One Man’s Scrap Is Another Man’s Treasure

You’ve probably never given it any thought, but scrap metal is everywhere.

Just picture a construction site after a large demolition. Or imagine your old, beat-up car that you traded in to the dealer. Fortunately, all that scrap doesn’t end up in a landfill.

There’s actually a market for it – and soon, you’ll be able to trade it in the form of a futures contract.

Starting November 23, the London Metal Exchange (LME) will launch the LME Steel Scrap contract. The launch comes at a pertinent time for the steel industry, which is suffering from tightening margins.

The new futures contracts will allow the steel industry to hedge, and it will give the financial community the ability to gain exposure to a new market with unique supply and demand attributes.

Scrap – It’s Everywhere

No matter where you travel, you’re bound to see scrap metal. After all, people, industries, and governments are constantly building, renovating, demolishing, and discarding.

The United States is the largest scrap exporter. Last year, it exported 15.3 million tonnes, representing 30% of global trade.

Scrap is an important additive to steel that makes up 10% to 20% of the total raw material mix. Furthermore, scrap can make up to 70% of steel production costs, as demonstrated in the chart below.

Because of this, the steel industry is both volatile and vulnerable to scrap prices.

So if that’s the case, and prices around the world vary considerably, then what scrap price will the futures contract actually represent? Believe it or not, Turkey.

Turkey is the largest global importer of scrap. In fact, it imported over 19 million tonnes in 2014, the equivalent of 19% of the global scrap trade, according to the LME. Thus, the Turkish import price is best positioned to become an effective global price, given the continuous level of interaction between Turkish steel mills and global scrap suppliers.