Recap and Observations #
Even though coking coal futures fell to as low as 1474.5, I still believe that closing it was the right decision, because supply is still tight and I believe the price of the futures has fully priced in the expected effect of the document issued last week. However, I have to point out that even with the self-discipline initiative, steel production remained high and even rose slightly, and Mongolian coal imports have not recovered. If either of these changes — that is, if steel production falls drastically, or Mongolian imports fully recover — the price of coal could have further downside. That said, I don’t think shorting coking coal is a good trade given the potential risk-reward ratio.
On the other hand, I think going long on hot-rolled coil may be a better option. The current level of steel production is not sustainable, as less than 10% of the industry is making money. This means that when the decrease in production actually occurs, there will be less steel produced. To go long on steel, hot-rolled coil is better than rebar because of the weak infrastructure and real estate market. Also, in recent years the ratio of consumption in manufacturing just exceeds that for infrastructure. This in part tells the story. From the positioning data, some big players are the top net shorts on hot-rolled coil, so I will not go long right away.
At a glance many products have fallen to the “bottom”, like live hogs, corn, glass/soda ash, alumina/caustic soda etc. I don’t think it’s a good idea to buy the dip. Even if they do bottom, when they will rise remains a question. If implied volatility is high, selling put options might be a solution, but I’m not comfortable selling options for the sake of speculation.
Plan #
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