Why do Oil Prices Affect Scrap Prices?
The prices of oil and scrap metals are inextricably linked. However, the relationship between these two seemingly disparate commodities is not always clear. What we should first appreciate is how changing oil prices will impact the scrap market. Processing scrap for recycling requires the use of fossil fuels such as petrol. Lower oil costs will cause the price of petrol to likewise fall. This results in significantly lower overhead in terms of processing applications. So, this can cause the aggregate price of scrap to drop as well. The exact opposite is just as true.
The Perception of Supply and Demand
As a general (although not universal) rule of thumb, lower oil prices tend to correlate with a drop in commodity costs as a whole. This results from a lack of confidence in global growth. So, the demand for materials such as copper, steel and gold could stagnate. A concern in a glut within the commodity sector could also affect the price of oil. If investors feel that the economy is entering into a bearish state, the cost of scrap metals will fall. Should they see an economy on the rise, the price per tonne of scrap will inevitably rise.
The Cost of the Dollar in Relation to Oil
The price of a barrel of oil and the value of the United States dollar enjoy a firm relationship. In fact, all commodities are currently priced in dollars. A weakening dollar will negatively impact the commodities market and therefore, scrap metal. A stronger (bullish) trend in the dollar will have the exact opposite effect. Let’s not forget that a cheaper dollar generally causes the price of oil to fall. So, the oil-dollar relationship can be a reliable indicator of the price of scrap metal in the near future.
Oil Prices and the Act of “Hoarding”
On a final note, investors and owners of scrap metal tend to become averse to a market which sees a drop in oil prices. They are more likely to adopt a “watch-and-wait” approach. This causes a slowdown in the demand for scrap metal and once again, prices have a tendency to fall. In a booming climate that sees oil prices rising, these same individuals (and corporations) are likely to sell their scrap to a buyer. This causes the aggregate price to rise.
These are some of the primary ways that oil prices directly impact the value of scrap metals.