At a global level the price of recycled metal is affected both by availability and demand. In many ways the price of recycled metal is a good indicator of the health of the economy.

When scrap prices are high it is because steel mills or copper and aluminum smelters are producing more metal units (slab, billet, blooms, long products) for the automotive, construction and manufacturing sectors. Scrap metal grades follow these global patterns even at a regional or local level. Take for example Korea or Turkey, India, Malaysia, China and other emerging economies that have invested heavily in electric arc steelmaking furnaces and efficient secondary metals processes (copper, aluminum , Zinc, lead etc product made by recycling recovered scrap metals) as opposed to using metal ores.

The investment in this extra steelmaking  capacity ensures that the price of scrap paid by mature markets, eg a steel mill in the U.K., Europe or the USA, closely follows these tiger economies. And once that steel is made then any excess capacity not satisfied by the country’s  own local demand will be exported worldwide.

It is against this backdrop that tariffs can have a consequential effect on recycled metal pricing.

Let us look at the country that introduces the new tariff. There are several scenarios.

1. There is no production capacity or technical ability for the country to produce that imported product domestically. In this case the imported product continues to flow at historic levels, the country’s tax revenue increases and the importing country either absorbs the cost increase caused by the tariff that may or may or may not be passed to the consumer,  or forces the exporting country to lower its price to subsidize the increased tariff revenue, or there is a partial absorption of the extra cost by the exporter and importer. Under this scenario there is no impact on the recycled metal price as overall demand has not been affected.

2. There is available production capacity and technical ability to manufacture the equivalent imported steel or  other secondary metal. Under this scenario if the steel or aluminum can be manufactured at a lower cost than the imported metal subjected to the tariff then substitution of that imported metal could take place. Say a steel mill in Pennsylvania manufactures this substitutional product in an EAF it will require extra scrap metal to make it. Does this volume of scrap metal exist locally? If yes, then the price of scrap metal won’t change. But let’s say the steelmill has to buy its extra demand from non local scrap yards then this has a pull on scrap away from its natural customers at a regional level. Competition for that scrap then ensues and the price goes up! Now imagine this competition happening all over the USA.  Further, the USA is a net scrap exporting nation (it produces more scrap than it consumes so exports what it does not need to other  countries globally). Ultimately therefore this will affect volumes of recycled metal exported. What will the response be by those importing countries? They will raise their price for the scrap until it becomes uneconomical. Yet the irony is that price will also be reflected internally within the US by USA steelmakers, remembering that scrap metal is a globally traded commodity. Of course a percentage of the new manufactured scrap will end up as scrap metal in downstream processes created. The US government will hope that the imposition of tariffs will promote extra steelmaking or processing capacity in the USA that can compete efficiently and will not be inflationary!

But what about the effect of Tariffs on the exporting country? Let’s assume it’s the U.K. that finds itself now unable to export to the USA because of the tariff effect. There are three issues.
1. Where substitution occurs, that U.K. manufactured metal has to find another market. Can it be sold within the U.K.? If so there is no real change to the market dynamics for scrap pricing today, Albeit more scrap may be generated by U.K. processors as a by product of manufacturing. Ultimately more scrap will be processed when that steel is recycled after use, many years in the future.

2. The bigger issue for the U.K.  is any import penetration by other (3rd) countries similarly affected by their export market impacted by the tariffs and looking for a new home to sell their steel or aluminium. If the U.K. Govt doesn’t protect U.K. manufacturers from import penetration from 3rd countries by imposing its own tariffs or indeed additional tariffs, then that may reduce steelmaking demand and potentially have a downward effect on the price of recycled scrap as local U.K. demand for scrap may reduce. However the larger UK scrap companies can export much of the surplus scrap so once again prices will be governed by global demand.

3. U.K. steelmakers themselves may look for alternative export markets at the same time 3rd counties are also looking to sell their substituted tariff-led products! This may affect steel pricing domestically but in the short term doesn’t affect scrap pricing assuming U.K. consumption doesn’t reduce.

So the above example uses the U.K. as an example but the effect will be mirrored across the world by other countries similarly affected by substitution under tariff scenarios.

It promises to be a period of flux for the metals sector and potential consequences on prices in the recycled metal market in a tariff era! Where global demand continues to increase outside of  the USA the effects of tariffs on scrap pricing is more easily absorbed. This of course is premised on there being no tariffs imposed directly on recycled scrap metal!