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Daily HRC index to roll out; volatility mounts

Oct 31, 2018 | 04:03 PM | Chicago | Michael Cowden

Tags  hot-rolled coil index, HRC index, Karl Schmidt, Hartree Partners, Daniel Uslander, High Ridge Futures, flat-rolled steel, steel prices HRC index

Fastmarkets AMM is moving ahead with plans to launch a daily hot-rolled coil index on Monday November 12.

Fastmarkets AMM continues to believe that daily pricing is necessary due to unprecedented steel market volatility stemming from the United States' Section 232 tariffs and quotas, potential changes in trade resulting from the US-Mexico-Canada Agreement (USMCA) and potential fallout of a trade war with China.

Daily pricing is also needed because hot-rolled coil prices are hovering at their highest point since the 2008 financial crisis - and many signs point to further volatility ahead.

"A weekly price for USA steel is ridiculous and outdated in today's market. I believe every market should have a daily price, and most do," Karl Schmidt, a trader at global commodities merchant Hartree Partners LP, told Fastmarkets AMM. "The stock market was down 250 points [on Tuesday]; it's up 350 points [on Wednesday]. Different factors drive different days, and it's important to reflect that."

And the concept is hardly foreign to the steel market abroad. "We see how daily steel prices in Asia enhance transparency. Do we not want the same?" he asked.

Daily pricing is available in Asia for both finished steel products such as hot-rolled coil and reinforcing bar as well as for raw materials such as iron ore and coking coal. Such tools make it possible to assess mill profit margins in the region. There is no analogous set of tools available to check on the performance of mills in the US, Schmidt said.

Fastmarkets MB carries daily prices for rebar and hot-rolled coil in China, along with daily seaborne iron ore and coking coal prices.

A mature futures market could provide a useful window into market sentiment. In the meantime, "a daily index would be helpful," Daniel Uslander, industrial metals specialist at commodity futures brokerage firm High Ridge Futures LLC, told Fastmarkets AMM.

Back to the future?
Fastmarkets AMM’s weekly hot-rolled coil index - currently at $41.27 per hundredweight ($825.40 per ton) - reached a nearly 10-year high of $45.84 per cwt in July, below the 2008 peak of $56.25 per cwt but still more than four times the 2001 low of $10.50 per cwt.

In other words, the difference between the 2001 valley and this year’s peak is a whopping $35.34 per cwt, an indicator of the sometimes violent cyclicality of the steel market.

On an annual basis, hot-rolled coil prices have averaged $41.92 per cwt through the first 10 months of this year, outpacing the average selling price for hot-rolled coil in 10 of the past 18 years.

While it remains to be seen where the price might settle by year-end, predicting that in theory shouldn’t be a difficult given that we’re nearly a month into the fourth quarter. But if the past two decades have been rocky for steel prices, 2018 has been volatile even by those standards.

Hot-rolled coil prices, for example, stood at $29.69 per cwt on October 31, 2017, when Section 232 tariffs and quotas appeared to have slipped off the radar of President Donald Trump's administration - and how long the Section 232 tariffs will remain in place remains an open question. High-level talks are already under way about the removal of tariffs on Canada and Mexico.

Few market participants foresee an upward jolt equivalent to the one the steel market received when Trump rolled out the surprise 25% duties on foreign steel in March.

Some sources have said prices could ratchet up again if the Trump administration raises Section 232 tariffs to 50% - something his administration has already done with Turkey - or if it implements a draconian quota regime to stem steel imports. But most sources suggest that such measures would backfire because they would make US steel prices, already the highest in the world , even higher - and at the expense of steel consumers.

In other words, downside risk might be mounting on hot-rolled coil prices but the prospect of another price spike is not off the table.

US versus the rest of the world

Whatever happens in the coming months, Section 232 duties have already caused US steel prices to balloon above those in the rest of the world.

The US hot-rolled coil price average of $41.92 per cwt thus far this year is 59.1% above China's year-to-date average of $26.34 per cwt and 62.7% above the northern European average of $25.76 per cwt.

Section 232 tariffs of 25% on Chinese steel - a proxy for steel prices in the world export market - would add $6.59 per cwt and freight another roughly $7.50 per cwt to that average price. This would put the price for foreign steel, delivered to the US and inclusive of Section 232 tariffs, at $40.43 per cwt - or roughly $1 per cwt below Fastmarkets AMM’s current weekly hot-rolled coil index.

And what about competition among domestic steel mills? There is little incentive for them reduce production given that almost any mill making steel is recording a profit at current prices.

Warning signs
Oil prices have been sliding. One domestic mill is said to be selling hot-rolled coil delivered to customers in the Midwest at $37.50 per cwt. And yet scrap futures are trending higher.

Oil, steel and ferrous scrap prices have traditionally trended together. Yet that disconnect is no longer unusual. Steel and scrap prices have decoupled for much of the past year.

Fastmarkets AMM’s No1 busheling index has averaged $382.45 per gross ton, equivalent to $17.07 per cwt, thus far this year. That represents a $24.85-per-cwt spread between finished steel selling prices and scrap costs.

To put that into perspective, the spread between scrap costs and finished steel prices is greater than the average annual selling price for steel in 2015, when hot-rolled coil averaged $22.54 per cwt.

Will steel prices continue to defy the gravity that scrap has traditionally imposed, or will they fall back to earth again?

Fastmarkets AMM does not take a position on that, but either way a daily hot-rolled coil price would allow industry participants to see when the market inflects - up or down - faster than had been possible with a weekly index.


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