5/19/16

The price of steel and iron will be falling, but not long

In December 2014, we posted on the falling producer price of steel and iron in 2014 and on further fall in 2015-2016. This prediction was right and the PPI of iron and steel has been falling from 226 (January 2014) to 173 (February 2016). The overall PPI has also dropped by 20 points since 2014.  Here we report that we foresee no general change in the declining trend in the short-term. In 2017, we expect that the producer price index of iron and steel will reach its bottom and start to grow, likely during the next decade. Moreover, the overall PPI will stop 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, and aforementioned December 2014). 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 2016-2017.  Please notice that the green line was predicted in 2008.

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 this post was 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 (or falls slower) than the index of steel and iron by approximately 2 units of index per year.

Figure 3 demonstrates the most recent period and confirms that our prediction for 2014 was correct – the difference fluctuates around the green line. The overall trend is still positive, i.e. the price of iron and steel falls faster than the overall PPI. There is no much room left for further growth in the difference from the historical point of view, however. One could suggest that the difference will reach its maximum somewhere in 2017-2018 and then will turn to a negative trend similar to that observed between 2000 and 2008.

It might be good time to think about investment in steel and iron. The pivot point is close.



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 April 2016. Green line predicts the evolution of the difference after 2009. Upper panel from the 2014 post and the lower panel used the most recent data. The overall trend is still positive, i.e. the price of iron and steel falls faster than the overall PPI.

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