- Price of iron and steel has been decreasing since 2012.
- There is a linear time trend in the difference between producer price index of iron and steel and the headline PPI allowing long-term forecast.
- The fall in iron and steel price will likely extend into 2016/2017 with possible short-term fluctuations.
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 Seekingalpha, 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 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, and August 2013). Here we revisit the previously predicted fall in the producer price index of steel and iron and formulate a preliminary hypothesis on the evolution in 2014-2016.
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.
Figure 3 demonstrates the most recent period and confirms that our prediction for 2013 was correct; the difference fluctuates around the green line. A short-term growth in the price of iron and steel observed in November 2013 and January 2014 is a transient one (a fluctuation), and the difference will return to the green line in the second quarter of 2014.
We confirm our forecast that the difference will be growing and fluctuating around the green line till 2016. The price of iron and steel will be declining further before the difference reaches ~10 to 20.
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 January 2014. The green line was first introduced in 2008.
Figure 3. Same as in Figure 2 for the period between January 2005 and January 2014. The green line predicts the evolution of the difference after 2009.