Viewpoint: UBC spreads to shrink as mills buy more spot

US mill spot buying spreads for used beverage can (UBC) scrap metal could tighten in 2020 as consumers pare back annual contract consumption in favor of buying more in the spot market.

While the pivot from contract-heavy positions to spot was prompted by an excess of scrap in the US market, swinging the balance significantly back toward spot could foster extra competition.

The change is expected create more competition among existing buyers. Some market participants are even expecting it to offset the perceived benefit of not being locked into year-long contracts.

"With more people in the spot market, people are going to get hurt," one Midwest UBC broker told Argus. "You're chasing the same tons, and now you're going to artificially push the spread in."

UBC spreads have tightened in terms of spreads off the Argus Midwest transaction price, edging up to roughly 58pc in the first week of December from 57pc a year earlier, while other common scrap grades have lost footing over the same period. These include litho sheet and the once highly valued bare 6063 extrusions. Litho spreads widened to 67pc of the Midwest transaction price from 73pc a year earlier, while bare 6063 extrusions widened to 72pc from 83pc.

One US mill that has outsourced all its UBC buying to several brokers has been contributing to the spot competition before 2020 even began. Other mills have a mixture of purchasing from contract orders and spot buys from in-house procurement teams.

Most buyers have attributed run-ups in spreads in 2019 to brokers attempting to fill contract orders slowly by keeping spreads wide.

The surplus of scrap has allowed brokers to widen spreads when buying from dealers with little resistance. But wide spreads have caused the pace to slow, forcing brokers to catch up on approaching 2019 contract deadlines by paying a greater percentage of the Midwest transaction price for new aluminum on UBC scrap.

By John Betz