Editor's Focus

Scrap pricing is held out by many as a front-and-center example of the law of supply and demand. No less an economic luminary than Alan Greenspan is said to closely monitor ferrous scrap pricing for its tell-tale portrait of the supply and demand situation in the manufacturing sector. But in an era of hedging, options, selling short and other forms of electronic speculation, does that line of thinking still hold? There is ample evidence that it still does—or at least it is still plausible.

Radical shifts in supply and demand—on both sides of the equation—can certainly be seen in the misfortunes of the scrap markets of 1998. Among the dominoes to fall during the fiscal crises that affected one Asian economy after another in late 1997 and early 1998 were the steel industries in East Asia. By late spring of 1998, steel mills in Japan, South Korea, Thailand, Indonesia and several other nations virtually exited the scrap market, or at least curtailed production so drastically that orders for overseas scrap dried up completely. Thus, the demand for scrap metal was reduced dramatically.

A double whammy was achieved when ferrous scrap continued to pour out of the nations of the former Soviet Union, without any regard for the lower prices being received for the scrap. In 1997, 1998 and into this year, entire factories, military installations and other government complexes in Russia, the Ukraine and other former Soviet nations have been dismantled and shipped into western Europe, Asia and North America as a means of raising cash. Whether the cash it brings is $120 per ton or $80 per ton hasn’t seemed to affect the flow.

As our readers participating in the ferrous markets well know, the oversupply coupled with slack demand produced one of the most dramatic price plummets in ferrous scrap history in 1998. The American Metal Market monthly average for ferrous scrap that year moved from $138 per ton in January to $73 per ton in December of 1998. It was a textbook illustration of supply and demand’s affect on price that most ferrous scrap dealers would rather not have experienced.

Beyond ferrous scrap, the pricing of other recyclable commodities can seem more mysterious. Nonferrous prices tied to the London Metal Exchange, COMEX or NYMEX markets are becoming increasingly less directly linked to immediate supply and demand situations, many traders contend. It is in this segment where speculators and traders seem to be staking claims as to where supply and demand will stand in 90 days or six months as opposed to making purchases based on present circumstances.

And then there are the secondary paper markets, where many of the recent pricing trends have been linked to government actions. Germany’s Green Dot program—which is also being tried in a handful of other European nations—has been hailed for its landfill diversion results. However, paper recyclers cited the program for putting Europe “awash in paper,” skewing the supply side of the market.

Conversely, recycling advocates are hopeful that federal government initiatives in the U.S. to require federal agencies and bureaus to purchase recycled-content paper are creating further demand for pulp made from scrap paper. If scrap paper prices in mid and late 1999 are any indication, the program may be achieving its desired result of firming up the market for recycled fiber.