The Relationship Between Oil Prices and Scrap Metal

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The Relationship Between Oil Prices and Scrap Metal

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People often ask whether there is a direct correlation between oil prices and scrap metal prices. Moreover, what they really want to know is whether an increase in oil prices means an increase in scrap metal prices as well. Before the year 2000, the answer would have been pretty straightforward as these two markets generally moved in the same direction. However, in the intervening years, the answer has become more complicated.

Falling oil prices usually result in a drop in new exploration and other projects. Naturally, there will be a decrease in the demand for metal for those projects. Rising oil prices, however, don’t always boost scrap metal prices either. Indeed, we have sometimes seen a negative correlation between oil prices and scrap metal prices. What hasn’t changed is that oil prices still affect the value of scrap metals. It’s just less clear how they will be affected.

Oil’s Impact on Other Markets

When oil prices remain high, it increases business overhead as running machines and transportation costs begin to rise. This in turn drives up the price of new metal production. On the other hand, when oil prices stay low, it pushes overhead down which can drive the scrap prices back down.

What goes without saying is that the global price of oil affects scrap metal markets throughout the world. Countries such as India and China that depend on scrap metal to build up their infrastructure are deeply impacted. This market will usually have a bit of wiggle room to leverage prices due to stockpiled materials. However, they will always have to take into account the status of the oil market.

Other Factors to Consider

Often, turmoil or upheaval in an oil-rich country can cause disruption in the market. Even  a change in power due to an election can change consumer confidence and the outlook for that particular country’s future contribution to the global oil market.

Other factors to consider include the time of the year, commodity stock prices and overall demand vs. supply. While oil prices are the most popular answer as to why commodities such as copper or aluminum prices move, it really is only one part of the larger picture. The market has become so much more complicated within the last twenty years that many commodities are chiefly affected by traders in stock markets around the world instead of merely rising oil prices.

Effects of the Boost in U.S. Oil Production

With the United States having experienced a boom in oil production in the twenty-first century due to technological advances such as fracking and horizontal drilling, there has been a significant increase in oil exports and our resultant status as the world’s top producer of crude oil.

In addition, falling oil prices due to excess supply do have some positive impact upon the scrap metal industry.

Firstly, lower prices translate to reduced processing costs for scrap metal processors. Furthermore, increased consumer spending also means more demand for cars, appliances and other products that incorporate metal into their components. Other businesses that deal with scrap metals such towing services for junk cars are also affected by higher demand for metals and parts.

While that may portend a rosy outlook, lower crude oil prices can hurt energy producers, especially ones investing in new projects or producers that haven’t become profitable yet.

It can also harm groups such as environmentalists and car recyclers, people whose causes tend to receive more support when gas prices rise as opposed to the opposite.

Strength of the U.S. Dollar in Overseas Scrap Markets

The strength of the dollar in markets abroad can also have a negative effect on exports. Because base metals are traded in U.S. dollars, a robust dollar can result in lower exports since prices with respect to foreign currencies will be really high. For a foreign scrap trading partner to purchase U.S. scrap, their currency may be worth less than it was a few months ago against a strong dollar.

Looking at a large U.S. scrap trading partner such as India highlights this discrepancy.  When the Rupee declines and U.S. scrap increases in price, Indian scrap is processed into domestic goods which they cannot possibly sell for the amount they paid for the scrap originally.

What we’re seeing is that in the short-term lower oil prices can help due to lower overhead costs and increased consumer spending. Nevertheless, when these prices remain low for a long time, confidence in global economic growth starts to fade. People also begin to worry about excess supply with oil and other commodities as well.  As a result, in the long-term, low oil prices are not always helpful to scrap metal prices.

As a buyer of metals, it stands to reason that lower prices would be helpful.  It doesn’t always work that way, however. When a major commodity such as oil stays down for a long period, major economic sectors remain are dragged down with it. Also, many people tend to horde materials when prices go down in anticipation of higher prices in the future.

Conclusion

We have seen that traditionally the scrap metal industry does better with inflation than it does with deflation. What we know going forward is that scrap metal prices will continue to move along with oil prices. However, the relationship between the two entities will remain more complicated than it was in the last century; it will be affected by other factors outside U.S. market control as trade continues to become more global, and market disruptions become more common. We now know that all countries feel the impact of changing oil prices which will continue to reverberate throughout the scrap metal industry.

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