The spot market remains on fire, as HRC prices move towards $650/st with little in sight to disrupt the upward momentum in the short term. This week, a mini-mill alerted buyers through an unofficial announcement that their offer price for new HRC inquiries would be $680. This propelled the price even higher, marking the 12^th straight week of rising prices with the rally spanning over $200/st and still going. Our analysis indicates that this is the fastest price rally over the past 10 years, with prices increasing over 5% per week on average. Moreover, the longer the rally last, the more upside momentum is possible. As inventories dwindle throughout the supply chain, buyers have few other options to secure material, forcing them to accept higher prices and longer lead times. This week we will look at how the futures market has reacted during this rally, and how it should be used to help defend against further increases.

The chart below shows the four upcoming HRC futures expirations with Nov in white, Dec in blue, Jan in red, and Feb in yellow as of yesterday.

The price trended downward for most of this year, with these expirations following the spot price and trading within a tight range. However, since the July lows, the November expiration has increased by nearly twice the amount of the February expiration, reflecting the tightness in the spot market. This is additional support for the point that in a panicked market, steel today is more valuable than steel tomorrow. If a buyer wants steel in November, they must pay a premium compared to deliveries in February. This is why service centers with inventory on the ground are able to sell at higher prices than mills during times like these.

As mentioned above, inventories will eventually be depleted, which will drive more buyers to the mills, increasing their negotiating power. With domestic production levels still historically low, and very little foreign competition, prices have significant upside risk through the end of the year. Additionally, lead times can remain extended, pushing the risk for buyers of not having material well into the first quarter of 2021. If this is a scenario that you see as likely, or if it is a significant risk to your business, the futures market may be able to alleviate some of this pain. The February future is currently priced at a $39 discount to the November. Locking in that discounted price today can help offset the higher cost should prices continue to rally into next year.

However, turning to the futures market right now will not help resolve current material deficits. In order to protect your business against the dynamics of the current market rally, hedges must be placed well before the panic ensues. This entails developing a long-term, systematic hedging program that will reduce the volatility that distresses so many steel consumers.