Scrap Musings for December

Trends by grade

Let’s have a look at some select grades:

Used Beverage Containers (UBC) – Absolute prices for UBCs are a touch higher, with indicative bids in the $1.02-1.04 per pound ($/lb) range. The higher LME and Midwest premium are driving this.

What’s notable is that the UBC-to-Midwest transaction price spread is slightly narrower than it was two weeks ago. We now see an implied discount of $1.14/lb compared with $1.17/lb in mid-November. This could be the very early signal that buyers are starting to compensate for the expected slowing down of inbound receipts.

Still, context matters: UBCs are trading at around 47-48% of the Midwest transaction price, which is a very wide spread compared with typical P1020 replacement economics. When aluminum can body stock is priced around 45¢ per pound (¢/lb) over P1020, the margins for can sheet mills are still very handsome.

This spread will likely narrow slightly as we get deeper into winter, but the probability of repeating January 2025 behavior, when UBCs buying spreads to the Midwest transaction price approached 80%, is extremely low.

The obvious difference today is the underlying Midwest premium. In January 2025, premiums were in the low to mid “20¢/lb’s” over LME. Today, we are 60¢/lb+ higher and that makes an enormous difference.

The higher Midwest premium gives UBC buyers far greater flexibility to show an absolute price that will draw out cans. But we never lose sight of the fact that absolute price matters – and UBCs are over $1.00/lb.

In an environment where inflation is making consumers feel pinched, high prices will draw cans “over the scale”.

5052-5xxx Segregated Alloys: Next to electrical conductor (EC) chops, the high-magnesium 5XXX segment have held value more consistently than anything in the scrap market.

Current discounts to the Midwest transaction price are around 25-30¢/lb and likely to narrow as industrial output weakens in the first quarter.

Primary magnesium is hovering close to – or slightly above – P1020, with prices in the $2.20-2.40/lb range, which keeps these alloys highly prized for the magnesium addition.

3003-3xxx Segregated Alloys: These “segs” (segregated alloy scrap) continue to hold value nearly as well as the 5XXX series, with discounts ranging between 35-38¢/lb to the Midwest transaction price. Supply could be vulnerable to a broader economic downturn though.

EC Chops: Being a “near-primary” alloy in 1350 specification, these remain a perfect direct primary aluminum substitute, and frankly, it’s surprising that the discount to P1020 has not narrowed much.

There is a reasonable amount of “reconductoring”, or the process of updating transmission lines with new conductors (wire), taking place within the utility grid. This entails taking down old conductor/power lines and upgrading with higher-ampacity lines.

That may be increase wire-chopping activity over the long term and generate additional EC chop scrap as utilities ramp up capital spending on replacement lines to support higher electricity demand.

Mixed Low Copper (MLC) Clips: The discounts in MLC continue to astound me. We have MLC trading at a $1.05-1.09/lb discount to the Midwest transaction price.

They are trading at around 70¢/lb wider discount than 3xxx segregated alloy. It begs the question of why scrap processors are not investing the time and effort to upgrade MLC into segregated alloy.

Modern sortation systems are now good enough to sort discrete alloys. It comes down to whether processors see a return that justifies the space, capital, and labor required to run upgraded lines. Still, momentum seems to be building among the most agile processors.

Another enigma in this market is why auto stampers have not moved more aggressively to put in separation equipment (such as Compass Systems) to segregate their stamping scrap.

By continuing to mix their alloys at the point of generation, they are contributing to the wide discount in MLC scrap. We hear of systems being installed, but also hear that some OEMs are disinterested in upgrading lines because space constraints at older facilities make the projects difficult, and they likewise don’t want to allocate capital to scrap handling.

I think smart scrap processors are ready to step into that void and offer upgraded MLC in exchange for the current MLC-to-segregated alloy spread.

356 Wheels: In last month’s article, we discussed the import threat from wheels coming into the US trying to take advantage of the 25% duty on an auto-part imports versus the 50% duty on the 7601 Harmonized Tariff Schedule grouping (P1020).

We noted that the arbitrage window was open for domestic wheels to undercut imports. They remain cheap, trading at a 92-96¢/lb discount to the Midwest transaction price.

Silicon prices remain low, at $1.34-1.45/lb delivered Midwest, so there is little incentive to pay up for wheels solely to capitalize on the 7% silicon content for alloy addition.

This market may see a slight narrowing of the spread during as winter slows retail wheel receipts, but a key offsetting factor is the heavy concentration of supply in the Sun Belt, where winter is much more forgiving.

Why This Matters

One of the most interesting developments in the scrap market is that the biggest buyers of scrap, namely the rolling mills, are fully supportive of maintaining Section 232 tariffs on P1020. This may seem counterintuitive, as one might assume consumers of aluminum would prefer lower cost.

The reason is the price arbitrage embedded in the sheet and extrusion finished product markets. All sheet and extrusion products are indexed and sold based on Midwest P1020 plus the appropriate conversion upcharges.

These products are all made with a high proportion of scrap, ranging from 100% for common alloys such as 3105 to 30-40% for industrial alloys and beverage end/tab stock. The ability to sell based upon Midwest P1020 and produce the product using scrap that is attractively discounted is a huge advantage.

The current big scrap discounts are a function of the high Midwest premium, which is directly tied to the 50% Section 232 tariff. That tariff embeds nearly 70¢/lb into the Midwest transaction price and is directly responsible for scrap discounts being as wide as they are today.

If you remove Section 232, you blow up this scrap-to-product pricing arbitrage. It is absolutely no surprise that rolling mills and extruders do NOT want 232 tariffs to go away.

This arbitrage is not lost on the end buyers of products.

They have been grumbling about this dynamic for years, but have been frustrated in efforts to get fabricators to convert pricing from a purely P1020 basis to a basket of P1020 plus scrap.

Some argue that the end buyers are able to offset some of the metal exposure through closed-loop tolling programs that provide credits for their process scrap. That is true, but those credits are being diluted by the much wider scrap discounts currently in place as a result of Section 232.

Let’s be clear, if you are a self-casting extruder or sheet mill, you are absolutely doing the right thing to optimize shareholder value by taking full advantage of the wide discount for scrap.

Leaders of these companies have me point plain: “Yes, we are making very good money using scrap now, but we are finally making the returns on capital against legacy investments plus consideration for new investments.” These leaders make no apologies for their earnings and note that they have endured decades-long earnings droughts.

Scrap is making them “whole” again, and they want to harvest those earnings for some time.