CME Group’s steel futures and options are a cost-effective hedging tool that can help you supplement your strategy and reduce risk in the steel supply chain.
Is it possible to buy futures?
Futures trading allows investors to speculate or hedge on the price movement of a securities, commodity, or financial instrument. Traders do this by purchasing a futures contract, which is a legally binding agreement to buy or sell an asset at a predetermined price at a future date. Grain growers could sell their wheat for forward delivery when futures were invented in the mid-nineteenth century.
Can I invest in futures?
Individual equities or an index, such as the S&P 500, can be used to purchase stock futures. A futures contract buyer is not required to pay the entire contract price up front. An initial margin, which is a proportion of the price, is paid.
Will the price of steel fall in 2022?
In a recent interview with S&P Global Platts, Phil Gibbs, stock research analyst at KeyBanc Capital Markets, said, “I think the bottom line is there was a scarcity in 2021.” “Aggressive normalization is expected next year, particularly in spot pricing as supply becomes more available,” says the analyst.
According to Platts pricing statistics, US HRC spot prices entered 2021 soaring, already around an all-time high of $1,009/st. In the final week of 2020, the price broke through the “grand a band” barrier, then soared another 94 percent to an all-time high of $1,960/st in late September.
Price erosion began in the third quarter, however domestic HRC spot prices remained over $1,900/st until mid-October, when they fell by 24% from their peak in the last months of 2021.
In a recent interview with Platts, UBS analyst Andreas Bokkenheuser said, “The US steel market is currently in surplus, after being in deficit for the past year and a half, and that surplus will most certainly grow larger next year.”
IHS Markit’s director of pricing and purchasing, John Anton, predicts that spot prices for hot-rolled coil will be significantly lower in 2022 than they were in 2021, when sheet prices were triple the 10-year average from 2010 to 2019. However, despite falling, he predicts that US sheet steel costs would remain high in 2022 when compared to the historical average.
“Prices are falling, and they are falling quickly,” Anton added, “but we still estimate the annual average will be 75 percent higher than the 10-year average.”
He believes that a reduction in cold-rolled coil spot pricing will be two to three months behind HRC before falling as precipitously.
Domestic lead times have decreased as output has increased and demand has stabilized, according to analysts at BofA Securities in their 2022 Metals and Mining Outlook. This trend is projected to continue through 2022.
As of Dec. 29, Platts’ HRC lead time average was 3.9 weeks, the lowest since May 2020 and down from an average of 8.5 weeks in July 2021.
In early 2021, when domestic mills were reluctant to restore capacity as the economy recovered from the early effects of the pandemic, steel customers experienced a state of hysteria and terror, according to Gibbs.
“I believe the car companies acquired more steel than they needed because they expected to make up production at some point, but that never happened,” Gibbs said. “All of these things, plus pent-up demand following the election, service center restocking… automobiles participating actively in the first half, are pretty much the same reasons that drove us up in 2021 and will drive us down in 2022.”
Steel demand projections for 2022 are being impacted by the stimulus that was placed into the market to allow the US to recover from the consequences of the coronavirus pandemic, according to Bokkenheuser.
“We’re seeing the tapering, and the pent-up demand for steel following the Covid stimulus is now fizzling out,” he added. “Effectively, demand growth is decelerating, not only in the US, but globally.”
Imports have also been on the rise in the United States in late 2021, putting additional downward pressure on domestic pricing.
“The lack of imports is one of the ways they got away with such exorbitant costs,” Anton explained. “In 2022, there will be no shortage of imports, so we won’t see the same high pricing.”
As distributors sell off steel purchased at higher prices, falling mill prices will be a big worry in 2022.
“It’s going to be a difficult environment for distributors with a lot of hot-rolled exposure to manage through,” Gibbs said. “No one ever thought they’d see those types of gains in inventory over the last several months, and they have to make sure they’re properly managing through this as best they can.”
The cash flow from inventory disposal will be wonderful, but if distributors aren’t hedged, 2022 will be a challenging year, he said.
“I think there’s been a little bit of denial for the previous several weeks because no one wants to accept the steel they just bought is already partly submerged,” Gibbs said.
Is the price of steel increasing or decreasing?
Steel prices are at an all-time high and are expected to fall from the late second quarter through the end of 2021. If you lock now, you’ll end up paying more in the second part of the year. Either buy on the spot or make sure your contract includes an escalator clause, which will operate as a de-escalator in the future months. Although supply chain problems have delayed predicted decreases, supply and demand fundamentals still point to a tipping point in the coming months.
Commodities Futures
Buying and selling contracts on a futures exchange is the most common way to trade commodities. The way it works is that you engage into a contract with another investor depending on the price of a commodity in the future.
For example, you might commit to buy 10,000 barrels of oil at $45 a barrel in 30 days under a commodity future contract. You don’t transmit the physical items at the end of the contract; instead, you close it out by taking an opposing position on the spot trading market. When the futures contract expires, you would close the position by entering another contract to sell 10,000 barrels of oil at the current market price.
You will earn if the spot price is greater than your contract price of $45 per barrel, and you will lose money if it is lower. If you had entered a futures contract to sell oil, on the other hand, you would profit when the spot price fell and lose money when the spot price rose. You have the option to close out your position before the contract expires at any time.
To invest in futures trading, you’ll need to open an account with a speciality brokerage firm that specializes in these transactions.
“Traders who have an account with a brokerage business that offers futures and options can access these markets,” says Craig Turner, senior commodities broker at Daniels Trading in Chicago. Each time you start or end a position in commodity futures, you will owe a commission.
Physical Commodity Purchases
You are not purchasing or selling the physical commodity when you trade futures contracts. Futures traders do not take delivery of millions of barrels of oil or herds of live cattlefutures are solely based on price fluctuations. Individual investors, on the other hand, can and do take actual custody of precious metals like gold and silver, such as gold bars, coins, or jewelry.
These investments expose you to commodity gold, silver, and other precious metals while also allowing you to feel the weight of your money. However, transaction costs for precious metals are higher than for other assets.
“This method is only viable for commodities with a high value density, such as gold, silver, or platinum. “Even then, investors will pay huge markups on the retail market over spot prices,” Giannotto warns.
Commodities Stocks
Another alternative is to purchase the stock of a commodity-related company. If you want to invest in oil, you could buy stock in an oil refining or drilling company; if you want to invest in grain, you could buy stock in a huge agriculture company or one that distributes seeds.
The price of the underlying commodity is tracked by these types of stock investments. If oil prices rise, an oil business should become more profitable, causing its stock price to rise as well.
Because you aren’t wagering on the commodity price, investing in commodity stocks is less risky than investing directly in commodities. Even if the commodity’s value falls, a well-run business can still generate money. However, this is true in both directions. While increased oil prices may improve an oil company’s stock price, other factors such as management and overall market share also have a role. If you’re searching for an investment that closely matches the price of a commodity, buying stocks isn’t the best option.
Commodities ETFs, Mutual Funds and ETNs
Commodity-based mutual funds, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) are also available. These funds pool money from a large number of small investors to create a huge portfolio that attempts to track the price of a commodity or a basket of commoditiesfor example, an energy mutual fund that invests in a variety of energy commodities. The fund may purchase futures contracts to monitor the price, or it may invest in the stock of various commodity-exposed companies.
“Commodity ETFs have genuinely democratized commodities trading for all investors,” adds Giannotto. “They are low priced, easily accessible, and very liquid.”
You can acquire access to a much wider choice of commodities with a minimal investment than if you tried to establish your own portfolio. Plus, the portfolio will be managed by a professional investor. However, you’ll have to pay the commodity fund a higher management charge than you would if you made the investments yourself. Furthermore, depending on the fund’s strategy, the commodity price may not be accurately tracked.
Commodity Pools and Managed Futures
Private funds that invest in commodities include commodity pools and managed futures. They’re similar to mutual funds, except that many of them aren’t publicly traded, so you have to get permission to invest in them.
These funds can employ more advanced trading methods than ETFs and mutual funds, resulting in larger returns. In exchange, managerial costs may be increased.
Commodity vs Stock Trading
Leverage is far more widespread in commodity dealing than in stock trading. This means you only put down a portion of the investment’s total cost. Instead of putting down the entire $75,000 for the full value of an oil futures contract, you might put down 10%, or $7,500.
According to the contract, you must maintain a minimum balance based on the estimated value of the trade. If the market price begins to move in a direction where you are more likely to lose money, you will be subject to a margin call and will be asked to deposit additional funds to bring the trade back to the required minimum value.
“Trading on margin can result in higher profits than the stock market, but due to the leverage used, it can also result in higher losses,” Turner explains. Small price changes can have a large impact on your investment return, so there’s a lot of room for profit in the commodity market, but there’s also a lot of room for loss.
Commodities are also a short-term investment, particularly if you enter a futures contract with a specified expiration date. This is in contrast to stocks and other market assets, where it is more typical to buy and hold assets for a long time.
Furthermore, because commodities markets are open nearly 24 hours a day, you have greater time to make deals. When trading stocks, you should do so during regular business hours, when the stock exchanges are open. Although premarket futures provide some early access, most stock trading takes place during regular business hours.
Overall, commodity trading is riskier and more speculative than stock trading, but it can also result in faster and higher rewards if your positions succeed.