Why are prices and profitability dropping?
Ample HRC supplies amid subpar end-user demand have pressured prices for HRC and busheling scrap since early spring 2023. This, in turn, has pressured steel profitability, as illustrated below. Based on the current futures forward curve, the spread shows slight improvement over the next several months, reaching nearly $390/st by summer 2024. The looming auto workers strike could further deteriorate steel demand, prices, and profitability.
How and why have HRC prices changed?
The recent downside pressure in the CME HRC Steel and CME MW Busheling Scrap spread is due to falling HRC prices. As we see below, prompt month average prices have fallen by nearly $440/st since April. Meanwhile, the futures forward curve has also shifted lower and changed from a backwardated market (where futures prices are lower than prompt) to a contango market (where futures are higher than prompt). This means that a steel mill can hedge future production at prices that are much higher than spot.
What about busheling scrap?
CME Busheling Scrap prices have fallen alongside that of HRC, but not as severely. Even though the futures forward curve is in a slight contango from October ’23 through summer ’24, prices are still in the recent range that occurred during the summer sell-off. Busheling scrap end-users can hedge shorter-term future needs near the lows of 2023.
This price risk can be hedged!
HRC producers can hedge their output in a variety of ways, as we illustrate below. As for busheling scrap, end-users can only consider swaps since there is no options market. Please get in touch with us for more information and specific strategies.
Futures forward curve nears spot prices...
Before we wrap up our analysis, we want to point out the futures forward curve. As the spot prices have fallen in recent months, the futures market for the latter half of 2023 and beyond has also fallen. However, as the chart below shows, most prices throughout 2024 currently hover near $800/T. Therefore, a steel buyer can still hedge future needs for 2024 at prices within $20/T (approximately) of spot market prices.
AEGIS can build your hedging program.
AEGIS can help steel buyers develop specific strategies that fit their operations. We are also happy to introduce new clients to more counterparties, therefore ensuring that you are receiving the best possible price. Please contact us for details.
Important Disclosure: Indicative prices are provided for information purposes only and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee of the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as "edge," "advantage," "opportunity," "believe," or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.