Traders using CME HRC contract to hedge

Traders are starting to use the CME Group's fledgling north Europe hot-rolled coil (HRC) contract to hedge physical business.

Volumes are currently too small to implement proper hedging programmes, but the intention of traders that have used the contract is to move away from physical positions and stocks, should liquidity continue to build.

The fourth quarter traded at €440/t today, for 500 t/month, as a new physical participant began using the contract. This was a premium to the underlying Argus index, which slipped by €0.25/t to €410 — the month-to-date average for May was €418.37/t.

The market flipped to contango this week, although it has flattened over the last few days on expectations that a revised steel safeguard and anti-dumping investigation into Turkey will limit import arrivals.

But the immediate spot market remains under pressure as mills try to patch up gaps in orderbooks for the next few months. Imports from the CIS, which operate on a much lower cost basis, were available at €380-385/t fca this week. Large buyers have been benchmarking purchases against this kind of level.

The contract traded the equivalent of 1,000t in its first month of trading, March, and 10,500t in April. This month it has traded 6,000t. This is a comparatively strong showing, given that the contract launched as Covid-19 pushed the world into lockdown.

The CME's established US HRC contract launched at a much slower pace. In its first five months of trading, the equivalent of 15,760st were traded. The north Europe contract has traded 17,500t since its launch 9 March.

By Colin Richardson