The prime ferrous scrap premium over shredded scrap in the US was at a five-year high on Wednesday.
The premium is as low as $40/lt in Detroit but as high as $70/lt in Ohio.
The spread between Platts No. 1 busheling assessment and shredded scrap assessment, both on a delivered Midwest mill basis, is $62.50/lt this week, the highest since December 2011.
"In Ohio we have a price disparity of shred and busheling of $70/lt," a supplier in Ohio said. "Either one is way overpriced, or one is way underpriced."
The prime scrap price has been driven by strong electric arc furnace, flat-rolled mill demand but also by a lack of pig iron due to lower Brazilian production and supply disruption due to the tensions between Ukraine and Russia. A four-to-five week outage at Nucor's DRI facility also contributed to tightness in prime scrap.
"We keep saying either busheling needs to come down, which we do not see, or shred needs to go up," one Midwest scrap supplier said.
Shredded scrap prices settled around $320-$325/lt delivered mill in the Midwest and prime scrap prices traded in a range of $360-$410/lt delivered.
"Demand is good, operating rates are good, visibility is good," another source said. "There is plenty of obsolete scrap available. It's spring, so we will see if mills can get away from the $400 primes and focus on plentiful shredded in April."
Most market sources agree the spread is now at a point where it will need to be reconciled. But the question remains: when? "Prime is too high, unless export increases," another scrap supplier said.
On Tuesday, a US bulk scrap sale to Turkey was done at $303/mt CFR HMS 80:20 basis, up $20 from the previous sale on February 15. An overwhelming majority of US scrap exports are obsolete grades but strong exports could have an indirect impact on prime by limiting the availability of coastal obsolete grades available to domestic mills if they attempt to offset prime needs.
"Mills are beginning discussions to melt more shredded as opposed to higher-priced primes," one broker said. "It could affect the market dynamic."
Many of the high-priced prime sales above $390/lt were out-of-region springboard deals. The broker said he believed that instead of prime scrap prices correcting across the board, mills may resist reaching for primes outside their regions and maintain their local prime scrap prices at the low end of the $360-$410/lt range.
"I think a lot of this is optimizer-driven," one scrap supplier said of the computer-based purchasing tool. "Optimizers have a certain delay in them. It all depends what mills are making. It's been a while since we have had a price gap like this."
Mill optimizers use formulas to calculate the cheapest raw material mix to meet chemistry requirements for a mill's upcoming orders.
There are also headwinds to elevated prime scrap prices. Market sources say numerous vessels of prime scrap have been booked by a US mill from Europe. Furthermore, Nucor's Louisiana DRI facility is expected to resume production this week.
Pig iron suppliers from India have also started to offer into the US, something a trader noted "hasn't happened in years."
"With DRI coming back, prime and shred will move closer together, even though there still isn't much prime in the market," another Northeast supplier said. "But it all depends on export. It is hard to see that getting weaker, but how much stronger can it get?"
