The price spread between prime grades of ferrous scrap and obsolete gradesin the US domestic market has narrowed to more than a 2.5-year low, but fundamentals suggest it could be short-lived.
The spread between industrial prime grade benchmark #1 busheling and shredded scrap prices on a national basis contracted to roughly $12/gt in October, down from a peak of $54/gt in October 2018.
Market participants surveyed by Argus mostly expect that the differential could continue to narrow in November before returning to a more typical average of $20-$40/gt.
A series of supply-demand imbalances throughout the market over the last few months has driven busheling scrap prices down at a faster rate than shredded scrap prices, which has shrunk the premium between the grades.
These factors include relatively steady manufacturing activity that has maintained industrial scrap flows even amid a downturn in prices, as well as weaker underlying demand for prime grade scrap from flat-rolled mills.
The persistent and steep fall-offs in shredded scrap and zorba prices has forced most shredders to drop collection prices to multi-year lows, stifling shredder feed flows. But a series of fundamental shifts could help to partially correct the imbalances over the next few months.
National average ferrous scrap shredded and #1 busheling prices delivered to consumer both fell to a nearly three-year low in October to $216/gt delivered mill and $228/gt, respectively, to the lowest since November 2016.
Electric-arc furnace (EAF) steelmaker Nucor's 2.5mn t/yr direct reduced iron (DRI) plant in Louisiana, will remain off line until at least mid-November after the planned 65-day outage began in the second week of September, later than originally expected.
The continuation of the outage into November could potentially impact prime grade scrap prices, as Nucor looks for other sources of raw material inputs. Prime scrap, DRI and pig iron are used by EAFs to produce higher-quality flat-rolled steel.
At the same time, impacts to industrial scrap flows from the roughly six-week work stoppage at General Motors (GM) following a strike with United Automobile Workers (UAW) union members are expected to materialize this month, even though the strike ended on 25 October.
Some suppliers have noted that multiple industrial accounts on the stamping side of the business have seen flows taper off over the last month.
Meanwhile, year-to-date August pig iron and scrap imports both dropped by 5pc to 3.49mn t and 3pc to 1.14mn t, respectively, compared to the same period a year earlier. DRI year-to-date volumes witnessed a similar trend and dropped by 3pc to 1.14mn t versus the same period a year ago.
Drops in busheling prices have also outpaced declines in pig iron with the spread between basic pig iron cfr New Orleans nation average #1 busheling prices at nearly $91/gt, hovering near an Argus historical record high.
Pig iron last traded at a similar premium to scrap in late 2016, at a time when scrap prices and weak mill demand mirrored current market conditions.
With the combination of these factors, most market participants expect the differential between #1 busheling and shredded scrap prices to widen in the few months.
