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Full of Scrap: Past trends may offer a guide to future scrap pricing

Keywords: Tags  U.S. ferrous scrap market, ferrous scrap market outlook, 2012 U.S. ferrous scrap outlook, AMM Staff

As lower September scrap deals closed out the third quarter, a combination of a long-term drop in scrap values, volatility in mill orders and production, and an often-mercurial 2012 export market had sellers facing some of the more fundamental questions about where business is heading.

Many North American scrap market players often express trepidation as the fourth quarter gets under way over what the end of one year and the beginning of the next might bring. While not necessarily predictive, the past does provide a guide to some overall trends and perspectives. For starters, here’s a quarter-by-quarter look at how the 2012 market has developed thus far:

-- First quarter: The year started with a bump up from the fourth quarter of last year, mostly due to an exceptionally strong January. But weaknesses began to emerge as the quarter progressed, an indication of the mini-bust to come.

-- Second quarter: Prices fell each month, and on average the quarter was about 7 percent weaker than the first quarter. June was an especially tough month, with prices falling hard across the board. Declining exports took much of the blame.

-- Third quarter: After dropping significantly in July, prices rebounded in August, only to see declines of between 3 and 7 percent in September. Average quarterly prices were about 15 percent below second-quarter levels and trailed by 21 percentÑor around $100 per tonÑlevels seen in the third quarter of last year, according to AMM data.

Now here are a few facts about market behavior since 2000 (trends are using an average of prices for No. 1 dealer bundles, No. 1 busheling, No. 1 heavy melting scrap and shredded scrap):

--The first question is where prices might be heading in November. In the new century, November prices have fallen eight times and risen four times compared with October for an overall average drop of about 8 percent.

-- In December, prices have risen eight times and fallen four times vs. November for an overall average increase of more than 7 percent. In fact, December prices have risen over November prices for the past six years, stretching back to 2006. Many market players believe that December has now become a reliable upward month in scrap’s cyclical behavior.

-- For nine of the past 12 years, scrap prices have risen from November to December and from December to January (and in 2002, prices were sideways in December and up in January). Although annual changes vary, gains generally have been significant.

-- More interesting is that for the past decade, December and January markets have moved in tandem; that is, when December is up or down, January subsequently moves in the same direction.

--On average for the past decade, prices rose more than 10 percent from November to December and logged a further gain of about 8.5 percent from December to January. Overall, the average price gain between November and January was about 19 percent. And those figures include the two yearsÑ2004 and 2005Ñin which the markets fell in both December and January; take those out of the calculation, and the numbers were up even more dramatically.

With the fourth quarter just getting started in what has been a volatile year, the market is jittery over the prospects for the end of 2012. Early talk already has December moving up this year, so if historical pricing is any guide the market should prepare for increases in January as well. Trying to predict the future with certainty can be a dangerous game for a business. Scrap dealers have no more insight than anyone else involved in the economy.

However, a review of market behavior in recent fourth quarters might offer some clues to the future:

-- Fourth-quarter 2011: Prices lost some value but remained historically strong, and 2011 ended as the one of the most consistent years of the new century. Prices never varied more than 4 percent up or down from one quarter to another throughout the year.

-- Fourth-quarter 2010: After a sluggish start, prices were driven higher by strong mill demand, short scrap supply and a hot export market, and the year ended with the highest-performing fourth quarter in history.

-- Fourth-quarter 2009: This quarter made it clear that the battered economy had reached a turning point. Although the scrap market was nearly sideways compared with the third quarter, it gave industry players hope that a sustained rally was possible.

-- Fourth-quarter 2008: The single-biggest dollar drop in scrap pricing history hit during this quarter. Prices fell sharply after September, and on average declined more than $250 per ton, or about 65 percent, compared with the third quarter. Mill productivity rates plummeted as the economic downturn hit all sectors hard.

Using these trends as a rough guide, scrap markets should expect to see a decline in November, followed by a reboundÑperhaps a robust oneÑin December and January. But this year is different than any other this century for several reasons: Despite some gains, the overall economy is still the worst in a generation; mill buying programs are fighting their way back to pre-recession levels; export trends have been hard to pin down as the global marketplace feels around for a rebound; and the U.S. is facing one of its most contentious presidential and congressional elections ever.

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