Commodity Modeling and Pricing: Methods for Analyzing Resource Market Behavior

CHAPTER 5

Time-Varying Ratios of Primary and Scrap Metal Prices Importance of Inventories

Irene M. Xiarchos

INTRODUCTION

Recycled materials act both as inputs into the production of and as substitutes for refined primary materials. As a consequence, fluctuations in demand and supply in the recycled material markets both influence and are influenced by the primary material markets. These links are evident in terms of prices, which express the market information available at every point in time.

In the 1970s and 1980s, many studies examined links between primary and scrap metal fundamentals, including prices, through structural modeling. Fisher and Owen (1981) expressed explicit structural relationships for scrap and primary aluminum and indicated a connection between primary and scrap prices. Employing a traditional structural analysis, Hashimoto (1983) argued that steel price fluctuations and comovements of primary and scrap steel prices are due to the industry’s inherent inelasticities and its sensitivity to the business cycle. Stollery (1983) modeled the demand and supply relationships among scrap, primary input, and primary output for copper and steel. His empirical model of copper showed that the scrap price varies in direct proportion to the primary London Metal Exchange (LME) price.

Although some studies found intertemporal linkages between primary and scrap prices, they assumed that the relationship was stable. Additionally, even though metal markets are known to be inelastic ...