What Does Steel Scrap Tells Us About Current Market Conditions?

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We spend quite a bit of time talking about trends in two key steel making raw material sectors, iron ore and coking coal (we reported on both materials last week) but admittedly don’t track scrap markets as closely as we should, though we will endeavor to do so going forward because scrap markets provide as many price clues as some of these other raw material inputs. What trends should we watch in terms of scrap? As it turns out, quite a few, take for example the following:

  • 80% of scrap supply comes from old household goods and cars which this year have not turned as quickly as in previous years due to the recession
  • According to the same article, Sims Metal Management, the world’s largest metals and electronics recycler sees a 79m ton decline in scrap consumption this year (of course this makes sense in relation to declining production volumes in 2009)
  • New mills coming on stream (with the exception of China mills) use electric arc furnace technology and hence require steel scrap. Since some of these countries have higher growth rates then the US, scrap demand has grown faster than in the US
  • A falling dollar makes US scrap exports more attractive in overseas markets. In particular, it has fallen against Australian and Brazilian currencies (those two countries account for a large percentage of iron ore) so the product substitution becomes attractive for steel producers thereby reducing scrap supply
  • Finally, when the markets went haywire during the summer of 2008, scrap became so “dear that much of the easy-to-get available scrap had been used leaving scrap inventories depressed.

Former Federal Reserve Chairman Alan Greenspan used to track No. 1 heavy melt steel scrap (he references that practice in his autobiography). He felt it served as a good proxy for manufacturing demand. When scrap prices increased, manufacturing demand followed. Whether or not that trend holds true today remains to be seen.

But according to MetalPrices.com, scrap steel prices, despite the ups and downs from one year ago, still trade within the same range as they did last year. But obviously any changes in availability could impact cost:


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We will endeavor to publish an electric arc furnace production cost model within the next two weeks. We use these models to help tell us the “should cost for various steel making operations.

–Lisa Reisman

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