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About a year ago we revised the evolution of several price indices of metals. Our general approach is based on the presence of long-term sustainable trends in the evolution of the CPI and PPI in the United States. The difference between various components of these indices is not a random but rather a predetermined process, as shown in a series of papers we published in 2008-2009 [1-4]. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities [5-7]. We have summarized these papers and some more studies in a monograph “Deterministic mechanics of pricing” published by LAP [8].

In this post, we revisit the trends in the PPI of three commodities related to metals: steel iron, nonferrous metals, and metal containers. Originally, these items were studied in our article [4]. This is a regular revision with the next scheduled to the end of 2010.

1. Figure 1 compares the original (upper panel), revised (middle panel) and the newly updated differences. According to [4]:

the normalized difference between the PPI and the index for iron and steel (101) is characterized by the presence of a sharp decline between 2001 and 2008: from +0.2 to -0.4. Between 1980 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. One could expect the negative trend is now transforming into a positive one.

A year ago we wrote:

Between March and June 2009, the difference continued to increase, and likely reached its peak in June (Figure 2). In July or August 2009, the difference will stall around its peak value and then will start to decrease. As a result, the index for iron and steel will be growing faster than the PPI. 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.

This prediction was right, as Figures 2 and 3 in this post demonstrate.

2. According to [4]:

the index for non-ferrous metals (102) shows an example of the absence of sustainable trends in the normalized difference. The curve is rather a comb with teeth of varying width. Although varying, the distance between consecutive troughs is several years at least. Therefore, one should not expect a quick recovery in the price for nonferrous metals.

A year ago we wrote:

Figure 4 displays the original and updated predictions. There is almost nothing to add to the previous statement. The recovery in March-June 2009 is likely only a short-term one, as the past experience shows.

We also display in Figure 4 the newly updated trajectory. As forecasted, the producer price index of nonferrous metals has regained its price setting power, and the March-June 2009 excursion in the difference was only temporary. It should not last long, however.

3. It was stated in [4] that,

the index for metal containers (103) provides an excellent example of linear trends in the normalized difference. There are two distinct periods between 1960 and 2008 with a turning point in 1987. A sudden drop in the difference in the end of 2008 may symbolize the start of transition to a new period with a negative trend. Then the price for metal containers will be increasing at an elevated rate, i.e. the index will get back its price setting power.

A year ago we wrote:

Figure 5 presents the original and updated versions of the difference between the PPI and the index of metal containers. The negative overshoot in the difference reached its peak in March and currently the difference started to increase. One can not exclude short-period oscillations in the near future. The future of the index for metal containers is vague.

The difference was on an upward trend since June 2009 with a short-period fluctuation, as expected. The evolution along the positive trend should continue into 2011, i.e. the price index of metal containers will be losing its pricing power relative to the overall PPI.

Conclusion

Our simple predictions were good enough and validate the general concept of the sustainable trends in the CPI and PPI differences. Will keep reporting on the further developments.

click to enlarge



Figure 1. Upper panel: The evolution of the difference between the PPI and the price index of iron and steel between July 1985 and March 2009 (borrowed from [4]). Middle panel: Same for the period between 1985 and June 2009. Red and blue lines highlight segments between 1988 and 2001, and from 2001 to 2008, respectively. Green line predicts the evolution of the difference after 2008, as a mirror reflection of the linear trend between 2001 and 2008. Lower panel: The difference updated for the period between June 2009 and April 2010. As expected, the difference has been decreasing during the reported period and sank below the new trend (green). The trajectory has to turn up in the near future and reach the new trend by July 2011. This means that the price index for iron and steel will be growing at a lower rate than the overall PPI.


Figure 2. Upper panel: The evolution of the difference between the PPI and the price index of iron and steel between January 2005 and June 2009. Red line predicts the evolution of the difference after 2008. Red circles represent the difference between April and June 2009. We expect the difference will start growing in August-September 2009. Lower panel: The newly updated trajectory. The difference precisely obeyed our prediction a year ago and sank below the green line (new trend).

Figure 3. Upper panel: The evolution of the PPI, the index for iron and steel, and their difference in the long-run between 2009 and 2016. The index for iron and steel is predicted to decrease from the level of 220, which it will reach by the end of 2009, to ~185 in 2016. Accordingly, the difference will be growing as shown in Figure 1. The PPI will be also slowly growing. Lower panel: The newly updated trajectory.


Figure 4. Upper panel: The evolution of the difference between the PPI and the index of nonferrous metals from 1960 to March 2009 (borrowed from [4]). Middle panel: Same as in the upper panel for the period between 1985 and June 2009. There are no linear trends in the difference, but its behavior demonstrates a clear periodic structure with relatively deep but short troughs, which reflect the fast growth in the PPI for nonferrous metals. The last excursion ended in 2009. A period of hovering near the zero line is expected. Lower panel: The newly updated trajectory. As forecasted, the producer price index of nonferrous metals has regained its price setting power, and the March-June 2009 excursion in the difference was only temporary. It should not last long, however.


Figure 5. Upper panel: The evolution of the difference between the PPI and the index of metal containers from 1960 to March 2009 (borrowed from [4]). Middle panel: Same as in the upper panel for the period between 1985 and June 2009. There are distinct linear trends in the difference. One can not exclude that the fall in the difference is a start of the transition to a new trend. Lower panel: The newly updated trajectory.

References


1. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

2. Kitov, I., (2009). Apples and oranges: relative growth rate of consumer price indices, MPRA Paper 13587, University Library of Munich, Germany.

3. Kitov, I., Kitov, O., (2009). A fair price for motor fuel in the United States, MPRA Paper 15039, University Library of Munich, Germany,

4. Kitov, I., Kitov, O., (2009). Sustainable trends in producer price indices, Journal of Applied Research in Finance, v. 1, issue 1.

5. Kitov, I., Kitov, O., (2009). PPI of durable and nondurable goods: 1985-2016, MPRA Paper 15874, University Library of Munich, Germany

6. Kitov, I., (2009). Predicting gold ores price, MPRA Paper 15873, University Library of Munich, Germany

7. Kitov, I., (2009). Predicting the price index for jewelry and jewelry products: 2009-2016, MPRA Paper 15875, University Library of Munich, Germany

8. Kitov, I. (2010). Deterministic mechanics of pricing. LAP Academic Publishing, Saarbrucken, Germany.

Disclosure: No positions

Source: PPI of Metals: An Annual Revision