Wide US scrap spreads could expand further

Historically wide spreads between US prices for obsolete and prime ferrous scrap grades could expand further in the April trade as the availability of each diverges.

US ferrous market participants expect spreads between key obsolete and prime scrap grades to widen further in the April trade, adding to already historic highs as a growing number of automakers are forced to temporarily shutter production because of supply chain issues.

US national average #1 busheling premium hit an Argus history high of $127/gt across 11 major trading regions, compared to a 4.5-year average of $39/gt.

Semiconductor shortages have cut automotive production, the main source of prime scrap, since early 2021 by 321,000 vehicles through 9 March, according to data from AutoForecast Solutions. On an annualized basis, this shortfall would account for 16pc of total 2019 US automotive production.

So far this week, major automakers including Honda, Nissan, Ford, GM and Toyota have announced further temporary stoppages at some facilities throughout the US.

The accelerated curtailments and disruptions to US auto production will likely continue to exaggerate tightness of #1 busheling in the April trade and after.

Auto output cuts had a direct impact on steelmakers' raw materials costs in the March trade, as highly sought after industrial prime grade scrap generated by the automotive sector has significantly contracted.

Prices of prime scrap grade #1 busheling increased by $70/gross ton in the US domestic March ferrous scrap trade.

At the same time, gains in US flat-rolled steel prices have outstripped those in busheling. Fewer imports, domestic production cuts and improving demand have lifted US hot-rolled coil (HRC) prices sharply.

Spreads between HRC ex-works Midwest and #1 busheling hit $810/t in late February and early March, compared to $333/t a year earlier. This has not only alleviated much of the concern over higher costs for mills but also acted as a partial justification to keep HRC prices high, sources said.

Supply fundamentals for shredded scrap have trended in the opposite direction as steep increases in prices combined with warmer weather have helped to support flows.

Improved availability, as well as a falloff in export pricing and higher freight costs for both bulk and containerized shipments could weigh on obsolete grades in the coming month.

Turkish ferrous scrap import prices of HMS 1/2 80:20 have fallen by $36/t to $422.50/t cfr since the beginning of March. Bulk freight rates from New York to Turkey have risen to $37-38/t on 12 March from $22-23/t at the start of the year.

Still, some factors are stacking up to limit spreads widening. For one, the historically wide price differential between both grades has caused mills to adjust their melt mixes to gradually favor more of the obsolete grade beginning in the March trade, which could help to relieve some of the pressure in April, even though there are lower limits on how much mills can cut busheling programs.

For another, tight spreads to preferable substitutes like pig iron could also alleviate pressure on busheling. Basic pig iron (BPI) prices cfr New Orleans fell to a $42/metric ton (t) discount against the national #1 busheling prices after the March trade, when accounting for a six-week lead time for BPI shipments. Typically, pig iron holds at least a $20/t premium to #1 busheling. Flat or falling BPI prices will also act as a ceiling on #1 busheling prices over time.

By Zach Schumacher and Brad MacAulay

Busheling-Shredded scrap spreads $/gt