Scrap prices have been relatively--not absolutely--stable during the fourth quarter of 2012 and most of the first quarter of 2013, including a possible $25 per gross ton increase in scrap prices in the beginning of March 2013. Might participants in the industry expect this condition to continue? We think the answer is "probably not" because the spot price of iron ore delivered to China may be headed down.
The price of scrap is impacted by a multitude of factors including: a) the size of the global obsolete scrap reservoir that's 10-40 years old; b) freight rates that, when low, increase inter-regional scrap price competition; c) the generation of home and new scrap, which is a function of steel production; d) the price of pig iron; e) exchange rates; f) blast furnace production relative to steel production; g) the price of scrap (which impacts collection); and h) regional steel scrap trade shifts, such as the rise in Japanese scrap exports over the past year.
With steel demand in 2013 forecast to rise only moderately, scrap prices may be poised to decline. WSD believes that the spot iron ore price, which is currently elevated, may fall substantially due to excess production in China and elsewhere. The spot price of iron ore, WSD thinks, out-rivals the scrap price as the most potent of all indicators. We say the "spot iron ore price is the new KING"--its throne is on top of the scrap heap.