US Al scrap spreads stabilize in May

US buying spreads for most mill-grade aluminum scrap plateaued in May at their narrowest differential to new aluminum in at least a year, stabilizing for the first time since Covid-19 disrupted the global economy.

While some scrap grades, like 1100/3003 clips, trade at their narrowest spreads to new P1020 aluminum in just a year, others like painted siding and mixed low-copper clips sell at their slimmest discounts since the summer of 2017.

Buying spreads for bellwether rolling mill grade, mixed low copper clips narrowed to 30¢/lb under the Argus P1020 Midwest transaction price in the last week of May from 45¢/lb under in the first week of 2020. The grade has traded at approximately 30¢/lb since the first week of the month.

The P1020 Midwest transaction price, which serves as the basis for high-purity aluminum scrap values in the US, dropped to an average of 74.73¢/lb in May, off by almost 20¢/lb from an average price of 94.78¢/lb in January.

Mill scrap prices are determined as a discount in cents per pound to, or a percentage of, the delivered price for the most common grade of new aluminum, P1020. When the P1020 transaction price drops, so do the prices of scrap tied to it.

But when scrap dealers are confronted with a particularly severe drop in the Midwest transaction price, they will often attempt to pass some of the burden back onto buyers in the form of demanding tighter spreads off of new aluminum prices. This slows the fall of the outright price in cents per pound dealers are paid.

Covid-19 mitigation efforts affected US manufacturing operations starting in March, but began afflicting the global economy as early as February. Cash official LME aluminum prices, which make up the largest component of the P1020 Midwest transaction price, dropped by 5pc in February, 4.6pc in March and 10.6pc in April.

LME settlements flattened in May to an average of 66.21¢/lb, almost even with the April average.

LME settlements were supported in May by most large economies, other than India, re-opening following Covid-19 quarantine measures. The Institute for Supply Management's (ISM) US production index rose to 33.2 in May from 27.5 in April, which was the lowest since the ISM business index records began in 1948.

The Argus P1020 Midwest transaction price closed above 77¢/lb last week for the first time since mid-April. This signals a likely bottom and provides more stability for buyers and sellers of scrap, which have been contending with months of falling aluminum prices.

By John Betz