Oil vs. Scrap Correlation – An Explanation

On Thursday evening’s issue of Steel Market Update we published an article about raw material prices. In the article, Peter Wright, a metallurgist, marketing specialist, contributing writer and Steel 101 instructor for Steel Market Update, referenced the relationship between WTI oil and scrap pricing. He said, “There is a close non causal relationship between the price of scrap and the price of oil.” One of our readers wanted to understand exactly what Peter meant when he asked us in an email:

“Must be me.I’m a pretty simple guy but also have a decent grasp of numbers,just not these numbers. If I take scrap at $180/ton or $.082/lb Vs oil at $30/bbl and divide one into the other, I can’t find any way to twist up this formula that equates to an answer of .927 – .937. I also understand the graph suggesting as you indicated that with oil troughing and scrap climbing, they have decoupled from each other as a leading indicator that scrap appears over valued currently and may be poised to back off. The graph tells a story, it’s the correlation of the numbers that doesn’t make sense to me.”