What could rebalance the US scrap market?

Those winning bids secured clean 6063 scrap at a 59 cents per pound discount to the Midwest transaction price, or about $1.70 per pound delivered Midwest with conservative freight estimates, cash payment, and loading charges ex-warehouse.

Whether toll converting that metal through a third-party processor or processing it via an internal casthouse, that pricing delivers extrusion scrap at a large discount to primary and secondary billet.

Consider the math.

If you did just an ordinary job of negotiating your toll conversion fees for 2026, you probably landed around 40 cents per pound. Applying that toll fee to the above metal would yield billet at $2.10 per pound.

Market value today for billet is $2.53 per pound (Midwest transaction price of $2.40 per pound plus a 13 cents per pound billet premium).

If you run your own casthouse, your conversion costs are far less than 40 cents per pound, so your secondary billet is even cheaper.

Granted, the pallet auction could be considered an anomaly. However, the market tells us that bare 6063 extrusion scrap is still only $1.81 to $1.85 per pound, a large discount to the Midwest transaction price.

Why aren’t people taking advantage of these massive discounts?

The obvious question is: If this material is so cheap, why aren’t people all over it at the expense of the Midwest transaction price trading at $1.04 per pound over the LME cash settlement?

We believe the answer lies in two structural problems facing the market:

1. Saturation effect. Smart casthouse operators have known scrap was cheap since Section 232 tariffs increased from 10% to 25% and then to 50% in June 2025. They began layering in scrap at progressively deeper discounts throughout 2025 and built their sourcing books for 2026 at what they believed were attractive discounts.
   • Given the current state of affairs, it appears that most buyers purchased early, thinking the spreads were as cheap as they were going to get. Of course, with the benefit of hindsight, who could have predicted that the Midwest transaction price would trade at $1.00+ per pound over the LME cash settlement?
   • Some expected prices in the low-to-high-80-cent-per-pound range, but I do not think anyone foresaw triple-digit Midwest premiums and a corresponding collapse in scrap spreads. As a result, most buyers are full today, with little open demand to fill.

• Chemistry limitations. Metallurgists are now being challenged to increase scrap incorporation rates for products such as end and tab stock, electrical conductor (EC) wire, foils, and similar products.
  • Some products are already maxed out, such as 3105 common alloy, which is 100% scrap. Can body stock has been made with 100% scrap, but mills are not pushing thresholds that high.
  • The next breakthrough for higher scrap usage will come from metallurgists giving buyers more flexibility to purchase additional scrap.

What happens next?

The cure for low prices is low prices.

At some point, buyers will need to bite the bullet and begin accumulating scrap against potential forward sales.

This means laying scrap down, financing it, and looking for windows to sell forward the LME to try to lock in sufficient contango to partially or fully finance the inventory.

Laying down baled or bundled scrap takes significant space, and chemistry and melt loss/recovery could pose risks. This argues for converting the metal into remelt scrap ingot (RSI) or billet. The problem with that approach is that little processing capacity is available today.

Looking ahead, toll converters are very good at the math and recognize that scrap spreads are deeply discounted. They will likely attempt to exploit those discounts by substantially increasing their toll conversion fees for 2027.

Anyone looking to lay scrap down for future sale or toll conversion needs to develop a good understanding of what toll fees may be in 2027. That will inform what they can afford to accumulate now and what potential margins could be achieved when liquidating it as RSI or billet.

Cheap scrap could undermine primary value-added products for 2027

The longer scrap remains cheap, the greater the threat to primary billet and slab.

In the case of billet, secondary billet could potentially undercut primary billet substantially depending on where toll conversion charges settle.

We expect those charges to rise significantly, which might neutralize the effect of the wide scrap discount. However, they may still allow tollers to obtain secondary billet at lower upcharges against the Midwest transaction price. This could force primary billet upcharges lower.

Primary slab has always been closely tied to scrap pricing.

Every rolling mill in the country tries to make its own slab as job No. 1. They purchase secondary slab next and then turn to primary producers when the first two approaches fail. Cheap scrap means it could be difficult in 2027 to sell primary slab.

Why It Matters

Scrap is cheap because there is no spot demand.

However, metallurgists are currently being tasked with creating more demand by increasing scrap tolerances.

Buyers are also likely to hold off longer before cutting 2027 deals, keeping more exposure to the spot market, where discounts have been substantial this year. Concentrating more demand in spot markets could narrow spreads.

I believe toll processors will be key in determining what spreads do in 2027.

Depending on how aggressively they raise tolling charges, tollers may either withdraw from the spot scrap market or charge into it more aggressively.