Premiums for new scrap over obsolete scrap in Europe could exceed €100/t in September if European steelmakers can secure volumes at their initial bid indications.
Many steel mills in Europe were heard to have given bid indications for E1 old scrap at prices at least €40/t below August levels, and E2 and E8 new scrap at €10-25/t down. One large steelmaker in Benelux was heard to have submitted bids to one supplier for E1 at €75/t down from August, which will put its prices below the current HMS 1/2 delivered to dock prices of €310-325/t at Amsterdam-Rotterdam-Antwerp-Ghent (ARAG).
Some Italian mills targeted €50/t down on the month for E1, while Spanish mills sought a decrease of €40/t from August prices. But most of these mills are willing to accept prices at just €10-20/t down from August for new scrap, shred and some other higher grade scrap such as bonus.
If mills can buy at around their price targets, new scrap prices will fall to around €420-450/t across Europe, while E1 prices move to below €350/t in many regions. This will create an unprecedented spread of more than €100/t between the two grades.
Some scrap suppliers said that the surging spread between new scrap and obsolete scrap is alarming.
"Such a wide gap is almost certainly not sustainable and it is just a matter of time before the spread moves back to a more sustainable range," one German supplier said.
The spread between E8 and E1 prices in Germany averaged €19.57/t in 2020. It began to surge in the second quarter of this year as a shortage of semiconductors forced many European carmakers to suspend or reduce production, which consequently limited new scrap supply, while flat steel prices increased to levels that encouraged mills to chase new scrap tonnes, even when prices surged. The spread in Germany between E8 and E1 scrap sat at €80.90/t in August compared to €61.32/t in July and €32.15/t in May.
"So, the question is: will obsolete prices rise or new scrap prices fall? And unfortunately, it is more likely that new scrap prices will fall," the supplier added.
The main consumers for new scrap are flat steel and specialty steel producers. After a prolonged multi-month price rally, flat steel prices began to plateau over the summer and may even fall in the winter months as cheaper imported volumes have started to arrive and the worsening Covid-19 situation in Asia is likely to lead to further production disruption for semiconductors that will consequently disrupt car manufacturing in Europe.
Any fall in European mills' consumption of domestically sourced flat steel could significantly lower demand for new scrap across the continent. And this fall in demand for new scrap will put new scrap prices under huge pressure, even if supply remains tight, given that cheaper imported flat steel tonnes are available and European mills' margins are reduced.
