Fob China HRC outpacing other LME steel contracts

The London Metal Exchange's (LME) Steel hot-rolled coil (HRC) fob China (Argus) futures has traded more than all of its other ferrous contracts combined this month.

So far in January fob China has traded 9,079 lots, compared with 8,343 on fob Turkey rebar, cfr Turkey scrap and US domestic HRC. Yesterday fob China traded 1,862 lots, while the other ferrous contracts amounted to just 1,313 lots in total.

Some questioned how successful the fob China contract would be when it launched, as dumping duties and Chinese domestic policy have seen the country's direct pricing importance reduce in some geographies.

But China is still the world's largest producer and consumer of the grey metal, and the development of its steel industry clearly has massive repercussions for the global marketplace.

The fob China contract has now surpassed 500,000t of traded volume, just 11 months since inception — it took the LME's fob Turkey rebar contract 23 months to reach this level. Liquidity surged on the fob China contract in December last year, with the record for daily lots traded being broken three times — culminating in 6,362 lots being traded on one single day.

It was widely expected that trading would dry up in the run-up to the earlier than usual Chinese new year. But volumes are on course for their second-highest monthly total in January. The biggest day of trading in January to date has been 4,722 lots. This is the second-highest trading volume for fob China HRC and more than two-and-a-half times larger than seen for the LME's US HRC contract, set back in October 2019.

Earlier last year, ferrous liquidity at the LME was very much focused on scrap, with rebar a minor share. Fast forward to the end of last year and the LME's ferrous liquidity was dominated by scrap and HRC. This is unsurprising and perhaps testimony to the inextricably intertwined nature of the global steel supply chain.

Turkey has become a focal point for HRC export trade, given its proximity to Europe and the fact it has so far escaped dumping duties, unlike most other bulk exporters. Turkish margins and steel prices are clearly heavily dependent on scrap costs, meaning the existing LME suite of HRC and scrap can be used as a rough hedge by physical participants and financial traders. A more accurate hedge would realistically require a fob Turkey coil contract.

Right now there is much keener interest than usual in Turkish scrap prices from participants in the European flat steel supply chain. Buyers hope scrap costs will slip, pulling down fob Turkey HRC prices to competitive levels and alleviating the domestic tightness, while sellers hope scrap stays firm to keep imports out.