Predicting the ferrous scrap market’s next move

May 29, 2012 | 04:42 PM | Lisa Gordon

Tags  ferrous scrap market, ferrous scrap market outlook, ferrous scrap prices,

The ferrous scrap market’s significance to the steel industry is deeply rooted, and its direction is keenly watched as a result. But trying to predict its next move can be much like betting on horse races—sometimes you pick the winner, sometimes you don’t.

Obsolete and discarded metallic objects play in big role in everyone’s pocketbook. Scrapyards keep an eye on the dynamics to maximize their profits, electric-arc furnace (EF)-based steelmakers scrutinize the market because scrap is their largest input cost, and finished steel buyers watch scrap prices as a harbinger to buy or move to the sidelines to wait for a better deal.

Yet despite the next-to-impossible task of accurately predicting where the market will head, there are a host of indicators that can make it easier to turn the odds in your favor. Understanding factors that drive the scrap market and paying close attention to numerous cues—ranging from the London Metal Exchange billet contract to imports and exports to end-of-month cancellation rights being exercised—are essential for all prognosticator wannabes trying to decide if it is a buyer’s or seller’s market.

The monthly ritual to determine where prices are headed is colloquially known as “The Dance” and the tempo that emerges is a clear sign for near-term scrap prices. Whichever party seems to be dragging their feet typically has the edge.

When mill buyers make offers and scrap dealers procrastinate, there is an expectation that prices are headed upward. Mills will test the market and offer sideways, while dealers—sensing higher prices—will hold off for a better offer. But when mill buyers are slow to enter the market, it usually means their suppliers will be offered less money; an unaggressive mill buyer might be out of the market because the mill is oversupplied or scheduling routine maintenance, but relaxed buying by mills is generally because prices are falling.....