The price of iron and
steel is likely to fall in October-December 2012 following the drop in oil
price. We have been reporting on the trade-off
between the (not seasonally adjusted) producer price index of crude oil
(domestic production) and the PPI of iron and steel since
2009. It has been always a linear and lagged link between them. Here we present data through September 2012.
Figure 1. The deviation
of the iron and steel price index and the index of crude oil from the PPI,
normalized to the PPI.
We first reported that
the PPI of crude oil had been likely evolving in sync with that of iron and
steel, but with a lag of two months in September 2009. In order to present both indices in a
comparable form, the difference between a given index, iPPI (i.e. iron and steel or crude), and the overall PPI was
normalized to the PPI: (iPPI(t)-PPI(t))/PPI(t).
These normalized differences represent the evolution of the rate of deviation
from the PPI over years.
Figure 1 depicts the corresponding
time histories of the normalized deviations from the PPI, including the most
recent period through September 2012. Even
a simple visual inspection reveals the following feature: the (normalized
deviation from the PPI of the) index of iron and steel lags by approximately two
months behind the (normalized) index of crude oil.
In order to reduce both
deviations to the same scale we additionally normalized the curves in Figure 1
to their peak values between 2005 and 2012.
(iPPI(t)-PPI(t))/[PPI(t)*max{iPPI-PPI)}]
This scaling allows a
direct shape comparison. In Figure 2, we display the normalized index of iron
and steel shifted by two months ahead to synchronize its peak with that
observed in the normalized index for crude petroleum. The scaled index of crude
demonstrates short-term deviations from the index of iron and steel in the overall
shape and timing of the peak and trough. Simple smoothing with a three-month
moving average, MA(3), makes the curves resemblance even better. As an extra
benefit of the resemblance, one can use the two-month lag to predict the future
of the iron and steel price index.
Figure 2. Deviation
of the iron and steel price index from the PPI, normalized to the PPI and the
peak value after 2005 as compared to the deviations of the index for crude
petroleum normalized in the same way. The normalized index for iron and steel
is shifted two months ahead. One can expect the index of iron and steel to fall
relative to the PPI in October-December 2012.
Conclusion
The link between oil
and iron has been unbreakable. Between 2006 and 2012, the deviation of the price index of
iron and steel from the PPI in the USA repeats the trajectory of the deviation
of the index of crude petroleum (domestic production) with a two-month lag.
Therefore, the prediction of iron and steel price for at this horizon is a
straightforward one. From Figure 2, one can expect the price of iron and steel
to fall relative to the PPI in October-December 2012 in line with the observed
fall in oil price.
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