As Predicted, The PPI Of Steel And Iron Has Been Declining

Includes: PSTL, SLX
by: Ivan Kitov

Two months ago we predicted a fall in the producer price index (PPI) of iron and steel: "The index of steel and iron will likely be falling in absolute terms in the fourth quarter of 2012 and the first quarter of 2013." On December 13, the BLS reported various PPIs for November 2012. It's 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 June 2010 and February 2012. Ten months ago, we predicted the index of steel and iron to return to the long term trend, which express a higher rate of growth of the overall 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 walk but is rather a predetermined process. Using these trends, one can foresee consumer and producer price indices for select goods, services and commodities.

Figure 1 compares the difference between the PPI and the index for iron and steel. This difference is characterized by the presence of a sharp decline between 2001 and 2008. Between 1985 and 2000, the curve practically fluctuates around the zero line. In 2008, our main assumption was that the negative trend observed before 2008 should start transforming into a positive one after 2008. In Figure 1, the expected new trend is shown by a 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 2012Q4 was correct - the difference has touched the green line. One may foresee the difference to fluctuate around the green line in the near future. The price of iron and steel will likely be declining. It is not the best time to invest in the commodities related to iron and steel.

Figure 1. The difference of the PPI and the PPI of steel and iron updated for the period between September 2012 and November 2012.

Figure 2. Same as in Figure 1 for the period between January 2005 and November 2012. Green line predicts the evolution of the difference after 2008. Red circles represent the difference between April 2009 and November 2012. The difference has been increasing during the reported period and reached the new trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.