Compared to recent weeks, the domestic HRC market was relatively quiet going into the long holiday weekend. Spot prices and mill offers continue to grind steadily higher, now well above the $1,600 level with no changes in the dynamics that have brought the rally this far. As demand continues to push the physical market forward, our view remains bullish, as automobile production has begun to restart, and the energy sector appears prime to start building additional rigs as crude prices stabilize above their $60-65 break even point. This week, we will look at some of the dynamics within the futures market since the sell-off earlier this month, while we wait for the new economic data released on next week.

The chart below is the HRC Net Speculative position (in blue) and HRC open interest (in white).

As we have referenced in prior reports, commercial participants are on the opposite side of speculative positions, which means the hedging community is “longer” than ever before. Additionally, current open interest levels slightly surpass the previous high in April, meaning hedgers continue to open new positions as prior contracts settle against the index. With this in mind, we look to the chart below, which is the HRC future’s curve from the last four weeks going out to June of 2022.

After the overall curve peaked and sold-off in early May, the front of the curve has rebounded, with June and July at all-time highs, while the back of the curve remains severely depressed from the elevated levels 3 weeks ago. The movement of these three datapoints: price, open interest and net spec positioning suggests that the buying (from commercial participants) and selling (from speculators) has occurred more significantly in near-term expirations. From a business and hedging perspective all this attention on the front of the curve could be a good opportunity to start looking at 2022 before contract negotiations, which will be much earlier than usual and provide additional upside pressure to the curve.