The Chicago Mercantile Exchange’s (CME’s) embryonic North European hot-rolled coil (HRC) futures contract is vastly outperforming the bourse’s more established US contract in its first few months of trading.
The US HRC contract traded 48 lots over its first four trading months of October 2008-January 2009.
The European contract, which settles basis Argus‘ northwest European HRC index, traded 575 lots in March and April, despite launching amid the Covid-19-induced lockdown.
This is the equivalent of only 10,500 tonnes, and the majority of the volume has come from just two participants. But interest is building from the wider marketplace, and some of the volume has already been a hedge of physical positions.
Lockdown has potentially hampered trading, with business continuity plans and the existential threat facing participants clearly taking priority over a fledgling futures contract. But the current market environment could also cultivate trade going forward.
Argus‘ benchmark northwest European HRC index has dropped by €57.75/t since the contract launched, from €482.00/t to €424.25/t ex-works.
The April average was €446.30/t, with the index starting the month at €460.50/t and finishing it at €424.25/t.
The rapid closure of manufacturing has been a noose around the market’s neck. Mills faced a perpendicular drop in contractual offtake from original equipment manufacturers and their suppliers, and the most automotive-focused producers had no choice but to shift to commodity-grade sales and vie with increasingly competitive imports. Russian HRC has been offered at as low as €380/t fca Antwerp.
With manufacturing activity slow to resume, global prices slipping and domestic stocks elevated, the market looks set to remain under pressure.
But the potential for coronavirus-induced emergency (restrictions)[https://direct.argusmedia.com/newsandanalysis/article/2101615] on steel imports could potentially reverse this trend.
Import arrivals look set to remain relatively subdued throughout May and June, given the lack of arbitrage in February and March, when cargoes would have been booked. Sensing a nadir in recent weeks, some trading firms piled into cargoes arriving from June onwards, but how these will be affected is unclear and today’s news will undoubtedly subdue import demand as participants await clarity. Such volatility and uncertainty could induce more hedging interest from the coil supply chain, as could increasingly lengthy contract talks for the second half of this year.