SSS XXXIII: Prime-obsolete scrap spread to stay tight – DJJ

Spreads between prime and obsolete scrap in the United States are likely to remain tight in the foreseeable future, with few obvious factors that could unhinge a narrow spread, according to an executive at David J. Joseph Co (DJJ), the largest domestic scrap buyer.

Current spreads between prime grades and obsolete grades are much lower than they were in the 2004-08 time frame, DJJ vice president of marketing and communications David Hodory said on Wednesday June 27.

The price spread between No 1 busheling and shredded scrap in Chicago – two key grades for steel pricing – is now at $25 per gross ton, with the former at $395 per ton and the latter at $370 per ton, according to American Metal Market’s June assessment.

Despite much fluctuation the spread had previously been at a consistently high average, according to Hodory’s presentation, pegging the spread at an average of $50 per ton for 2004-11. That’s well above the $5 per gross ton average spread recorded for the 1990-2003 period. Since 2012, spreads have generally ranged from $6 per gross ton to $23 per ton, only widening once to $53 per ton in 2017.

According to American Metal Market pricing data, the spread narrowed to as little as $5 per ton in April after climbing as high as $40 per ton in January and February. Prime typically sells at a premium to obsolete scrap.

Consistent use of low-residual iron alternative metallics, like pig iron and direct reduced iron (DRI) plus prime scrap imports, help to keep that spread tight, according to Hodory, whose company is both the largest importer of scrap in the US and of merchant pig iron in the world. DJJ parent company Nucor also started up a 2.5-million-tonne-per-year DRI plant in December 2013, one factor in this long-lasting market dynamic.

“This spread has been largely compressed and we expect that to continue,” he said during a raw materials panel at the Steel Success Strategies XXXIII conference in New York, co-sponsored by American Metal Market and World Steel Dynamics Inc.

This generally narrow spread is not new, as such spreads on average have been “much lower” in the past five to seven years than in 2004-08, Hodory said.

Once more supply of alternative metallics come online – like Cleveland-Cliffs Inc’s 1.6-million-tonne-per-year hot-briquetted iron (HBI) plant in Ohio, which is due to start commercial production in 2020 – this will only further cement that narrow spread, he said.

In high-demand scrap markets, the spread might widen but scrap demand is now broadly steady and “manageable,” according to Hodory.

“Also, when that spread widens, the ability to import prime [scrap] from other regions of the world can effectively put a lid on that [spread],” he added.

In 2018, US prime scrap imports even came from Japan, a “very atypical” source of the product, and yet that deal made sense simply due to the direction of market pricing, Hodory added. 

US imports of all ferrous scrap grades from countries excluding Canada totaled 189,192 tonnes in the first quarter of this year, according to US Census Bureau data, down 43.8% year on year. Meanwhile, US pig iron imports jumped 25.3% in the same comparison.

“Over the long run… as the US market seems to have an appetite to continue to add low-residual metallics, it’s very difficult for me to think of an environment that would push that spread consistently higher,” Hodory said, without projecting a specific busheling-shredded scrap spread for the coming months or years.

Notably, the US obsolete scrap reservoir could potentially grow by 22% in 2018 compared with last year, with an additional 14.3 million short tons of scrap possibly coming into the pool, according to Hodory’s presentation.

Prime scrap supply has broadly flattened or declined over the past 25 years, coinciding with a drop in US manufacturing, he said. These factors contribute more to the internal price dynamics of busheling or shred than to the spread between the two grades.