Last week saw an aggressive drop in spot ferrous scrap prices, following on from those seen in manganese ore and met coal thus far in 2017. While the others can be related to Chinese demand, scrap is much more levered to demand in other emerging markets who source from the developed world. This move points to two things – strong scrap collection over the developed world winter and, perhaps more concerning, the potential arrival of weakness in emerging market steel consumption in an increasingly uncertain world.
Being an extremely liquid physical spot market, steel scrap prices are often looked at as the key barometer of real-time metals market conditions. As such, last week’s sell-off suggests considerable weakness in market fundamentals. Benchmark Turkish import prices dropped over 15% on the week, including the largest single day fall recorded in the history of daily price assessments. Clearly, such aggression in the fall suggests a breaking point was reached among scrap exporters who are likely sitting on high inventories. However, as we have previously noted over the years, there is often a specific reason for the particular weakness in scrap, namely its exposure to emerging markets ex-China.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
