Very little changed this week in the physical steel market, with mill offers and the spot price continuing to push higher and all eyes on the $1,700 level for HRC. Current momentum and our bullish outlook remain intact based on 8-week lead times now translating to early August delivery and foreign offers for late Q3/early Q4 coming in just below current spot levels. Additionally, demand for steel, the most important driver of price, continues to expand as the auto and energy sectors are beginning to ramp up. In contrast, a familiar dismissive tone from the analyst and prognosticator community has picked up over the last 2-3 weeks, as they continue to stick to outdated predictions that a collapse in the HRC price is right around the corner. If this sounds eerily familiar, it is probably because this dynamic has already played out repeatedly, and at significant cost to anyone who has chosen to ignore the facts on the ground. This week, we will shift our focus to the dynamics around next year’s mill contract negotiations, which will bring significant implications on next years’ prices.

As referenced in last week’s report, we believe contract negotiations will be earlier than ever this year due to the vice grip mills currently have on the spot market. When negotiations complete, there will be a significant interest in the HRC futures curve in 2022 for those trying to understand next year’s price levels. Before that happens, a refresher on what the futures curve is, what it means, what it tells us, and importantly, what it does not mean, will be vital in making informed decisions. The futures market is where participants agree on a date and price at which they will buy and sell an asset. The corresponding curve represents the trade-offs those participants make when evaluating time, availability, financing, and storage costs among other factors.  The futures curve is not a tool for prediction and provides no insight into where prices are going. If there are more sellers on the curve than buyers, they will undercut each other and the future price will decrease, while a surplus of buyers will have the opposite effect and push prices higher.

Therefore, the overall shape of the curve is simply an indication of buyers and sellers at each expiration into the future. What this really means is that the shape of the curve provides a snapshot of supply and demand in today’s spot market. If the market is undersupplied the futures curve will be in backwardation – meaning the price today is higher than it is in the future. When the market is oversupplied, the curve is in contango – where today’s prices are discounted compared to future expirations. Yet somehow, analysts continue to peddle the idea that the price for steel is going lower because the futures curve says it will. The curve has been in backwardation since Sep 25^th, yet spot prices have only moved drastically higher as demand continues to outpace supply. Listening to incorrect interpretations of the curve have been extremely costly.

If you are going to buy steel next year, on a mill contract or in the spot market, then you are naturally short the curve. Last year, on June 11, 2020, you could have purchased the entire year of 2021 for $540 with futures. If you purchase 500 tons per month and failed to lock in that price, then the cost for your steel is $3.96 million dollars higher than it would have been. On top of that, this cost is only calculated through June, and we have another 6 months to go. Now, much like then, it appears demand for steel is being discounted by analysts and that imbalance could offer value to your business. More importantly, locking in a portion of next year’s price reduces your volatility, and would allow you to operate with stable costs in the future. If you missed out on these benefits last year, we encourage you not to make the same mistake twice.