Increased availability of shredded scrap in the US domestic market and lags in the generation of industrial prime grade scrap widened the spread between prime and obsolete grades of ferrous scrap to a more than 2.5-year high.
The spread between prime grade benchmark #1 busheling scrap and shredded scrap prices on a national basis widened to nearly $58/gt in June, extending the upward trend which began in January.
The premium remains below the near-term historical high of about $80/gt in September 2017.
Supply imbalances drives spread wider
The supply shocks on both prime and obsolete scrap flows from Covid-19-related shutdowns of US auto and other manufacturing plants, as well as stay-home-orders, have slowly begun to ease over the last month, alleviating some supply pressure.
The June US domestic ferrous scrap trade marked the first time since March that supply improved at a rate on par or faster than demand, which helped the market step closer to a supply/demand equilibrium and led to flat-to-slightly-higher prices.
Demand has been hobbling along near-decade lows since April, with US steel production capacity utilization rates at 53.3pc for the week ending 6 June, according to the American Iron and Steel Institute (AISI).
Shredded scrap has become much more widely available in recent weeks, with an overhang of material in multiple major US domestic regions dragging on prices in the June trade month, casting some concerns over further erosion to prices in the coming the weeks.
National average ferrous scrap shredded prices fell by $4/gt to $253/gt delivered mill.
Even though supply issues for some grades have become less severe certain grades, like prime scrap, have continued to feel the knock-on effect from a slow restart to US manufacturing.
Suppliers surveyed by Argus this week said they are only projecting industrial prime grade flows to hit 50-60pc of normal monthly volumes through June.
“Flows are improving but we are no where close to getting inundated,” one Detroit supplier said. “I don’t expect any surge in supply with the three shifts in auto manufacturing. It will generally start increasing through June and early July.”
The lingering supply tightness on prime grades helped to support prices in the June trade with national average #1 busheling prices up nearly $7/gt to $311/gt delivered mill.
Demand recovery clouds outlook
Some market participants do not expect the prime premium to stretch any wider amid cues that current supply levels of primes are adequate to meet demand. Volumes are expected to improve through June which could tilt the balance toward being oversupplied.
“Flows might still be off but it’s still good enough to easily meet demand,” one Detroit consumer said. “As auto continues to smooth out supply chain issues and continues to ramp up, flows will only get better.”
Others noted that a restart to some integrated steel capacity in the next few weeks, including AK Steel’s flat-rolled steel mill in Dearborn, Michigan, and US Steel’s No 1 blast furnace at Mon Valley could help to improve the overall scrap demand environment next month.
But market participants note integrated mills returning to the market will have great impact on overhanging shredded scrap availability. This differs from their impact on prime grade scrap fundamentals, since the mills use a relatively small percentage of prime scrap.
Electric arc furnaces (EAFs) have already been running at much higher operating rates than national average rates, in the low-50pc range.
Scrap/iron metallics imports retract
Steelmakers efforts to hedge against supply constraints appears to have eased in June, with fewer scrap and iron metallic vessels on the water compared to the wave of seaborne imports that arrived through May.
US seaborne imports of pig iron and ferrous scrap are poised to hit 400,000t in June, down nearly 41pc from May volumes, according to an Argus analysis of vessel tracking data. At least one scrap vessel, the Kellett Island, is en route from Amsterdam to New Orleans, arriving 21 June.
The reduction in scrap and scrap substitute imports could stem from a variety of reasons. This includes adequate inventory levels, as well as increased competition with Chinese buyers for pig iron, which has impacted US mill’s ability to secure tonnage, keeping prices elevated.
The easing of US seaborne imports of pig iron and ferrous scrap could indicate that mills are in an adequate position to operate with prime units, suggesting a further easing of demand for certain prime grades like #1 busheling heading into July.