leveraging North American Free Trade Agreement and US

Mexico Canada agreement to tranship steel from countries

like China, Japan, South Korea and Brazil. This has

been a point of concerns for us producers. However, the

Biden administration announced on July 10 the

reinstatement of section 232 tariff at a rate of

25% on seal imported from Mexico is melting

import into a country other than Mexico, Canada or the

US. And this move has been welcomed, of course, by

domestic steel producers. Cliffs even expect Mexico to be

removed from the USMCA in 2022. These

tariffs and any further trade enforcement actions related to Mexico

should provide a boost to us seal and scrap prices.

So last question to round this all off. How are

current prices and the forward curve shaping up for bushing

scrap? As of July 26, us number one bushing

scrap prices have remained steady at around

$380 per ton deliver midwest and

$395 per ton deliver southeast. Open interest

has been stable at around 2500 contracts mid

July. The forward curve suggests gradually increasing prices,

reaching about $455 per ton by the end

of the year. Thank you so much Catherine. It's been great to have you on.

It's always interesting for me to do a little bit of a different topic.

I'm sure our listeners will be interested in this too, and

hopefully you can come to London sometime soon. Of course, I will

see you soon. Hopefully. Hopefully. Thank you

Catherine. To round out our guest today we have Hao Pei who

will be giving us his update on ferrous products. Iron ore has seen a correction

during this last report week. However, there was a big spike today.

What happened and will this become sustainable? Actually,

iron ore corrected for three weeks previously. We

just hit the train for the past two weeks, mentioning

in our weekly reports we missed the first correction

week, but the rebound today was related

to a recent derailment in BHP. However,

this is too recent so there is no further details about the

real impact. But we assumed the accidents should

be over less than a week. And during this

morning we saw a quick recovery on China

equities. In fact, the

CSI, which is China securities

index 300 up by

2.16% which

created the biggest single day increase

from the early February, so which lifted

sentiments on metal products, including ferrous in

particular. So in addition, we heard mills in

different provinces of China started to protect this

price of finished steels and started

proactively cut production

and started maintenance from late July

to late August. And I think

the correction trend in mid run

yet should see a big reversal at the standpoint

because of the high delivery and high

inventories. And also Vietnam launched

export tariffs against China and India so which could

be huge since those are two biggest importers of iron

ore of the world. And second of all, Vietnam is top

three importers of finished steels for China and

Vietnam accounted for almost 12% of steel

export from China in H one. So I think the

trend, the spike is probably the short run

trend. I do think this might probably take few days or

even weeks more, but in mid run we haven't seen any

signals for the reversal of the rna.

And for FoB Australia coking coal, it

approached a two year low. How long will this

bearish trend last? I honestly think the

correction is not over yet. That's also for a mid run or low

run standpoint. I think the fob coking coal has

chances to see lower place in August and September,

in other words because of a very high supplies and fried

lakers. However, in short run following the resilient demand in

China and India are getting back to the market

as well as narrow a bid and offer prices in

some of the pmbs and plvs that indicate there will be

some brutal trading recently. So we saw chances of

deposition in short runs for the coking core. Thank you so much

for that update, Hal and joining us today. Thank you

Jess. See you in the wild. Thank you again for

joining us. And just a reminder that this will be the last episode before

we take a summer break, but we'll be back in the autumn. We look forward

to giving you more insights on freight and commodity markets

at that point. But until then you can get signed up to our app fis

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