Economy
January 17, 2016
The Relationship Between the Price of Scrap & 3 Useful Benchmarks
Written by Peter Wright
Often with steel related economic statistics it’s useful to compare a given data stream with others which may or may not be causally related. This usually puts the steel data into context and shows whether a direction change is for real. In this piece we are comparing the price of Chicago shredded scrap with the IODEX price of iron ore delivered North China, the value of the US $ and the price of oil in Cushing, Oklahoma.
The price of ore and the value of the US $ have a direct causal effect on scrap prices. There is not a causal relationship between scrap and oil but they are both global commodities with a highly correlated price ratio. Comparison with these benchmarks has enabled us to signal whether the price of scrap is out of line either on the up or down side. The price of Chicago shredded scrap rose by $30 in January to $190 per gross ton, down from $334 in January 2015.
Figure 1 shows the IODEX (62% Fe delivered N. China) and the price of scrap through January 9th. The correlation since January 2006 has been 0.8292. In the period 2007 through 2009 the correlation was 0.9182 but the relationship became de-coupled in 2010 and 2011 when the big 3 ore cartel began to eliminate long term contracts.
