The traditionally strong correlation between ferrous scrap and iron ore has been eroded by global trade upheavals and economic troubles in Turkey, the largest import market for steel scrap. Previously, the relationship between ferrous scrap and iron ore prices often meant price movement in one would lead to a corresponding price change in the other – with market participants trading on this correlation. Between 2014 and 2016, the relationship between iron ore CFR China and heavy melting 1/2 (80:20) steel scrap CFR Turkey – respectively the global benchmarks – was robust, showing a correlation of 87.3% for that time period. Over 2017 and 2018, the correlation weakened considerably until it showed signs of a decoupling this year. In fact, the correlation in 2019 to date was not only weak, but negative, as the rally in iron ore prices following several supply-induced bottlenecks saw no corresponding bullish move in Turkish scrap prices, which slipped by almost 15% since the beginning of the year. This result does not change even if one accounts for a potential time lag of price effects on the other raw material. The decoupling of scrap and iron ore price movements appears to be largely driven by trade-related… continue reading
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Source: CTRM Center