HRC Futures in Steep Backwardation as Upside Risks Mount

The following article on the hot rolled coil (HRC) futures market was written by David Feldstein. As the Flack Global Metals Director of Risk Management, Dave is an active participant in the hot rolled futures market, and we believe he provides insightful commentary and trading ideas to our readers. Besides writing futures articles for Steel Market Update, Dave produces articles that our readers may find interesting under the heading “The Feldstein” on the Flack Global Metals website, www.FlackGlobalMetals.com. Note that Steel Market Update does not take any positions on HRC or scrap trading, and any recommendations made by David Feldstein are his opinions and not those of SMU. We recommend that anyone interested in trading steel futures enlist the help of a licensed broker or bank.

The U.S. sanctions against Russian oligarch Oleg Deripaska has resulted in his company, Russian aluminum giant United Co. Rusal (Rusal) losing its ability to accept payment in dollars. The sanctions have essentially blocked Rusal, the world’s second largest aluminum producer, from the global financial system. This has immediately halted all deliveries and resulted in a major global aluminum supply shock. The reaction has been powerful with the three-month aluminum future gaining as much as 35 percent in less than two weeks. Not only does global aluminum supply lose Rusal’s production, but also the orders on Rusal’s books all go poof and those orders need to be placed elsewhere, exacerbating the short-term supply shock. Last week, Glencore announced force majeure on 50,000 tons of aluminum expected from Rusal. While this could lead to incremental steel demand to substitute for aluminum in short supply, there is something much larger afoot.