Viewpoint: UBC supply to tighten

Competition for used aluminum beverage cans (UBCs) is expected to increase in the second half of the year, as domestic supply tightens and a weaker dollar limits access to imported scrap.

Most market participants expect UBC prices to trade closer to the midwest transaction price for primary aluminum, as competition intensifies.

Consumers purchased UBCs at 73-75pc of the Argus midwest transaction price last week and some expect spreads to strengthen to as much as 76-78pc by the end of the year.

The spread indicates what percentage of prompt delivered London Metal Exchange primary aluminum prices consumers are willing to pay for UBCs. Higher numbers indicate greater demand.

Spreads for UBCs have weakened in the latest week from 81pc of the Argus midwest transaction price at the beginning of 2017. Imported UBCs from earlier in the year and a mild winter have allowed consumers to build large inventories, which has weakened demand.

A year ago this week, spreads were stronger at around 77pc of the Argus midwest transaction.

Generation of UBC scrap typically peaks in the summer, as outdoor events that boost consumption of soft drinks and alcohol taper off in the second half of the year. This slower generation eventually leads to some tightness if demand is steady or increases.

An appreciation of the dollar in late 2016 after the surprise US presidential election victory of Donald Trump gave consumers increased purchasing power to acquire lower priced cans from Mexico, Canada and many other countries. But the US dollar has declined steadily since April and is now weaker against most major currencies compared to a year earlier.

This could cause rolling mills to shift buying focus more to US suppliers in the second half, which could result in increased competition for domestic supply and stronger spreads in relation to the midwest transaction price.

Another factor supporting increased competition is Tri-Arrow Aluminum's expanded Kentucky can sheet mill, which is expected to start melting more scrap in the second half, boosting domestic demand.

Amsterdam-based Constellium, which operates a beverage can sheet mill in Muscle Shoals, Alabama, announced in March that it has also installed new equipment — in this case a furnace.

Still, some of these increases could be offset by a recent decision by Alcoa to restart its Warrick smelter in Indiana, to supply molten aluminum to its on-site can sheet mill. The mill will need to continue purchasing UBCs, but some market participants are concerned scrap consumption volumes may change.