<article><p class="lead">A historically wide price differential between US prime and shredded scrap will likely cause mills to adjust their melt mixes to gradually favor more of the obsolete grade beginning in the March trade.</p><p>Supply disparities between both grades resulted in historically high spread between domestic #1 busheling and shredded scrap prices, with the busheling premium increasing from $38/gt in January to $93/gt in February, the highest level in <i>Argus</i> price history. The spread averaged $23/gt in 2020.</p><p>The unusually high spread is likely to cause mills to adjust their melt mixes in favor of shred. The shift in volumes will vary from mill-to-mill and will be dependent on operational constraints including product, chemical specifications and density.</p><p>"The goal is to buy and use cheapest scrap mix you can but melt shop managers don't want to flip on a whim so over time you move in the cheapest direction, which now is maximizing obsolete grades while still meeting the correct chemistry," a Midwest consumer said. </p><p>But upping the percentage of shred in melts could be more difficult following severe winter weather across much of the US that has crimped flows of shreddables into yards.</p><p>"If this was May you would be able to go out and minimize primes and buy more shred but the issue now is with this weather," the consumer said.</p><p>Obsolete grade prices are elastic, with higher prices likely to generate more supply, while prime grades are constrained by manufacturing production regardless of price. </p><p>Prime scrap tightness will likely persist for the March trade, especially as the <a href="https://metals.argusmedia.com/newsandanalysis/article/2184400">semiconductor shortage negatively impacts</a> auto production and busheling generation. Multiple automakers have cut back operations because of the chip shortage.</p><p>"Prime scrap is in short supply and if automotive slows down more due to the semi-conductor shortage, it could get worse," another Midwest consumer said. </p><p>The tight supply situation for both grades of scrap could see the historically wide spreads persist into next month.</p><p>Busheling scrap flows have lagged demand levels for at least the last six months with prices trading sideways or rising each month since September, with average national prices climbing from $267/gt delivered to $488/gt over that span.</p><p>Obsolete grades for the most part trended the opposite direction with steep gains in domestic and export pricing through November-January boosting inbound flows to yards. National average shredded prices topped out at $452/gt delivered in January before dropping to $395/gt in February.</p><p class="bylines">By Brad MacAulay</p></article>
