We have been following the evolution of several price indices of metals since 2008. 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. The difference between various components of these indices is not a random one but rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.
In this post, we revisit the trends in the PPI of three commodities related to metals: steel iron, nonferrous metals and metal containers. Originally, we reported on these items in 2008 and then revisited in 2010.
1.Figure 1 compares the difference between the PPI and the index for iron and steel (101). The difference is characterized by the presence of a sharp decline between 2001 and 2008. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. A year ago we expected the negative trend to start transforming into a positive one as the green line in Figure 2 shows. Our previous predictions were correct. For example, two years 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 2. In other words, the period between 2008 and 2010 is characterized by very high volatility, which will fade away after 2011.
2.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, we expect this index to decrease relative to the PPI and the difference in Figure 3 to rise to the level of -10. Non-ferrous metals will be getting cheaper.
3.The index for metal containers (103) provides an excellent example of linear trends in the normalized difference (see Figure 4). There are two distinct periods between 1960 and 2008 with a turning point in 1987. As we predicted in 2009, the sudden drop in the difference at the end of 2008 manifested the start of transition to a new period with a negative trend. The price index for metal containers will be increasing relative to the PPI, i.e. the index will get back its price setting power.
(Click charts to expand)
Figure 1. The difference updated for the period between June 2010, and January 2012. 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. This means that the price index for iron and steel will be growing at a lower rate than the overall PPI.
Figure 2. The evolution of the difference between the PPI and the price index of iron and steel between January 2005, and January 2012. Green line predicts the evolution of the difference after 2008. Red circles represent the difference between April 2009 and January 2012.
Figure 3. The evolution of the difference between the PPI and the index of nonferrous metals from 1985 and January 2012. 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.
Figure 4. The evolution of the difference between the PPI and the index of metal containers from 1985 to January 2012. There are distinct linear trends in the difference. The difference has started its transition to a negative trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.