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Does recent scrap price run suggest historical move?

Jan 30, 2017 | 12:04 PM | John Ambrosia

Tags  ferrous scrap, prices, 2016, Great Recession, shredded scrap, no. 1 busheling, no. 1 dealer bundles, no. 1 heavy melting


The recent run of strong scrap prices from November through January has created a lot of excitement among scrap buyers and sellers. But what does it mean historically? History has been called everything from knowledge to a weapon, from cyclical to bunk. But is it prologue? Which end of that spectrum does ferrous scrap pricing history fall on, if it is to be used to try to understand market dynamics?One possible way to answer that question is to look at each individual monthly market and how it has performed historically. Or to put it another way, over time do particular months exhibit specific outcomes that might be useful in looking ahead? Using the first 17 years of the 21st century as a sample, here are the average scrap prices for each month from 2000-2016:
 




Well that was easy. August clearly is the strongest month for scrap prices, while November is the worst. Done, right? Not so fast. There are two things wrong with that conclusion. First, as the old joke goes, if you sleep with your feet in the oven and your head in the freezer, a statistician will tell you that, on average, you’re pretty comfortable. The numbers in the above table are averages, and although 17 years is a decent sample, such an approach doesn’t tell the whole story.Secondly, this approach also ignores the impact of the biggest event in recent memory: the Great Recession of 2007-2009 (and beyond?). So here are those averages again, this time first for 2000-2007 – the eight years leading up to the economic collapse of 2008 – and then for 2009-2016, the eight years since (I’m going to leave 2008 out as its wildly high and low prices tend to distort the overall averages):



And here are the eight years since the collapse:



Whatever else the fallout of the recession may have been, scrap prices appear to have permanently moved into a higher rent zone.

But there is another way to look at monthly markets beyond averages: How many times a given monthly market has increased or decreased over time. This table shows each month, and its number of up or down markets from 2000-2016:



Now this is interesting; prices hold or rise in nearly two-thirds of the months, making sideways or up markets a statistically significant event. Some of these months are very strong, and have only rarely experienced any significant price decreases. Clearly the fall is the weakest time of the year for prices, and the winter and summer the strongest.
 
Finally, looking at trends of data not in these tables reveals some telling facts about monthly market behaviors in recent years:• December rose eight years in a row, from 2006-2013.

• January has risen 10 years in a row, from 2007-2016.• February fell six of the eight years from 2009-2016.

• June has produced the most sideways months.

• The middle of the year is the time most likely to generate a run of sideways or near-sideways markets. Examples include June-September 2011, May-October 2002, May-July 2007, March-September 2001, and June-September 2000.

• This history suggests that at the start of 2017, January should have increased – which it did significantly – and February should be unchanged or fall.

However, it also suggests that March should be sideways to up, and that seemed up in the air, at least according to forecasts from some in the industry, who think the recent November-January run may freeze for the short-term. But remember, these are useful only as probabilities, not as iron-clad forecasting tools.





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