STEEL SCRAP PRICE TREND VS. RAW STEEL PRICES: WHAT’S THE CONNECTION?

Steel Scrap Price Trend vs. Raw Steel Prices: What’s the Connection?

Steel Scrap Price Trend vs. Raw Steel Prices: What’s the Connection?

Blog Article

In the global steel industry, pricing trends are a major focus for producers, suppliers, and buyers alike. Among the most important relationships to understand is the one between steel scrap prices and raw steel prices. These two variables often move in tandem, but not always — and understanding their connection can reveal powerful insights into market dynamics, cost pressures, and profit margins.

This article explores the core link between scrap and raw steel prices, the factors that drive each, and the scenarios where they align or diverge.

1. The Role of Steel Scrap in Steelmaking


Steel scrap — derived from recycled steel products and manufacturing waste — serves as a crucial raw material, especially for Electric Arc Furnace (EAF) steelmakers. In this method, scrap is the primary feedstock, as opposed to Basic Oxygen Furnace (BOF) steelmaking, which primarily uses iron ore and coal.

In regions like the U.S., EU, and parts of Asia, EAF production is dominant, making scrap prices a key cost input. This means changes in scrap prices can directly impact the cost of steel production, and by extension, the price of finished steel.

2. Direct Relationship: Scrap Prices Influence Steel Prices


Input Cost Pass-Through


As a commodity input, when scrap prices rise, steelmakers face higher production costs. To protect margins, they often pass these costs along to consumers, causing raw steel prices to rise.
Example: If domestic scrap collection slows during winter, reduced availability can push scrap prices higher. Steel mills respond by increasing steel product prices to offset the higher input costs.

Profit Margin Monitoring


Traders and analysts often monitor the spread between raw steel prices and scrap prices. A widening spread indicates higher mill profitability, while a narrowing spread signals margin compression and possibly reduced production.

3. Reverse Relationship: Steel Demand Drives Scrap Prices


Sometimes the chain of influence flows the other way. When demand for raw steel surges, production increases — and so does the need for scrap.

Demand-Pull Scenario



  • Infrastructure booms, auto manufacturing upticks, or construction growth can all lead to higher demand for steel.

  • As mills ramp up production, scrap demand rises, pushing up prices.


Example: A large government infrastructure package may boost demand for rebar and beams, increasing steel prices and subsequently driving up scrap consumption and prices.

4. When the Correlation Breaks Down


Despite their close connection, there are times when scrap and raw steel prices diverge. Here’s why:

Different Regional Supply-Demand Balances



  • Scrap may be abundant in one region but scarce in another.

  • Steel demand may be strong globally, but local scrap oversupply can keep prices low.


Feedstock Shifts and Iron Ore Prices



  • If iron ore becomes significantly cheaper, steelmakers with BOF capacity may reduce reliance on scrap.

  • This can lower scrap demand, even if steel prices remain strong.


Policy and Trade Disruptions



  • Scrap export restrictions, tariffs, or import bans can distort local scrap markets.

  • For instance, Turkey — a major scrap importer — may reduce imports due to currency fluctuations, affecting global scrap demand.


Seasonal Impacts



  • Cold weather affects scrap collection and transportation, tightening supply.

  • Meanwhile, if construction slows at the same time, steel demand — and prices — might fall, causing an unusual disconnect.


5. Strategic Implications


Understanding the relationship between steel scrap and raw steel prices offers several advantages:

  • Producers can forecast cost changes and adjust production schedules.

  • Buyers can plan procurement when the scrap-to-steel price spread is favorable.

  • Traders can identify arbitrage opportunities or hedge against price movements.

  • Investors can monitor market health using spreads as an indicator of mill margins.


6. Conclusion


The connection between steel scrap prices and raw steel prices is both fundamental and dynamic. While they often move together, market participants must recognize the various factors — including demand cycles, global trade flows, and input cost variations — that can cause them to decouple.

For those involved in the steel industry, closely watching this relationship is essential to making informed, strategic decisions.

 

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