US ALUMINUM SERIES: Domestic scrap shortage sees no relief; prices set to stabilize

This report is part of a series on impactful trends in the US aluminum market based on S&P Global Commodity Insights pricing, news, and analytics.

US scrap yards saw scant supply through the latter half of 2024, and market participants expected inventories to remain snug for the foreseeable future.

"Volume is flat, pricing is flat," a scrap dealer said.

The dealer added that scrap prices were not climbing as rapidly as some dealers had expected as limited scrap yard supply was balanced, for the time being, by tepid demand for raw materials.

"So, scrap prices are pretty tight," a scrap dealer said. "Historically speaking, use UBCs as an example. Flat rolled is the larger of the sectors from a market segment standpoint. UBCs are 81-83 cents/lb, delivered Midwest. Historically, looking at 2000 through now and prior to 2015, that was typically the norm of where those prices were going to top out — where substitution becomes a factor."

Outside of somewhat weaker prices leading to declining inflows, the dealer said that flow was down overall because spreads were not contracting.

"Now you have capacity in the order book issue," the dealer said, adding that a trio of factors were underlining weaker flow as well as lessened demand for the items: "Automotive, housing, and construction forward-looking order books are not as robust as one would think, given where prices are."

The dealer reported that mills were less inclined to pay more to take on greater volume at this juncture.

"They don't have an incentive to pay more to take in greater amounts of volume against weaker order books," the dealer said. "It's not like they're looking forward and saying 'Hey look at Q2, it's only January' — they're looking at [the] late February-March time frame. They would not say, 'hey, my order book is looking stronger for Q2, so I better start buying now to out more inventory on the ground'... .That's why you're seeing a topping out of spread tightness. With the contraction of spreads ... you're not going to do much."

The dealer said it would take a meaningful market shift in the automotive and housing sectors to move the needle on yard supply and demand for raw materials.

"The conversation boiled down to two areas — tell me where housing will go and tell me where auto sales go, and I'll tell you where scrap demand goes," the scrap dealer said. "Absent of a renewed construction cycle, absent renewed growth in autos, we just see things flat."

Another scrap dealer stressed the domestic scrap supply was snug.

"I could tell you any secondary items are very tight right now," the scrap dealer said, adding, "The LME and Midwest is holding up. Our retail scrap yard that normally brings in 3,500-4000 mt a month of light iron — which is everything else that comes with it — is only on track for 55% this month."

The second scrap dealer said the current main driver of the slowdown was weather, noting the ferrous market was strong.

"With winter weather who wants to go outside and peddle scrap?" the scrap dealer asked.

A buyer for a secondary scrap smelter agreed that scrap was tight and was expected to become more snug with colder weather. Still, he said his buying was on pause as he was covered for January, and that his January buy will carry him well into February.

"Cold weather slows things down; we have 50% of our needs met as customer scrap. We are finding what we need," the buyer said.

The buyer added that the reality of new trade tariffs under the incoming Trump administration could mean a looser market for a handful of items.

"The biggest concern is if Trump puts in tariffs that might keep a lot of the overseas scrap here. So, for some mill grade items and on shreds, we could see prices actually decrease," the dealer said, adding, "We won't know that for a while ... but we aren't looking to buy early because of that."

Inbound scrap slows despite firm pricing

While scrap prices have held strong and are expected to hold firm on tight supply, the slowdown of material into the yards is not solely attributable to seasonal factors, the second scrap dealer said.

"Prices and margins and [the] cost of everything has gone up. Prices you're getting for peddler scrap, how do you live on that? I think that's impacting the flows. But weather is key. We are not going to see any increase in flows, probably certainly until February," the dealer said.

The first scrap dealer said that he hesitated to attribute the slowdown to colder weather — noting that's a predictable annual factor.

The dealer expected both prices and yard volume to stay flat for the foreseeable future.

"You're seeing a topping out of spread tightness," the scrap dealer said. "The contraction of spreads is not going to change much. The conversation boiled down to two areas — tell me where housing will go and tell me where auto sales go, and I'll tell you where scrap demand goes. Absent of a renewed construction cycle, absent renewed growth in autos, we just see things flat."

Heading into February, the first dealer said, buyers can expect nonferrous scrap supply to remain tight.

"Ferrous comes in and nonferrous comes with it; If you don't get the ferrous, you're not getting the nonferrous," the dealer said, adding: "Scrap is very tight ... Secondary items all tight right now — I don't see any relief in sight not until the spring cleanup."

The dealer also noted that more shredded material was being shipped overseas, which may or may not feel an impact upon the announcement of new tariffs in late January.

Labor shift partly drives weaker flow into yards: scrap dealer

The first scrap dealer pointed out that "gig economy" employment is more profitable and less straining and had led to a decline in scrap peddling in recent years.

"I could make an assumption: a significant — say 30% — of households feel fairly wealthy, so they're not focused on collecting and selling scrap," the dealer said. "But there is a growing portion of folks [with] lower incomes that would collect scrap if it paid more. This is where it takes an interesting curve for me.

"The alternative is the growth in the gig economy: Why go collect scrap to sell UBCs at 40 cents[/lb] when I can go drive a car and work for Uber and make $700 a week? Why collect scrap? It's not as profitable."

The dealer acknowledged, however, that he expected some of those who turned away from the scrap business to return.