Recycling and Material Price: An Exploration of the Effects of Secondary Substitutability on Price Stability

"High material prices and price uncertainty can be harmful to manufacturing firms. Increased use of recycled materials, industry-wide, can lower both material prices and price variability; moreover, increased recycling decreases the use of primary material, which mitigates price increases due to scarcity effects. These stabilizing and price lowering effects are explored using an Aluminum industry model. We show that (a) increased recycling leads to smaller price fluctuations in the presence of a primary metal supply perturbation, and (b) that the more substitutable the secondary metal is for the primary metal, the lower the overall material price is.IntroductionThe price of an industrial metal is expected to be a function of both the marginal cost of extraction and its scarcity[l-2]: where scarcity can be defined as the degree to which anticipated demand exceeds the known supply. Recycling end-of-life metal increases the apparent supply of the metal, or-in a functionally equivalent, but alternative conception-lowers the demand for primary metal; this lowers primary metal scarcity and should, theoretically, reduce its price. To the extent that this theoretical prediction holds true, recycling can provide benefits to consumers of industrial metals in the form of lower prices.Using a platinum industry model, prior work by Alonso[3] has shown that increased industrywide recycling can reduce metal price volatility because the secondary metal production (a) offsets virgin metal depletion, and (b) responds to supply-demand balance fluctuations more rapidly than the primary market. However, Platinum is not a typical industrial metal in the sense that secondary metal is perfectly substitutable for primary metal: Both primary and secondary platinum metal are functionally equivalent and have a common price. Other metals, such as secondary aluminum which is used as an example case in this study, contain varying degrees of other elements that were either intentionally added, or were inadvertently mixed in with the metal during the scrap recovery process. Consequently, different grades of scrap exist that have different profiles of elements in their composition. Depending on their particular profile of elements, more or less of a given grade can be used as a mass fraction of the final alloy-the secondary metal is not perfectly substitutable for the primary metal. For the purposes of this paper, the aluminum mass fraction of the final alloy that can be made up of secondary aluminum is termed the secondary substitutability of that grade in that alloy."