Whenever a car is assembled and delivered to a new car dealer, the clock starts on its lifecycle. According to IHS Markit data, the average age of cars currently registered and driven on American roads is now at 11.9 years. That figure continues to grow as car owners keep their vehicles for longer and longer. And after their useful life has passed – whether that’s 5 years of extreme abuse, an average life of 12 years, or a pampered existence of two decades or more – they most often end up in the same place. The junkyard.
Nearly 100 percent of the cars in the United States will eventually be recycled, turned into raw materials that re-enter manufacturing in a cycle. The junk car market is worth approximately $32 billion in sales for the United States alone. Not only do recyclers depend on a steady flow of junk and scrap cars, but the used auto parts marketplace also feeds off of them. But as the novel coronavirus pandemic drags on, how does that affect the junk car industry?
Marcin Ladowski is the COO of junk car buying marketplace CarBrain. He sees room for growth and higher prices for the industry, but after a bit of a tough go. “Junk car prices plunged when the pandemic hit the US, but we’ve already seen some signs of recovery. It’s going to be challenging for junkyards and recyclers for a bit, and then I see the potential for junk car buyers and recyclers to do really well when prices recover, and car owners will benefit from higher prices too.”
The road to recovery has only just begin for the junk car industry as well as the rest of the American economy. But when it gets back to whatever normal will be, it could look a little different than before.
Scrap Metal is Worth a Little More
As of August 2020, the price per tonne of scrap steel hovered around $287. That’s well short of just two years ago when $345 US per tonne was the going rate. But the two-year-old price is likely to be surpassed soon after the auto industry regains inventory control. At that time, it’s expected that a shortage in scrap steel will command higher prices.
It could climb to the $450 mark like it did in 2013 if demand for steel continues to exceed to outpace vehicle production and dealerships can’t maintain a 30-day inventory of new cars. There’s an outside chance that it passes the 2013 mark as well.
Owners Will Keep Cars Longer
However, the same pressure pushing up prices for junk cars could limit supply of scrap steel. With a shortage of raw manufacturing materials, the average new car price has nearly reached $38,000 US. Car owners in the United States are feeling the financial pinch more than ever as the economy tries to recover, and spending almost $40,000 on a new vehicle is a stretch for many households.
For that reason, owners of older cars will choose to hold onto their vehicles for longer. The 11.9-year average right now could easily extend to 12.5 or 13 years within a short 12 to 18 months. Another factor is a reduced number of car accidents during COVID, eliminating thousands of cars from prematurely entering the junk car market. Again, the resulting effect is an increase in scrap car prices as buyers entice owners to sell their vehicles.
The Used Car Parts Market Will Grow
Over the past five years, the used car parts market has grown by 3.5 percent annually, but that occurred in ‘normal’ economic years. With increased new car prices and a depressed economy, the used car parts market will experience higher demand. It would not be surprising to experience an increase of five to eight percent in demand for parts, and a double-digit increase in price would not be out of line.
The higher demand would come as a result of car owners piecing and patching them together with low-cost repairs, keeping them on the road as long as they can. However, it’s only a stopgap until the cars reach the end of their lifecycle and owners have no choice but to retire their non-working vehicle.
While there’s great potential for prices to climb in the junk car market, car owners are already in a good position to capitalize on their older vehicle. Incentives on new cars are competitive and interest rates are low. Combined with strong pricing on junk cars and scrap steel, owners can make away like a bandit.
