In the weeks and months leading up the Thanksgiving holiday, not much had changed regarding the outlook and pace of the current HRC price rally. Supply disruptions, elevated lead times, shrinking inventory levels and steadily increasing demand drove the spot price to increase at an average pace of approximately $20 per ton each week – the fastest pace price rally in recent history. However, over the last week, market dynamics changed, further damaging the beaten up buying community. Spot offers from mills are now at $840/st with limited January availability. This represents a $90/st price increase this week, and has already spurred some buyers to transact at that price. Moreover, this increase occurred even as news broke that U.S. Steel would restart its blast furnace #4 at Gary Works. If there were any doubts as to whether this market was in a shortage, the drastic moves over the past week should solidify this narrative. If this market is currently in a shortage and buyers cannot secure material today, they should look at possibly locking prices and tonnage into the future using the forward curve. This week, we will look at the evolution of this strategy over the past month, and how it can be used today given the current market dynamics.

The below chart shows today’s forward curve in green, compared to the curve one month ago in orange. The bottom panel shows the dollar per ton change in each forward expiration over the past month. This represents the savings that buyers are currently sitting on if they locked in prices a month ago – almost $200 per ton for each month in the first quarter of next year.

We have assisted multiple customers in locking prices and secure future tons over the past month, positioning them at a significant advantage compared to their competitors. Unfortunately, we have also seen many buyers pass on offers and predict lower prices next year. Let’s explore how this will play out for steel consuming companies over the next few months assuming that they are right and HRC prices decline starting in January. If the spot price falls $40/st over the month from its peak near $850 (representing a significant drop based on historical cycles), the spot price entering February will still be above $800. Furthermore, lead times will be into at least March. While the buyer may feel good about predicting a peak in prices, their company will be replenishing their depleted inventory in late March or early April with $800 HRC. The lead-time and price look even worse if the rally lasts longer or peaks at a higher price.

Thankfully, the curve offers an alternative that is risk reducing and more attractive pricing on the same timeline. The second quarter is trading near $750, allowing buyers to lock in that price, receive material at that time, and reduce the risk that prices continue higher. Due to the shape of the curve, the prices get more attractive further out into the future. Our recommendation  – Buy when you can, not when you have to.