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London Metal Exchange Aug Scrap Contract Volumes Hit Record High

Aug 26, 2017

August is already a fresh record monthly high for the London Metal Exchange's steel scrap contract with a few days to spare. 

The contract traded the equivalent of 266,220 mt of scrap by Wednesday's close, up from the previous record set this January of 262,450 mt. 

September traded at $354/mt for 30 lots Thursday morning, before trading at $355/mt and $356/mt, both for 30 lots: it closed at $331/mt on August 1, and $357/mt on Wednesday, reflecting higher physical prices. 

The Steel Index's CFR Iskenderun reference price, which the contract cash-settles against, was stable at $357/mt Wednesday. 

"The past few months have seen a great deal of volatility in scrap prices, so it's particularly heartening to see LME volumes once again rising to break new records," advisory company Ferrometrics CEO Phillip Price told S&P Global Platts. 

"In just a few weeks we've seen extreme contango markets softening toward backwardation, providing plenty of opportunity for physical hedgers and those wishing to express a view on pricing alike," he said. 

He also referred to LME trading volume holding up despite some very quiet periods in the underlying physical. Participants have been searching for direction this week with mills remaining out of the market, and seesawing prices in China influencing sentiment. 

With the scrap curve also reflecting "physical market sentiment," it demonstrated the contract was "becoming a reference point for the underlying merchant trade," Price added. 

"With available forward market steelmaking spreads available at as much as a 8% premium to spot market levels mills are in reality achieving, we expect to see a continued trend of mills starting to participate in this market," he said. 

There has been a rapid uptick in physical players hedging inventories using the contract, with some taking advantage of the recent strong contango to build positions, sources say. 

With the curve flattening of late, in line with the rally above $350/mt CFR, one trader said hedged cargoes were becoming a "competitive spot option" as fixed price players struggled to source material against previous sales and quote subsequent deliveries.