How much of an influence does the demand side of ferrous scrap have on the direction of scrap pricing as opposed to, say, foreign demand or other variables? Even more than you might expect.
Scrap prices have moved in tandem with the changes in overall scrap demand every year for the past 10 years, based on annual average numbers for both measurements; if ferrous scrap demand rises or falls, prices move in the same direction. You have to go back to 2003 to find a year when the two were out of sync.
This may seem like a No kidding, Sherlock conclusion, but it is important to document because there are occasional debates within the scrap community over whether mill demand, export sales or any of a number of other factors are a bigger driver of scrap prices. The most common factors argued over are mill purchases and export buys.
First, lets take a look at annual pricing movements, comparing the volume of scrap (in millions of tonnes) that mills have purchased from dealers and brokers with pricing (an annual average of AMMs weekly indices for No. 1 busheling, No. 1 heavy melt and shredded scrap, delivered to consumers) each year (2013 is a projection):
Scrap prices moved in the same direction as mill purchases every year. But comparing ferrous scrap export tonnages (also in millions of tonnes) with the same average pricing shows that in 2009 and 2010 prices moved in the opposite direction of demand, which certainly puts at least a slight dent in the argument for the strength of export influence:
Overall domestic and export demand--the total tonnes sold by scrap dealers and brokers each year--shows that prices moved in the same direction as overall demand:
But how meaningful is any particular five-year period? Taking a look at a larger sample size, this chart compares the annual average percentage change in mill scrap buying vs. the change in average scrap prices for the past 20 years:
A pretty strong correlation emerges here. Only four times did mill demand move in a different direction than prices, all prior to 2004. This correlation is less firm when comparing export demand with scrap prices for the same period; although only five years showed any difference, three of those were in the past decade:
Finally, comparing total scrap demand with scrap prices for the past 20 years shows that only twice did scrap prices move in a different direction than overall demand, both prior to 2004:
We seem to have a winner.
Available scrap supplies have varied widely in the past two decades, but nevertheless total demand has shown to have a clear link to annual average scrap prices. It is apparent that overall scrap purchases by domestic mills and export yards is an indicator of annual shifts in scrap prices. How helpful that may be in determining month-by-month changes in scrap value is a question for another day.