Why the big fuss over benchmarking No. 1 bundles?

Jul 30, 2008 | 01:20 PM |

Auctions, like futures exchanges, sometimes seem like the magic bullet for price discovery. They let a commodity's value be demonstrated by disclosing actual transactions that can be cross-checked, free of bias. No human conversations needed to coax information from biased sources.

That's part of the reason there's such a fuss about the possible disappearance of the auto industry's factory bundle auctions, which have served as a pricing signal for industrial scrap. The controversy seems like a flashback to my first AMM stint in the mid-1970s.

The late Bob Himelfarb of Luria Brothers, a dominant scrap company of that era, hated the monthly table on rail scrap auctions. He didn't challenge the accuracy of the figures. What bothered Himelfarb was that some scrap suppliers would view the auctions as an objective measure of the rise or fall of steel scrap prices in general.

When rail scrap auction prices rose, suppliers would expect Luria Brothers to raise buying prices for other grades of scrap. But Himelfarb argued that railroad discards were exotic grades of scrap, signifying nothing about other materials, and maintained that AMM would be doing recyclers a favor by dropping the month-by-month series on rail scrap auctions.....