HR Coil Price Volatility: Buckle Up With Leading Contract Options

LONDON, April 22, 2019 /PRNewswire/ — US Midwest HR coil price volatility has increased markedly in recent months as opaque policy decision making processes and inelasticity of domestic supply have led to large variations in physical market price.

HR Coil Price Volatility: Buckle Up with Leading Contract Options (PRNewsfoto/CRU)

Concurrently, volume and open interest on CME Group’s hot-roll coil futures and options contracts*, settled on CRU’s US Midwest HR coil price (“The CRU”) has surged as physical market participants look to manage price risk. This CRU Insight, written in partnership with CME Group, identifies the reasons for US Midwest HR coil price volatility, suggests it is here to stay and presents options for both understanding future market fundamentals and therefore price, and managing price risk now.

Prices and policy more volatile

Volatility in US Midwest HR coil prices increased markedly in 2018. One measure of this, standard deviation in weekly data points of “The CRU,” increased from $19 /s.t in 2017 to almost $75 /s.t in 2018. Meanwhile, the range of prices across the year also increased significantly from $83 /s.t to $330 /s.t.

HRC futures volumes and open interest surge in 2018; reach record levels in Q1 2019

Use of CME HR coil futures and options contracts expanded greatly in 2018 and into 2019, as Chart 2 below shows. Open interest, for example, increased 14% y/y in 2018 Q4, over 37% y/y in January 2019 and 50% y/y in Q1 2019.

This futures contract has enabled users of the CRU to effectively hedge with minimal basis risk, taking advantage of a contract that has grown consistently and increasingly rapidly in liquidity while settling their physical contracts on the index of choice in that market.

In line with increased use of futures by commercial firms, there has also been growth in futures trading activity by financial participants. These firms are hedging their exposures to industry financing or providing liquidity to the market overall. As a consequence, January 2019 saw another monthly record volume in the CME futures. Why have prices become more volatile?

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