Currency Shocks: FX Pass-Through to Scrap Prices—A Comprehensive Guide for Industry Professionals

Introduction

Navigating the metals industry requires a vigilant eye on a web of ever-shifting market forces, but few elements exert influence as immediate—and unpredictable—as currency shocks. Over the last decade, the global scrap market has become increasingly exposed to foreign exchange (FX) volatility, fueled by geopolitical uncertainty, divergent central bank policies, and complex international trade dynamics. When exchange rates swing sharply, the resultant FX pass-through can send ripples across scrap prices, transform export competitiveness, and create new winners and losers almost overnight.

For metals and recycling professionals—scrap buyers, sellers, brokers, and analysts—understanding how currency volatility transmits through the pricing chain is not a luxury. It’s a critical requirement for risk management, profit maximization, and sustainable growth. Historically, misreading FX signals has contributed to inventory write-downs, missed arbitrage opportunities, and eroded margins. Today, with real-time pricing and globalized supply chains, the stakes have never been higher.

In this guide, we unravel the core mechanisms by which FX shocks shape scrap prices. By leveraging scenario analysis, real-world cases, and actionable strategies, we aim to equip you with the tools and insight to thrive in any currency environment. Whether you’re optimizing your next contract, rebalancing your market exposure, or building a resilient procurement strategy, mastering FX pass-through is a decisive competitive edge. Let’s decode the economic and strategic dynamics that matter most in the modern scrap industry.

1. FX Pass-Through: How Currency Shocks Move the Scrap Markets

Currency shocks refer to swift, often unexpected movements in foreign exchange rates that alter the purchasing power and cost structures for traders around the world. In the globally interconnected metals industry—where over 35% of ferrous and 60% of non-ferrous scrap is traded internationally, according to the Bureau of International Recycling—FX volatility can quickly become a dominant force for both local and cross-border participants.

Understanding the Mechanisms of FX Pass-Through:

- Price Transmission: When a currency depreciates against trade partners, the country’s scrap becomes more competitively priced for foreign buyers. This increases external demand, lifting local prices (at least temporarily) as foreign buyers take advantage of the arbitrage created by currency weakness. Conversely, currency appreciation can reduce export attractiveness, pressuring domestic prices as export volumes contract.

- Import Costs and Inflation: Countries reliant on imported scrap or semi-finished metals see their landed import costs rise on the back of a weaker domestic currency. This squeeze can translate into higher operating costs for recyclers and end-users, which may ultimately be passed on to end consumers if scrap supply contracts or if buyers refuse to absorb the full brunt of currency movement.

- Risk Management and Hedging: FX hedging instruments—such as forwards, swaps, or options—provide some insulation against volatile currency swings. However, hedging is costly and not universally adopted, particularly among smaller market participants or those in emerging markets. Incomplete pass-through sometimes leads to temporary mispricings, increased bid-ask spreads, or abrupt corrections.

- Cross-Market Dynamic: The FX pass-through is rarely uniform. It can be immediate in spot markets or delayed in regions with slower scrap collection and logistics, as traders await confirmation that currency movements will persist before adjusting offer prices.

Case Study:

In Q2 2020, the sharp appreciation of the US dollar versus the Turkish lira (over 20% in three months) made US-origin ferrous scrap significantly more expensive for Turkish steelmakers—historically the largest importers of US scrap. The ensuing contraction in Turkish imports led to a glut in the US market, forcing domestic prices down until alternative outlets and logistical bottlenecks rebalanced the situation.

Key Insight:

The scrap market's global nature magnifies FX pass-through. Large-scale currency fluctuations can set off chain reactions between continents—reshaping trade flows, squeezing inventory, and testing both resilience and agility across the supply chain.

Visual Framework — "FX → Scrap Pass-Through Map"

Use this flow to orient readers before diving into casework. It shows where a currency shock actually turns into a price or margin change, and where it gets absorbed (lags, freight, contracts, hedging, substitution).

flowchart TD A[FX Shock] --> B{USD stronger / weaker?} B --> C1[Export competitiveness shifts] B --> C2[Import landed costs change] B --> C3[Forward points & options reprice] B --> C4[Freight compounding in local ccy] B --> C5[Policy: duties, quotas, licenses] C1 --> D1[Foreign bids rise/fall] C2 --> D2[Mill procurement adjusts volumes/terms] C3 --> D3[Hedged vs unhedged cost gap widens] C4 --> D4[Substitution: HMS ↔ Shred ↔ P&S ↔ HBI/pig iron] C5 --> D5[Effective supply in/out of domestic market] D1 --> E1[Offer/bid spreads widen or tighten] D2 --> E2[Inventory re-mark; intake grid moves] D3 --> E3[Cash conversion & credit headroom shift] D4 --> E4[Melt mix re-optimized; grade premia reset] D5 --> E5[Regional basis realigns; routes re-fixtured] E1 --> F[Observed Scrap Price Move] E2 --> F E3 --> F E4 --> F E5 --> F %% Lag modulators L1[[Lag: quote validity & index windows]]:::lag L2[[Lag: collection/logistics cadence]]:::lag L3[[Lag: contract FX clause & thresholds]]:::lag L4[[Lag: bank liquidity / credit lines]]:::lag C1 --- L1 C2 --- L2 C3 --- L4 D1 --- L1 D2 --- L2 D3 --- L3 classDef lag fill:#f6f6f6,stroke:#bbb,color:#555;

How to use it in the text: walk readers from A → B (shock), then pick two dominant channels for your current region (e.g., C2+C4 for an importer during a freight disruption), and call out which Lag boxes are binding this week.

2. Market Drivers: Decoding the FX–Scrap Price Relationship

FX pass-through is a nuanced process, not a direct lever. Multiple factors moderate how fully—and how quickly—currency shocks affect prevailing scrap prices. Recognizing these drivers allows industry professionals to anticipate, rather than simply react to, FX volatility.

A. Global Metal Demand: The Gravity Effect

The gravitational pull of major scrap-consuming economies constitutes the single largest determinant of scrap flows and price sensitivity to FX shifts. For example, when China's steel output surges (it represents over 55% of global steel production according to the World Steel Association), its scrap imports intensify, exerting upward pressure on global prices. If the Chinese yuan suddenly weakens, China's capacity to import scrap at given dollar prices diminishes, inadvertently causing global prices to recalibrate downward.

Recent Data:

In 2021, China's stepwise relaxation of scrap import restrictions, combined with relative yuan stability, propelled a 150% year-over-year increase in scrap imports—a clear instance of FX stability supporting strong import flows.

B. Cross-Border Trade Flows and Arbitrage

International scrap arbitrage opportunities emerge rapidly in the wake of FX swings. A 5% move in a currency can close, open, or invert regional price differentials overnight—especially when logistics and trade frictions are low. Traders adept at rapid repositioning can capture arbitrage profits, but laggards may face adverse selection or be caught out by further currency corrections.

Industry Example:

In late 2022, UK-origin HMS 1/2 scrap became highly sought after in India following a sharp decline in GBP/INR—a move that widened export margins for UK recyclers but forced Indian buyers to intensify their search for competitive price points as spot rates fluctuated.

C. Domestic vs. Imported Scrap Mix

Exposure to global currency shocks is strongly correlated with a region's reliance on imported scrap. Turkey, the world's leading importer of ferrous scrap, sources over 70% of its feedstock from abroad (as per Turkish Steel Exporters Association), rendering its steel sector highly sensitive to USD/TRY volatility. In contrast, the US and Japan are net exporters, able to weather FX storms by redirecting flows between export and domestic markets.

D. Government Policy & Tariffs: The Regulator's Hand

Governments respond to FX pressures by deploying trade policy tools. For example, countries might impose export duties to restrict outbound scrap flows (preserving domestic supply during currency weakness), or they might lower import tariffs during periods of currency strength to attract inflows and support local industry. Such interventions can further distort spot price pass-through or introduce multi-month lags.

Case Study:

In 2022, the Indian government temporarily raised export tariffs on ferrous scrap, buffering the impact of rupee depreciation and moderating local price spikes despite ongoing FX weakness.

E. Scrap Collection Chains and Timing

The geographically dispersed nature of scrap collection imposes logistical lags that can dampen or delay FX pass-through. From the initial yard purchase to delivery at mill gates, price signals may take weeks to percolate, especially in less digitized markets. Efficient data systems, predictive analytics, and agile logistics are now seen as sources of competitive differentiation.

The first half established the transmission channels. Let's now walk the curve as it actually trades: how a currency shock ripples through quotes, inventory, freight, mill melt schedules, and balance sheets; why the pass-through is sometimes instant and sometimes sticky; how to hard-wire FX logic into contracts and ops; what to expect from the next volatility cycle; and how to turn that volatility into a repeatable edge.

Expanded Scenario Analysis

Imagine a normal week in scrap: exporters are floating numbers for ISRI 211, HMS 1/2 80:20, and P&S 5/7; importers are juggling vessel windows, discharge free days, and working capital; traders are straddling two calendars—steel demand and FX risk. Now drop a currency shock in the middle of this picture and follow the money.

Start with a strong-dollar spike. Dollar strength does two things at once: it raises the local-currency cost of dollar-invoiced imports for EM steelmakers, and it improves the translation economics for dollar earners who sell into weaker currencies. A Turkish buyer seeing USD/TRY jump from 30.0 to 33.0 watches a $360/MT CFR shredded quote leap from 10,800 to 11,880 lira per ton the instant the FX prints. If the mill's billet or rebar realizations don't rise as fast, their purchasing team throttles volumes, substitutes grades where possible, and leans on payment terms. Exporters feel the recoil as bids fade. Some yards cut intake prices to slow inflows; others pause offers for forty-eight hours to let basis reform. If the dollar surge persists, exporters pivot to destinations with less FX pain or to domestic melts that suddenly look competitive. This is classic short-run incomplete pass-through: not every dollar of FX movement shows up in the scrap print because margins, inventories, and elasticities absorb part of the shock—until they can't.

Flip the sign to a local importer's currency crash. When an importer's currency slides sharply—think rupee, lira, or peso after a policy surprise—the first casualty is forward cover. Banks widen spreads, forward points swell, and option premia jump. A purchasing desk that normally rolls one-month forwards might be forced to buy spot and ration tonnage. Quotes that were "firm for today" become "subject." Sellers with unhedged exposures try to re-price mid-flow; buyers invoke material-adverse-change language if their contracts allow it. Physical flow does not halt, but it changes character: more partial cargoes, more mixed grades to hit "cheaper" blends, more countertrade ideas, more requests to stretch free time at discharge. The pass-through in this case is delayed by operational bottlenecks rather than price discovery; the trade knows where the price must go, but it needs to renegotiate the path.

Layer in a freight shock on top of FX. Suppose a Red Sea disruption adds ten to twenty dollars per ton to lanes that matter for you. FX and freight interact multiplicatively in local-currency terms. A buyer calculating landed cost at $360 plus a sudden $15 freight bump is not comparing $375 to last week's $360; they're comparing 375 translated at a worse rate. The compounding effect turns a "small" freight move into a large local-currency pain point and accelerates grade substitution. EAFs leaning on prime scrap tilt marginally toward heavier obsolete if the melt mix allows it; long-product mills push more HMS relative to shredded; integrated mills explore more pig iron or HBI if those links are looser to the dollar or indexed differently. The map of feasible substitutes is the shock absorber of pass-through.

Now consider a synchronized G-3 policy turn that weakens the dollar. Dollar softness reverses much of the above in slow motion. Emerging-market buyers lean back into prompt shipments; exporters regain bargaining power and begin to pull offers higher. But if sellers spent the strong-dollar period discounting to move cargo, they will not instantly claw back all the concessions. Contracts often embed quote validity windows, indexation lags, and progress-payment schedules that smooth the rebound. Mills that locked in billet or finished-steel sales at prior levels now enjoy temporary margin expansion; their purchasing teams use the window to rebuild working inventories at slightly better grades. This is long-run, more complete pass-through: the new FX regime shows up in the print as contracts roll and the physical chain re-prices in sequence.

Finally, inject policy and capital controls. Export duties, import quotas, and ad-hoc license regimes distort the pass-through by changing effective supply. When a government restricts outbound scrap during currency weakness, domestic yards see bids firm even as the world price suggests the opposite, because exportable supply is trapped. Conversely, a temporary tariff cut in a strong-currency phase pulls imports forward and creates a flurry of short-dated fixtures. The lesson is simple but often forgotten in the heat of the moment: in scrap, FX is a necessary variable, not a sufficient one. Freight, policy, grade substitutability, and inventory cycles determine how much of any currency move actually lands in your P&L.

In-Depth Economics of Pass-Through

Pass-through lives in the microstructure. Begin with invoicing currency. Most ferrous and non-ferrous spot trades clear in dollars, which means dollar movements transmit directly to any buyer whose functional currency is not USD. If the buyer invoices their downstream sales in local currency and cannot re-price immediately, the FX hit compresses margin, which in turn tightens scrap bids. If they sell finished steel in dollars—common in export-oriented mills—the natural hedge raises their tolerance for dollar-priced scrap, and pass-through looks lower because the enterprise is hedged at the revenue line.

Now add inventory and quote duration. Yards purchase inflow from collectors in local currency; they hold inventory that was "bought" at yesterday's FX through the intake price they paid. When the currency moves, they can either re-mark and seek today's replacement cost or offer from historical cost to keep turn velocity. High-turn yards with short quote lives show faster pass-through; low-turn yards, or those with contractual intake programs pegged to domestic indices, transmit more slowly. Mills with monthly pricing windows show lower short-run pass-through because a mid-month currency swing is averaged with prior days.

Elasticities matter. Prime-scrap dependent flat-rolled melts exhibit tight residual constraints and pay persistent premia over obsolete. In those chains, FX pass-through is high because the substitution set is narrow. Long-product melts have a wider blend space across HMS, shredded, and P&S; pass-through is diluted by substitution. Cross-commodity linkages also bite: when pig iron or HBI arbitrage opens, it caps scrap upside. When energy prices lurch, it shifts relative melt economics in ways that either amplify or mute FX effects.

Hedging reduces measured pass-through but never eliminates it. A simple forward locks the translation rate, but it introduces cash-flow timing and credit usage. Options keep upside to favorable currency moves but cost premium and, in stressed tapes, suffer from slippage and widening vol. The cleanest illustration is arithmetic. If a buyer faces a $360/MT CFR quote and USD/TRY is 33.00 on the screen, spot translation yields 11,880 lira per ton. If forward points push a one-month deliverable to 33.66, the forward-hedged landed cost is 12,117.6 lira per ton. The pass-through is now a function of both spot and carry; a rally in local rates that widens forward points quietly raises your true cost even if the spot FX looks unchanged.

Contract design shapes pass-through more than traders admit. A deal that references a dollar index plus a published freight route with an explicit FX adjustment band will behave differently than a flat CFR number "firm for today." The first embeds a rulebook that spreads the shock across components; the second throws you into renegotiation with every big print. The most resilient contracts in volatile regimes blend three ingredients: a transparent base (index or formula), a short but realistic validity window, and a defined FX clause that triggers automatic adjustment instead of argument.

Quantitative Sidebar — "Pass-Through You Can Calculate"

This section gives readers formulas they can run in Excel/Sheets or a notebook to quantify what they feel in the tape.

1) Landed cost in local currency (spot-settled)

Let P_usd be the USD scrap price (CFR), F_usd USD freight/other USD legs, L_loc local charges (in local currency), and S spot FX (local per USD).

Local landed cost:

LC_spot = (P_usd + F_usd) * S + L_loc

2) Hedged landed cost using a forward

With domestic interest rate r_dom, USD rate r_usd, tenor T days:

Forward FX via covered interest parity:

F = S (1 + r_domT/360) / (1 + r_usd*T/360)

Hedged landed cost:

LC_fwd = (P_usd + F_usd) * F + L_loc

Forward "carry" impact (hidden pass-through even if spot is flat):

Carry_impact ≈ (F - S) * (P_usd + F_usd)

3) Quick pass-through elasticity (rolling "beta")

Work with log changes over a window (e.g., 20 trading days). Let p_t be local scrap price index, x_t be FX (local per USD).

Compute series: Δln p_t = ln(p_t) - ln(p_{t-1}), Δln x_t = ln(x_t) - ln(x_{t-1}).

Estimate slope each day over the window:

β̂_t = SLOPE(Δln p over window, Δln x over window)

Interpretation: β̂ ≈ 1 → near-full short-run pass-through; 0<β̂<1 → partial; β̂<0 → other forces dominate (e.g., freight collapse or policy change).

4) Control for key confounders (specification you can run when you have data)

Regression in logs or % changes (daily/weekly):

Δln p_it = α + β Δln FX_t + γ Δln Freight_t + δ Δln Steel_t + θ Policy_t + μ_i + ε_t

p_it: local scrap price (by route/grade i)

FX_t: local per USD

Freight_t: route index (e.g., Med-to-South Asia)

Steel_t: relevant finished steel benchmark

Policy_t: dummy for duty/quota/reg change

μ_i: route/grade fixed effects

5) Pricing-window smoothing

If contracts settle on a window [t0, t1], readers can show why mid-month FX shocks only partly show up:

FX_window = AVERAGE(FX_{t0..t1})

Price_settle ≈ f( FX_window , Freight_window , Steel_window )

6) Worked example (show the compounding that practitioners feel)

Suppose: P_usd = 360, ΔFreight = +15, S = 33.00, F (1M) = 33.66.

Spot landed: (360+15)*33 = 375*33 = 12,375

Forward-hedged landed: 375*33.66 = 12,622.5

Even if spot stays 33.00, a rise in forward points lifts true cost by ~247.5 local-currency units per ton—pass-through via carry, not spot.

7) Ready-to-paste Excel/Sheets snippets

Spot landed:

=(P_usd + F_usd) * SpotFX + L_loc

Forward rate (CIP, day count 360):

=SpotFX (1 + r_domDays/360) / (1 + r_usd*Days/360)

Rolling beta over 20 rows (assumes Δln arrays):

=SLOPE(OFFSET(dlnP, ROW()-ROW(dlnP_start), 0, 20, 1), OFFSET(dlnFX, ROW()-ROW(dlnFX_start), 0, 20, 1))

Rolling correlation (sanity check):

=CORREL(Window_dlnFX, Window_dlnP)

How to use this sidebar in practice: translate today's quotes with both spot and forward to reveal carry; compute your rolling β̂ to see if your market is currently sticky or hyper-responsive to FX; and reference the regression spec to explain to stakeholders why a given currency move didn't fully show up (freight, steel benchmark, or a policy toggle absorbed it).

Actionable Industry Takeaways

Treat FX as part of your bill of materials. Start at intake. If your yard buys in local currency, calibrate intake prices not just to the export market but to the replacement FX you can actually secure. A forward or collar sized to your realistic shipment schedule is operational hedging, not speculation; it protects the cash conversion cycle, which is where scrap businesses live or die. On the sell side, quote two ways when appropriate: a hard-dollar CFR with a narrow validity for counterparties that need certainty today, and a formula-based number that breathes with FX for counterparties who value transparency over fixation. This duality increases your hit rate without committing you to a single risk posture.

Make your pricing windows work for you. If you sell against a monthly or bi-weekly window, align your FX cover to that cadence; covering daily while your sales settle monthly is a quiet source of basis risk. If your mill buys weekly but sells steel against longer windows, consider partial hedges that anchor a portion of your scrap while keeping optionality for the sales side to catch up. Optionality is an asset in volatility; pay for it consciously with options rather than unconsciously with slippage and renegotiation.

Engineer the FX clause. A robust clause defines the base pair, the reference source, the timestamp, and the adjustment formula. It can include a stabilization band—for example, no adjustment inside a one percent move intraday to avoid operational noise—and an automatic roll to the next fixing if counterparties cannot confirm within the validity. When the clause is mechanical, your commercial relationship survives the shock because both sides can point to the same odometer.

Exploit substitution and timing rather than trying to outguess FX. In weeks when dollar strength pressures EM bids, move inventory toward destinations with natural hedges or higher dollar revenues, or rebalance toward domestic sales if they have become relatively richer. In weeks when your intake has run ahead of exportable outlets, widen grade invitations to capture cheaper residual-tolerant flows and create blendable flexibility. The best traders treat FX as a wind that changes daily but keep their sails—grade mix, destination mix, payment terms—trimmed for speed.

Build a daily rhythm that fuses markets and ops. The practical routine is simple to describe and powerful to execute. Before you look at offers, translate last night's FX closes into your two or three most important landed-cost equations. Mark your freight routes to current fixtures rather than memory. Re-express your steel sales prices into the currency of your next scrap purchase. Scan for temporary dislocations: a reload port that stayed bid while your discharge currency weakened, an index that lagged, a bank that is still quoting tight forwards because their book is balanced. Turn those observations into small, frequent decisions: bring a shipment forward by a few days, resize a hedge from full to partial, nudge your intake grid by a hair to slow the wrong flows and encourage the right ones. The daily grind is where pass-through becomes profit.

Future FX/Scrap Trends

Volatility is not an episode; it is a regime. Divergent monetary cycles, occasional capital controls, and energy-transition dynamics will keep the dollar at the center of scrap pricing, even as more counterparties experiment with alternative rails. Dollar invoicing will remain dominant because of liquidity and hedgeability, but the margin share of non-USD settlements will grow where regional trade blocks deepen. Expect more cross-currency basis moves to matter at the margin: a euro buyer watching USD/EUR slip a cent while their local bank widens forward points by twenty basis points will feel the forward rather than the spot, and that subtlety will decide the winning bid.

Digital settlement and real-time risk will creep from the edges toward the core. Faster confirmation cycles and programmable payment terms will shorten the window in which currency noise can disrupt a trade, but they will also compress the time you have to react. Pricing engines that blend live FX, published indices, and freight quotes into a single continuous number will spread from the largest houses to mid-market players because the technology is becoming off-the-shelf. The winners will be those who pair automation with judgment: let the system mark the world; let the human decide when to lean against it.

On the physical side, substitution maps will widen as EAF flexibility improves and as more mills can toggle marginal tons between scrap, HBI, pig iron, and primes based on short-run economics. Wider maps mean more cushions against FX shocks. But compliance will tug in the opposite direction: traceability mandates and residual caps in high-spec product keep certain scrap premia persistently elevated and their pass-through high. The industry's center of gravity will—slowly—shift toward contracts that reward certified quality and predictable delivery rather than pure opportunistic price, which again moderates the violence of pass-through without eliminating it.

Conclusion: Turning Pass-Through Into Playbook

Currency shocks will keep arriving uninvited. They will continue to reprice your offers, your inventories, and your nerves. But they do not have to whipsaw your business. The mechanics are knowable: invoicing currency sets the transmission belt; inventory and quote cadence decide the timing; substitution and freight decide the amplitude; contract architecture decides whether you argue or adjust; hedging converts uncertainty into a defined cost. When you embed these mechanics into intake grids, quote logic, FX clauses, and a tight daily routine, pass-through becomes less a hazard and more a signal.

Treat every morning as a rehearsal of the same three moves. Translate the world into your cash terms with today's FX and freight. Rebalance your mix of grades, destinations, and terms to where the translated margins are fattest. Lock the right slice of that mix with the right hedge for the right duration. Repeat. Over a quarter, that quiet repetition converts volatility into edge. Over a year, it becomes culture. And in a business where basis points compound into market share, that culture is the most durable hedge you can own.