Why scrap metal is an opportunity too good to waste
4 minute read
Research Director, Global Mining
Investors need to ready themselves for the scrap revolution. A combination of extraordinary growth in demand for metals, the need to reduce industrial emissions and elevated energy security concerns will all underpin a prolonged surge in investment in recycled metal. The opportunities are boundless.
It won’t be for the faint-hearted, however. Scrap markets can be complex, disjointed and opaque – and that’s just the mature markets, for metals such as steel, copper, aluminium and lead. Scrap markets for energy transition metals from battery, electric vehicles (EVs) and renewable energy are just emerging, offering abundant growth potential, but with a healthy dose of technological risk.
The structure of scrap markets will also evolve. Policy will stimulate higher domestic processing and consumption and the international trade of low-value waste will dwindle. We expect vertical integration up and down the value chain in key growth markets as manufacturers seek supply security. And as demand for greener sources of metal units burgeons, this will be reflected in pricing.
In a recent report, Scrap: an opportunity too good to waste, we explored what’s driving scrap use, some common elements of current secondary markets and how scrap markets might develop over time. We identified three main drivers and five key trends.
Read on for a brief outline – and fill in the form to access a complimentary replay of Nick Pickens' recent presentation at the Future Facing Commodities Forum.
Scrap metal: three catalysts + five trends = a great opportunity
What’s driving the renewed focus on scrap metals? We see three main catalysts:
The need to overcome primary metal supply constraints
The energy transition will be built on electrification and the supply of zero-carbon fuels and feedstocks. The transformation of the power and transport sections – key pillars of the change – will rely on technologies that are profoundly metals-intensive.
The reuse of metals through recycling will help alleviate the effects of primary supply constraints and accelerate the energy transition.
Carbon emissions, sustainability and a preference for secondary sources
The mining and processing of metals is a significant source of emissions – steel and aluminium combined account for almost 10% of the global total. Secondary aluminium production typically has a carbon footprint five to 25 times lower than primary production. For steel, emissions are often halved by using scrap.
What’s more, recycling also keeps reusable materials out of landfill.
Security of metal supply
The war in Ukraine has shone a light on the potential leverage of countries that control natural resources. Global reliance on China for minerals critical to the energy transition has become a major concern in the US and EU, among other places. The use of domestic recycled metal could help to reduce reliance on imports or single sources.
The shift towards circularity is driving investments in scrap metal recycling infrastructure and encouraging collaboration between stakeholders along the value chain.
What does this all mean for scrap? We see five key trends shaping the market right now:
1. Reshoring of scrap metal supply chains
Regulations will limit the global trade of scrap and incentivise domestic consumption. Governments are already seeing scrap as a strategic source of low-carbon domestic supply. The biggest impetus is in regions that are short on raw materials and long on requirements.
Policies designed to ‘onshore’ the supply of scrap and disincentivise exports are becoming ever more frequent, notably in the shape of tighter quality standards and import restrictions.
2. Vertical integration and consolidation: closing the loop
The shift towards circularity is driving investments in scrap metal recycling infrastructure and encouraging collaboration between stakeholders along the value chain. It presents opportunities for new business models and innovative approaches to recycling and manufacturing.
In nascent markets such as EV lithium-ion batteries, there is a blank canvas in terms of market development.
3. Tighter scrap supply
Demand for secondary feed and the build-out of new scrap processing capability could also mean tighter scrap supply, unless recycling rates and utilisation improve. Legislation on minimum recycled content, meanwhile, will spur demand for higher-grade material, in particular.
The future landscape will be shaped by how quickly and efficiently the rising pool of scrap can be mobilised via collection, sorting and processing into end-use products.
4. A revolution in recycling technology
Advancements in recycling technologies are enhancing the efficiency and quality of scrap metal processing. Innovations in sensing, sorting and separation techniques are already enabling better recovery rates and reducing waste for end-of-life products.
Digitalisation and data analytics are also playing a significant role in optimising operations and improving material tracking in the scrap metal value chain. There is a lot more to come.
5. Disrupted pricing mechanisms
Global pricing mechanisms for scrap are like many other differentiated commodities. Price discovery is generally via price reporting agencies. The London Metal Exchange does have a steel scrap futures market, but none of the mechanisms are particularly transparent, and there are opportunities here for traders and market participants.
Interested in the future of metals and mined commodities?
Nick Pickens was one of the presenters at the Wood Mackenzie Future Facing Commodities Forum, with a session entitled Paradigm playbook: unpacking the impact of war, an energy trilemma and China’s evolving economic landscape.