Scrap Metal Recycling
Date May 2017
- Ferrous scrap prices bottomed out and have begun increasing; no. 1 heavy melt prices have increased 26.1 percent and scrap copper prices have increased 18.6 percent during the past year
- Scrap pricing is currently stable
- U.S. ferrous scrap exports remain inconsistent but maintain at stable prices
Ferrous scrap pricing recovering: During the second quarter of 2017, global demand for recycled ferrous metals increased, and ferrous sales followed. In the nonferrous scrap market, pricing trended upward during the quarter, reflecting a combination of improved global demand and tightness in the copper market, primarily related to supply outages. These supply outages were driven by China’s removal of its induction furnaces, along with production curtailments intended to lower emissions. China’s initiative to reduce overproduction will help improve the global scrap market. For the month of May 2017, scrap pricing was steady as scrap was plentiful, while buying slowed. Looking forward, some scrap buyers are fearful that the current slowdown in automobile sales may be a sign of an impending downturn that would have a negative impact on the scrap metal industry.
U.S. export market remains inconsistent: Although pricing of scrap metals has increased over the past year, the U.S. export market is still weak as the dollar remains strong. Exports to Turkey have become dormant as Turkey has purchased cheaper scrap from European countries over the past several months. Traders expect intermittent trading to continue at current pricing, although traders are unsure how long this will persist. East coast exporters will be loading bulk vessels to Turkey, Kuwait, and Pakistan in the first half of June 2017. This should allow future capacity to improve, which could help the overall market going into the second half of 2017.
Machinery values at risk: Gordon Brothers’ appraisers have observed the price of shredders, among scrapyards’ primary assets, drop significantly during the past year. Lenders with portfolios secured by this type of equipment should immediately assess exposures. Values of ancillary equipment, such as rolling stock, have been less affected by the downturn since the assets can be redeployed to many industries.
Inventory values improving: Because scrap prices routinely fluctuate and are historically volatile, the value of scrap inventory must be carefully monitored to ensure that the cost of the inventory is not materially overstated as market prices fall. It is critical to ensure that costs are being marked-to-market on a routine basis or, if on an average cost system, that the average cost basis is not too far off from market. As prices have increased, it is likely that some scrap inventory values are currently understated. Market sentiment is improving at this time, but there is still a surplus of scrap inventories on hand. Secondary market purchasers still want larger-than-normal discounts in this environment to make their speculative investment worth purchasing.
Market Prices vs. Current Inventory Costing: The market conditions and prices for various ferrous and non-ferrous scrap metals are considered using both consumer and broker prices, and utilizing market price publications and indices as of the appraisal effective date. Typically, scrap metal companies cost their inventory using a weighted rolling perpetual average. This type of costing system typically means that the company’s costs will trail market by a certain period of time, which can vary based on the overall rate of the inventory turnover. For example, inventory that currently turns approximately 10 times per year would indicate the average cost of the inventory would be representative of market conditions as of 5.2 weeks prior to the actual inventory date. As market prices change in relation to the company’s reported cost, the estimated recovery values will change.