How to Hedge Base Metal Scrap

Every batch of scrap contains a percentage of recoverable base metal — determined by physical assay reports. A load of #1 Copper scrap might assay at 99% copper. A batch of Zorba aluminum might yield 90% after shredding and separation. Galvanizer's dross might contain only 60% recoverable zinc.

That recovery percentage is your hedge ratio. 100 tonnes of scrap at 90% recovery = 90 tonnes of hedgeable metal. You then sell 90 tonnes of exchange futures (rounded to the nearest lot size of 25 MT on the LME) to lock in the base metal price. The remaining 10% — non-metal content — is not hedgeable and not your metal price risk.

This is fundamentally different from hedging primary metals where you hedge 100% of the tonnage. Scrap hedging requires an additional input — the assay report — and the hedge ratio changes with each batch. Getting this right is the difference between a well-hedged position and an over-hedged one that creates unnecessary margin exposure.

Scrap traders and processors carry inventory that is exposed to exchange price movements on its metal content. A copper scrap dealer holding 100 tonnes of #2 Copper (96% recovery) has ~96 tonnes of copper price exposure. A 5% LME drop — common in a single month — wipes out the trading margin.

The challenge is timing. Physical scrap takes days or weeks to process and sell. During that holding period, the underlying metal price moves every second. Seasonal collection patterns create inventory buildups. Fixed-price customer contracts lock in selling prices before procurement costs are known. All of these create exposure windows that hedging can close.

Scrap firms also face spread risk — the risk that the discount between scrap and exchange prices changes. Exchange futures hedge the metal content, not the spread. Understanding what you can hedge (the metal) versus what you manage through physical market timing (the spread) is key to effective scrap risk management.

Copper scrap: High recovery rates — Bare Bright at 99%+, #1 Copper at ~99%, #2 Copper at ~96%, Millberry at 99%+. The high purity means hedge ratios are close to 100% of scrap weight. LME copper futures capture most of the value. Hedge ratios typically run 96-99%.

Aluminum scrap: More variable recovery. Taint/Tabor at ~95%, Zorba at 85-92% depending on mix quality, alloy scrap varies by composition. Wider recovery ranges mean more sensitivity to assay accuracy. Hedge ratios typically run 85-95% — getting the assay right matters more here than with copper.

Zinc scrap: The widest recovery range. New zinc offcuts at 95%+, old zinc at 85-95%, die-cast (Zamak) at 90-95%, but galvanizer's dross at only 55-70%. Dross recovery depends heavily on iron content and processing method. Hedge ratios range from 55% to 95% — getting the assay right is critical to avoid over-hedging.

Recovery-matched hedging: The standard approach — sell exchange futures equal to the recoverable metal from your assay. 100 MT of Zorba at 90% recovery = sell 3.6 lots of LME aluminum (90 MT / 25 MT per lot). This is the starting point for most scrap operations.

Conservative hedging: Hedge slightly less than the assay indicates — e.g., 85% of estimated recovery instead of 90% — to account for processing losses and assay uncertainty. This avoids over-hedging and the margin exposure that comes with it. Common when assay data is from sampling (not full-batch testing).

Layered hedging: Build hedge positions gradually as scrap is purchased over time, rather than hedging all at once. This averages out the hedge price across LME levels and reduces timing risk. Particularly useful for operations with regular scrap procurement cycles.

Collar strategies: Buy a put to protect against LME declines, sell a call to offset the premium. Creates a price range within which your metal content is protected. Useful when full futures hedging creates cash flow pressure through margin calls — collars limit downside without daily mark-to-market.