Five months ago we revisited the previously predicted fall in the producer price index of steel and iron in the first half of 2013 and formulated the hypothesis on the evolution in 2013-2016: “We foresee that the difference will be growing fluctuating around the green line till 2016. The price of iron and steel will be declining further before the difference reach ~10 to 20. ” It is time to revisit our prediction.
Originally, we reported on the difference between the overall PPI and the PPI of steel and iron in 2008. Then we revisited the difference in 2010, February 2012, December 2012, and August 2013. We predicted the index of steel and iron to return to the long term trend, which express a higher rate of growth of the producer price index than that of steel and iron. Our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between various components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.
Figure 1 displays the difference between the PPI and the index for iron and steel (BLS code 101). The difference is characterized by the presence of a sharp decline between 2001 and 2008. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. In 2008, our main assumption was that the negative trend observed before 2008 should start transforming, after a short period of large fluctuations, into a positive trend after 2010. In Figure 1, the (originally expected) new trend is shown by green line. This trend suggests that the PPI grows faster than the index of steel and iron by approximately 2 units of index per year.
Figure 2 demonstrates the most recent period and confirms that our prediction for 2013 was correct – the difference fluctuates around the green line. Therefore:
We confirm our early prediction that the price of iron and steel will be falling through 2016 before the discussed difference reach ~10 to 20. Investments in iron and steel related assets are likely not profitable.
Figure 1. The difference of the PPI and the index of steel and iron updated for the period between November 2012 and October 2013. The green line was first introduced in 2008.
Figure 2. Same as in Figure 1 for the period between January 2005 and October 2013. Green line predicts the evolution of the difference after 2008.