Last week, market prices in the ferrous complex were higher again, as the spot HRC price rally extends into its 7^th month. Spot HRC pricing moved above $1,300/st, supported by the lingering tightness in terms of mill and spot material availability. While this current market tightness is the same as it has been over the past several months, we are hearing more optimism from those in the market that the end is in sight. Driving this optimism is the loosening of freight markets and mills indicating that they are finally catching up on late contract orders. Additionally, last week we discussed the looming threat of imports being more realistic in the months ahead. It is important to consider what an “end” in this rally means for pricing in the months ahead, but we urge caution as the risk/reward ratio for buyers at these prices has shifted. An end of a price rally does not necessarily mean lower prices are eminent, and lead times indicate prices can stay high for several weeks. This week, we will dive into how paper market hedgers can give any insight into the demand outlook in the months ahead.

In previous reports, we have discussed the Net Speculative positions in HRC future contracts, as the directional positioning can give insight into the price outlook from banks and funds. The below chart shows the TSI Midwest HRC price on top, with the Net Speculative positions in the lower panel.

If speculators are net short, it means that commercial positioning is net long. Commercial positions usually consist of physical market participants who are hedging. Therefore, a negative reading in the net speculative position, followed by an increase in the price means that physical hedgers are benefiting at the expense of the speculators. An interesting note is that there is more physical hedge buying with prices at $1,300 compared to April 2020, with prices at $500. This may seem backwards because buyers are locking in higher and higher prices over time. However, we see this as a signal about the strength of the demand in the market. Because buyers of hedges are generally locking in prices to achieve a desired margin on their end sale, the dynamic of increased hedging at higher prices indicates that demand for the finished product is growing as the price increases and hedgers are confident about passing along those increases. This strength in demand will continue to support prices at elevated levels for some time, even after prices stop rising.

As we discuss hedging and the outlook for prices, we should also discuss how the future curve has reacted recently, and what opportunities it is presenting. With the front of the curve trading at prices higher than the current spot, and upside momentum slowing, we would avoid locking in hedges during the summer months. The risk reward appears to favor waiting to buy spot material, as lead times will be into June soon. However, the back of the curve continues to offer a value for buyers, with over $400 discount for 2022 purchases.