Are CME HRC Futures Ready for Prime Time?

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jovannig/Adobe Stock

The Chicago Mercantile Exchange (CME) hot-rolled coil (HRC) steel futures market finally demonstrated increased liquidity during 2018, about five years following its introduction in February 2014.

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Both volume of trading and open interest numbers showed improvement during 2018, as evidenced by increasing trade volumes throughout the year. Additionally, the London Metal Exchange (LME) introduced a new Hot Roil Coil contract.

As a result, there’s been quite a bit of excitement and coverage lately of the HRC futures market — is it warranted?

Looking at Chart 1, since January 2018 or so, the CME HRC finally experienced an uptick in regular daily trading volumes, as demonstrated by the bars along the bottom of this daily settlement price chart.

Chart 1: Trade volumes are increasing, finally hitting a regular stride during 2018.
Source: Quandl.com

The next chart also shows a positive sign for CME HRC futures. Open interest shown by the red line in the chart continues to trend upward, charted along with the daily settle price.

Chart 2: Open interest in CME HRC futures continues to increase.
Source: Quandl.com

Have HRC Prices Moved Similarly to Other Steel Price Indexes?

Taking a full look back at prices of CME HRC against our own MetalMiner IndX(™) price tracking since the inception of the trading product, we see only small amounts of variability between historical MetalMiner IndX(™) HRC prices and CME HRC prices.

Chart 3: The MetalMiner IndX(™) U.S. HRC price versus the CME HRC close of day price, February 2014 to February 2019.
Source: MetalMiner IndX(™) and Fastmarkets

Taking a closer look, the next chart focuses on the year 2014 from the CME HRC’s inception date.

As shown in the first couple of charts, the U.S. HRC price was fairly stable around 2014. Comparatively speaking, the CME HRC price was less stable (although it may have offered a speculative opportunity, as it tended to fall faster than actual prices).

Chart 4: The MetalMiner IndX(™) U.S. HRC price versus the CME HRC close of day price, 2014.
Source: MetalMiner IndX(™) and Fastmarkets

Generally speaking, volatility increased in 2015, as the price dropped into December 2015. Thereafter, the price became more prone to fluctuations, but still traded mostly sideways in a band around the earlier price highs from 2013 and never returned to quite as low a price as it hit in 2015.

In early 2018, the price of HRC increased. Actual prices tracked by MetalMiner’s IndX(™)  seemed less volatile than CME HRC prices. However, prices trended very similarly.

Chart 5: MetalMiner’s U.S. HRC price versus the CME HRC close of day price, 2018.
Source: MetalMiner IndX(™) and Fastmarkets

What Does This Mean for Industrial Buyers?

The CME HRC futures liquidity amped up during 2018, the product’s fifth year on the market.

Volume and open interest increased. CME steel prices tended to follow a fairly stable trajectory, similar to what the major indexes report (e.g. CRU, TSI, Platts, etc).

Furthermore, large organizations with significant planning needs that buy in sizable volumes may benefit from the arbitrage play these contracts allow, as well as the overall benefits of using hedging instruments to lock in margins.

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