CBP pallet auction highlights scrap arbitrage opportunity

We spoke to several parties who inspected the material before the auction and cited a litany of reasons why they were likely to submit lower bids:

Freight

• The West Coast location meant the metal would likely have to be trucked back East to be sold.
• Truck freight rates are increasing. We understand current rates are about $4.00 per loaded mile.
• If the metal is headed to Texas or points even further east, we estimate that freight could be 10¢ to 11¢ per pound.

Payment terms

• CBP required full payment within 48 hours of the invoice being tendered.
• The total value of the two lots at the average winning bids was a cool $31.5 million dollars.
• At current interest rates, that could present nearly 1¢ per pound per month in financing costs

Outbound logistics

• The buyer was responsible for loading costs, and the initial shipping notice had to be tendered within five days of payment in full.
• All material had to be removed within 12 weeks.

Packing

• Some prospective buyers were wary of handling the stacked pallets.
• They also questioned how they would charge them into their furnaces.

Stacking up the bids

How did the winning bids compare to other available scrap in the market?

Reliable sources said 6063 alloy bare extrusion scrap at the time of the auction was about $1.81 per pound, delivered Midwest. That represents about a 59¢ per pound discount to the Midwest transaction price.

These two lots traded at about $1.575 per pound or an 82.5¢ per pound discount, in-warehouse, with cash payment.

Assuming freight of 10¢ per pound to haul the material east and three months of financing cost (3¢ per pound), the delivered price into Texas would be about $1.705 per pound. On paper, this is 10.5¢ per pound less than nominal replacement cost of bare, 6063 extrusion scrap.

It appears both buyers secured relatively low-price metal.

Why this matters

The successful bidders appears to have acquired substantial tonnage at significant discounts to what was already relatively low-priced bare 6063 extrusion scrap.

For the casting extruders, melting scrap has already proven financially advantageous this year compared with buying primary or secondary billet at 13¢ to 15¢ per pound over the Midwest transaction price.

With a Midwest transaction price around $2.40 per pound and billet at a 13-cent-per-pound upcharge, primary replacement cost is about $2.53 per pound. These pallets are delivered into the casthouse at $1.705 per pound. That’s a whopping discount of 82.5-cent-per-pound discount to billet.

The buyers were willing to navigate the novelty of the material, the commercial conditions set by CBP, and the amount cash required upfront to complete the transaction.