November 18, 2022

Some steel producers feel that HRC prices are nearing a bottom, as most are operating at breakeven or even at a loss, according to Argus. Many of these steelmakers are working through “high-priced” pig iron and busheling scrap that was purchased months ago, thereby leading to higher conversion costs and lower profitability. However, these producers report that downstream demand is “decent,” as shipments have been stable in recent months. AEGIS notes a looming rail worker strike in December could be damaging to the US economy and might affect HRC prices, demand, and supply. (Source: Argus)

Previous reports from Argus suggest that the HRC steel market is “oversupplied.” This has pressured CME HRC prices in recent months, pushing prompt month (November) CME HRC futures down nearly 58% from the highs of mid-March, as the last trade was $663/st (7:00 AM CST). This could be a good time for steel end-users to hedge future needs into 2023 by buying HRC swaps. Using swaps converts a variable cost into a fixed cost, thereby ‘locking in’ a price for the hedged steel. Since HRC swaps are thinly traded, we suggest using limit orders to establish a specific steel price. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (11/18/2022)

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