While the market size for the scrap metal industry is projected to grow by 8.3% in 2022, the sector is facing a significant challenge; surging prices. As of 2021, the process of iron and steel rose to approximately $435 per metric ton. This is almost double the $228 price for the previous year.
Depending on the circumstances, such a rise in prices may translate to either a steep surge in demand or a shortage of supplies. In this case, it’s a little bit of both but more of the latter. Despite the sector’s size and resilience, it’s incredibly dependent on other industries.
Therefore, when the production of plumbing materials, appliances, refrigerators, window frames, and automobiles is affected, so too will the availability of scrap metal.
Read on to learn how scrap prices are affected by supply chain issues.
The Supply Chain Crisis
Over the past year or so, manufacturers have been grappling with several supply chain issues. According to Timothy R, Fiore, chair of the Institute of Supply Chain Management (ISM) Manufacturing Business Survey Committee, the challenges include:
- Wide-scale shortages of key components
- Record-long lead times
- Logistical challenges
- Rising prices
Ordinarily, any of the above challenges can be disruptive. However, together for such an extended period, all of them are chaotic for manufacturers. As a result, manufacturers report low purchasing and inventory indexes while the order backlog index is a record high. Such challenges in the manufacturing sector are now reflected in the surging prices of scrap metal.
Sectors such as automotive and appliances are among the worst hit. To begin with, there’s a microchip shortage limiting production. This is further complicated because domestic suppliers are operating at full capacity, and imports are far from enough to cover the deficit.
The Root of the Supply Chain Crisis
Aside from manufacturing and scrap metal recycling, supply chain snarls impact the entire business community. But to fully understand it, it’s crucial to answer one key question; where did it all begin?
Well, the answer may be easy, but it’s not simple; Covid-19. During the pandemic’s peak, several separate events took place, which collectively contributed to the current situation. To begin with, most nations across the globe went into partial or full lockdowns. This would set off the first supply chain constraint as the production and supply of materials came to a grinding halt.
When it comes to manufacturing and production, the Asia-Pacific region is a world leader. Most companies, including in the US, rely on materials produced there. And this was one of the hardest-hit areas during the pandemic.
Combined with labor shortages and production limitations, energy limitations further affected supply. What followed was a drastic shortage of supply in the US, the primary destination for such goods.
But that’s not all. While people were at home during the stay-at-home and lockdown periods, the US government provided stimulus checks. The goal of the economic stimulus was to cushion people from the effect of not being at work. While it achieved this with great aplomb, there was also another impact; the demand for goods in the US rose.
So, on the one hand, there was a sharp decline in the supply of raw materials necessary for producing goods, and on the other hand, demand for goods was rising. As you can imagine, when such unique circumstances coincide, they result in a supply chain nightmare.
However, as the Asia-Pacific region gained control over the spread of Covid-19, production levels began increasing. At the time, the sentiments were that a rise in production would alleviate the surges in prices and shortages. But that would not be.
While production was increasing, there was still a significant deficit compared to demand. This then triggered stiff competition to access scarce resources resulting in higher production costs. Additionally, another logistical nightmare followed with different sectors increasing production to meet rising demand.
Getting products to consumers was challenging as demand for transport was at record-highs. As a result, there was congestion in ports and shipping docks, further increasing delivery times. Moreover, vessels turned their focus on the most profitable cargo.
As a result, businesses were forced to turn to the more expensive air mode for goods that would otherwise come by sea. With all this also increased transport costs, pushing prices further up.
How the Supply Chain Crisis Has Affected Scrap Metal Prices
When you consider all the supply chain and logistical issues, it’s easy to see how a backlog in production can have far-reaching consequences in the business world. But how exactly does it impact scrap prices?
1) Shortages of Materials
As you may know, the scrap metal industry relies on end-of-life products that contain metallic components. These often come in the form of appliances or discarded fragments from construction works. And therein lies the problem.
There is a significant shortage of the raw materials necessary for making cars, appliances, etc. With this, production is not able to meet demand. Furthermore, even the available raw materials take too long to reach manufacturers. This then slows down production further. Therefore, people are forced to remain with appliances they would otherwise discard.
Also, with construction materials not being readily available, projects are stalling. With this, the scrap metal from construction is also in low supply. And, as the laws of demand and supply dictate, this is forcing scrap metal prices upwards.
If a supply shortage is not enough, it coincides with a high demand for raw materials. In turn, manufacturers are now forced into price wars to get the necessary materials for production.
2) Rising Prices of Materials
Since Idling due to Covid-19, producers of both ferrous and nonferrous metals have struggled to catch up with the demand. While import activity is increasing, it has not done much to reduce the prices. This is because long delivery times for offshore purchases are still a challenge.
According to Davis Index, the metal industry’s information service provider, prices have risen across the East Coast, Midwest, and Southeast. This is so much so that foundries and mills pay as much as $66 more per ton for shredded scrap metal.
While the price rise has been gradual for the most part, there have also been sudden increases. For instance, the Raw Material Data Aggregation Service (RMDAS) reports that between November 2020 and May 2021, steel and ferrous raw metal prices rose by 84%. This is from $313 per ton to $575 per ton.
3) Difficulty in Transporting Products
Although the shortage of raw materials will impact scrap metal supplies, it’s not necessarily the primary challenge. Some scrap processing executives in the Midwest indicate that the supply of scrap from both retail and wholesale channels is high.
This assertion is backed by the fact that both the demand and availability of stainless scrap and copper are high. However, the only challenge at present is the widening delivery times. With this, there is a perceived shortage of these metals.
But why are delivery times widening?
This goes back to the logistical challenge of opening up economies and the previous supply deficit. As a result, there’s a stiff race for producing enough products to satisfy this demand in virtually all sectors. But this is met with one primary limiting factor; transport.
Even if the goods produced are enough to meet the demand, they must be delivered to consumers or stores. However, accessing raw materials and delivering products is challenging with a limited transport capacity. As a result, transport costs for scrap metals have been going up.
For instance, the most significant cost increase factor for aluminum and copper is shipping and logistics charges. According to a Bloomberg report, transport costs now account for 20% of aluminum’s total price. Moreover, the price for shipping copper is in the US has reached all-time highs since 2003.
As long as ships are stuck out at sea with raw materials and railroads remain ill-equipped to handle surging transport needs, logistics will remain critical in scrap metal prices.
Suggested Reading: How Gas Prices & Scrap Prices Are (or Are Not) Related
How the Mining Industry Affects Scrap Metal Prices
One of the sectors that was hit hardest by Covid-19 was mining. Mining companies did not have this option when other sectors faced the stiff challenge of transitioning to remote teams. Moreover, considering that mines have thousands of employees operating in limited spaces, keeping up with the social distancing requirements was challenging.
As a result, mining operations came close to a complete halt, thus reducing the supply of much-needed metals. As the supply from mines dwindled, organizations shifted to scrap metals as an alternative. This then triggered a rise in the price of scrap metals.
Stay Informed at All Times
Despite the supply and logistical challenges over the past two years, the scrap metal industry remains on an upward trajectory. As it grows, scrappers have an excellent opportunity to capitalize on the surge in prices.
In this regard, there’s no better resource than the iScrap App. It provides all the key information about the scrap metal industry, including current prices. So, download the iScrap App today to stay ahead of your competitors.
Other Valuable Resources
- Factors of Scrap Metal Pricing
- What Location Has To Do With Scrap Prices
- 5 Most Important Items In Your Scrap Truck