CME to launch north European HRC futures contract

CME Group will launch a north European hot-rolled coil (HRC) futures contract on 9 March, at a time of heightened volatility in the continent's coil market.

The coil steel supply chain has been roiled by various pricing dynamics in recent years. Most notably, spot HRC prices collapsed from €535/t ex-works on 12 November 2018 to bottom out at €412.25/t ex-works on 18 November 2019.

This saw buyers, particularly in the automotive supply chain, clamouring for lower contract prices that mills refused to enter into, as they were below breakeven.

Most half-yearly contracts were eventually finalised at €440-460/t ex-works, a level that was just about palatable to mills. Some are still outstanding, and buyers will likely have to pay more than those levels: the market rose to €473.25/t on 31 January but has since ebbed to €468/t on concerns over the coronavirus and falling raw material costs and import quotes.

Given the heated and protracted nature of those contract talks, some were understandably looking to move to index-linking on the supply- and buy-sides.

There has long been pent-up demand from the automotive supply chain to hedge fixed-price steel exposure, and some have been doing so through iron ore and coking coal futures markets. Since 2015, and with the increased regionalistion of the steel market, the correlation between those raw materials and EU HRC has broken down, meaning it is not a particularly strong hedge.

"This new hedging tool for the north European HRC market is very timely given the increased volatility of European steel prices," said Lee Kirk, managing director of Cargill's metals business.

"This contract benefits the ferrous industry as a whole and provides us an opportunity to work and create value with our customers across Europe so that they can focus on what really matters."

Cargill's footprint has increased in the European coil segment, it is supplying into Spain and Italy and looking to grow its northern business as well. A futures contract would enable the company to provide fixed or index-linked long-term cargoes.

The contract, which will cash settle against Argus' northwest European HRC index, will trade out from March 2020 to February 2021 and be euro-denominated.

The London Metal Exchange is also looking to launch a north European HRC contract later this year to capitalise on rising demand for hedging mechanisms, given the building volatility and proliferation of fixed-price risk.

LME and CME both have existing HRC contracts, the former for fob China and the latter for the US domestic market. The LME contract, which settles basis Argus' fob China index, traded more than 130,000t in January, with a nominal value of nearly $29 million. At points in the month, it was more liquid than all of the LME's other ferrous products combined.

The CME's US contract, which settles basis CRU's weekly price, is regarded as one of the most successful ferrous products outside of China.