12/29/14

The price of steel and iron will be falling

In March 2014, we posted on the falling producer price of steel and iron in 2014. This prediction was right and the PPI of iron and steel has been falling from 238.0 (January 2014) to 225.7 (November 2014). The overall PPI has also dropped by 7.2 points since March.  Here we report that we foresee no general change in the declining trend. In 2015, we expect that the producer price index of iron and steel will experience further fall together with oil and many other commodities.  Moreover, the overall PPI will be also falling and dragging consumer prices down.

For price prediction of various commodities, 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 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.

On Seeking Alpha, we first reported on the evolution of the producer price index (PPI) for iron and steel in July 2009. We compared our earlier prediction from 2008 with the actual evolution of the difference between the PPI of steel and iron and the headline PPI and made the following forecast:

“In the short run, one can expect a fast recovery of iron and steel prices to the level observed in January-March 2008, i.e. the index will reach the level 210 to 220. However, this recovery will not stretch into 2011, and the index of iron and steel will be declining in the long run to the level of 2001, as depicted in Figure 3. In other words, the period between 2008 and 2010 is characterized by very high volatility, which will fade away after 2011.”

Figure 1 in this post reproduces Figure 3 from the 2009 post, where the green line gives a prediction of the future evolution. Since 2009, we made several updates considering new data on both PPIs (June 2010, February 2012,  December 2012, August 2013). According to our long-term tradition, we revisit the previously predicted fall in the producer price index of steel and iron and formulate a preliminary hypothesis on the evolution in 2015-2016.  

Figure 2 displays the difference between the PPI and the index for iron and steel (BLS code 101) since 1985. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. The difference is characterized by a sharp decline between 2001 and 2008. Our main assumption described in the aforementioned post was absolutely right - the negative trend observed before 2008, after a short period of large fluctuations, started its transformation into a positive trend after 2010. In Figure 2, the (slightly updated according to actual data between 2009 and 2011) 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. This observation was valid between March and November 2014.

Figure 3 demonstrates the most recent period and confirms that our prediction for 2013 was correct – the difference fluctuates around the green line. As described in our previous post, the short-term growth in the price of iron and steel observed in November 2013 and January 2014 was a transient one (a fluctuation) and the difference returned to green line in the second quarter of 2014. 

We have to confirm our forecast that the difference will be growing fluctuating around the green line in 2015 and 2016. The price of iron and steel will be declining further before the difference reach ~10 to 20.  Investments is iron and steel related assets are likely not profitable. 



Figure 1. The prediction of steel and iron price made in 2009.


Figure 2. The difference of the PPI and the index of steel and iron for the period between January 1985 and November 2014. The green line was first introduced in 2008.




Figure 3. Same as in Figure 2 for the period between January 2005 and November 2014. Green line predicts the evolution of the difference after 2009.

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