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A Manageable Grade?

Departments - Editor's Column

Brian Taylor September 7, 2012
 

Brian Taylor

 

When engineers design a highway or road that passes through mountains or steep hills—especially one likely to carry heavy traffic loads—they strive hard to create surfaces that do not rise or fall at too sharp of a grade. The interstate highway standard, for instance, calls for a 6 percent maximum grade.

Commodity traders and recyclers who collect and process secondary commodities may at times wish a similar 6 percent maximum was in place when it comes to pricing volatility, especially when prices are trending downward.

Discerning the angle of the slope for nonferrous scrap pricing in the past 12 months or so may depend in part on the viewpoint of the trader, recycler or scrap consumer involved. Using London Metal Exchange (LME) prime or alloy material prices as a yardstick, however, shows a clear trend of a steady downward drift.

From July 2011 to July 2012, LME cash settlement copper pricing fell from more than $9,600 per metric ton (as a July 2011 monthly average) to $7,590. This 21 percent drop in 12 months can certainly be considered drastic, especially for someone still holding on to (unhedged) material purchased in July 2011.

Likewise, in this same span, the LME aluminum alloy price has fallen by more than 17 percent, and the price of nickel has dropped by 32 percent.

These percentages are nothing to sneeze at, and there is little doubt that budgets, forecasts and profit margins have been knocked askew by the steady downward trend.

Yet, while the downward drift has been relentless, it also has been seen as a relatively welcome scenario compared with alternatives where the appropriate metaphor might be plummeting down a fast rollercoaster or even plunging off a cliff.

Highway engineers certainly have a difficult task keeping the maximum grade at 6 percent when laying a road through a mountain range, but to a great extent they have control over the situation.

Nonferrous traders and recyclers, on the other hand, are at the mercy of a large, global market that can take sharp dives and spikes because of an unexpected data point or a crisis occurring half-a-world away.

As prices of nonferrous metals trended upward during China’s economic growth boom years, a frequent topic of conversation was predicting just how rapidly they might fall when the boom began to lose momentum.

By no means have 2011 and 2012 revealed the full answer to that question, but the grade of descent so far has not met the worst of expectations. Although it is controlled by the invisible hand of the market as opposed to a civil engineer, ideally that angle of descent will remain manageable.

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