The Correlation between the Fundamental and Technical Side of Recycling

Posted on October 10, 2011 · Posted in PK Metals Blog

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The volatility of commodity prices has been wreaking havoc on Wall Street in recent months. Traders and analysts have been staring at their terminals in amazement as prices continue to drop with no end in sight. With the click of a mouse, they can change their position or hedge their bets. However, for the scrap metal recycling industry, or the fundamental side of the business, adapting to the price swings can be exponentially more challenging.

The correlation between the fundamental and the technical side of the scrap metal recycling industry plays out across the globe every day. The price of copper has a tremendous impact on the bedrock of globalization: infrastructure and construction. Every construction site in the world depends on copper for electricity, plumbing, and communication, and the price of this commodity has become increasingly dependent on traders and analysts, rather than supply and demand.

For example, a company is considering building a new warehouse to expand their production. Back in January, they met with a contractor to give them an estimate. Depending on whether the price of copper went up or down, the estimate would change accordingly by the time construction is ready to begin.

In 2010, when the price of copper was skyrocketing, this cost would be passed on to the consumer, and may have caused a delay in construction. This delay in construction may cause the contractor to lay off some of his employees. As you can see, the strength/weakness of fundamental side of the economy directly correlates to the technical side.

Copper prices in 2011 is a different story. Prices have been dropping steadily over the last few months, and has caused a major disruption in the industry. Mills are more cautious in their approach to take on more inventory because of the uncertainty in pricing and direction of demand. Therefore, it is becoming increasingly difficult for scrap recycling companies to sell their product into the market after the process of recycling their inventories. With one eye on the trading terminal and one eye on their inventory, scrap recycling executives are taking a wait and see approach.

The difficult part for scrap recycling executives is to know when to adjust prices and lock in positions to manage inventory and create a profitable market to cover expenses such as shipping costs to end user. Scrap metal executives serve as a “specialist” due to the fact that they always have to keep a balance in the market by being buyer and a seller.