COLUMN: Why Are Scrap Prices Falling So Sharply?

If you work with metals, you may have already noticed this. Metal prices have been on a steady decline for months. You might notice this when you purchase new products or sell scrap metal.

Decline in Scrap Prices Due to BRIC Countries

There are several reasons for the decline in scrap metal prices. As with all commodities, metals are highly subject to the age-old principle of supply and demand. While the BRIC countries (Brazil, Russia, India, and China) were expected to continue growing in both production and consumer spending, this growth has fallen short of expectations. The crisis in the Chinese economy, in particular, is a major factor in this. With our Western perspective, we may have overestimated the growth and potential of the BRIC countries. Furthermore, the freedom of individual citizens to consume what they want differs in countries with certain governmental structures compared to the free West. It is therefore highly likely that the problem of declining demand is not temporary, but structural.

Greek Tragedy: Fuel for Speculators

Because sales of scrap metal to China are lagging, prices are falling. Demand is declining, while supply remains steady.
The Greek crisis is also a problem. As with other crises, consumer mistrust is growing, and investment is lagging. This is a logical development. It’s having an impact on the prevailing economic climate. If you ask a hundred people how they feel about the current economic situation, a large proportion will bring up the Greek tragedy and view it negatively—even though, on an individual level, they haven’t (yet) experienced any direct consequences of it.

Short-lived surge in scrap prices due to a stronger dollar

Prices rebounded a month ago, as you can see in the image below. This has influenced the general sentiment somewhat. It is therefore important that we examine the trend starting January 1, 2015. Over a longer period, you can see the sharp declines (red percentages).
Another important factor in this story is the strong dollar. The dollar is currently strong, partly due to a weaker euro and a weaker yuan (Chinese currency). This may seem like a contradiction, but emerging-market countries—particularly the BRIC nations—carry debt denominated in dollars. If the dollar strengthens relative to the euro and the yuan, their debt burden increases substantially.

*Scrap metal is not included in this overview. The price of scrap metal has fallen by 22% (!) since January 1, 2015.
**Image courtesy ofCasper Burgering, Economist at ABN AMRO Group.

As you can see, everything is actually interconnected. A crisis in Greece weakens the euro against the dollar and erodes confidence in emerging economies. This is a simplified explanation, but it gives you a glimpse of how local issues can influence global prices. Just like us, you also buy or sell metals. So, whether you like it or not, you have to deal with this.

By:Jan-Willem Dekker, metal trader at Krommenhoek Metals