Viewpoint: UBC buying spreads to stay wide in Q1

Mill buying spreads for used aluminum beverage can (UBC) scrap are expected to stay near more than 10-year lows in the first quarter as an abundance of scrap and unusually far-ahead buying offset typical winter tightness.

Rolling mills producing beverage can sheet and sellers expect consumer purchasing spreads to be flat in the first quarter around 56-57pc of the Argus midwest transaction price, on par with mid-December levels.

Outright prices for UBCs, on a cents per pound basis, are trading near two-year lows of 60-61¢/lb.

The pivot of US mills such as Novelis and Constellium to automotive body sheet from beverage can sheet has changed their scrap mix. Automotive body sheet, which is made to fit strict engineering tolerances, cannot be made using UBC scrap, which has gradually freed up some supply.

The growing adoption of automotive body sheet in the US has also caused mills to generate more "run-around" scrap, which can be put back into the furnace for future heats and displacing some purchasing of external scrap on the open market. Casting and rolling beverage can sheet coil creates about 18pc scrap by volume after cutting to dimension, while casting, rolling and cutting automotive sheet can produce twice as much scrap, according to one former purchasing executive.

Mills generating 5xxx and 6xxx series automotive scrap have had difficulty segregating them and selling them separately to scrap companies, leading to a glut of mixed low-copper clips on the market, a designation that sells for as much as 40¢/lb less than segregated clips.

Suppliers have also been frustrated by a formerly consistent buyer of aluminum scrap that has been out of the market, or only purchasing lightly, for most of the year, detracting from US demand.

The result of these two trends is a shrinking consumer base for US sellers of UBC scrap as suppliers struggle to find new consumers inside or outside the country.

Scrap in 2018

Mill quality scrap was abundant in the US throughout the year, causing rolling mills to push out new scrap delivery appointments as far as three months from the spot period, even though mill order books were strong.

Alcoa, Constellium and Novelis each posted higher overall shipments in the first three quarters of the year, but scrap continued to sell at greater and greater discounts to the all-in price of aluminum or the midwest transaction price until it reached its current trough of 56-57pc.

Still, if the midwest transaction price for aluminum drops sharply because of a recent announcement that sanctions will be lifted on Rusal, spreads could deviate from expectations. On 20 December, the day after the announcement, LME cash and three-month official settlements were off by less than 0.5pc from the prior trading day.