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Ivan Kitov
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I am a Doctor of Physics and Mathematics, Lead Researcher at the Institute for the Geospheres' Dynamics, Russian Academy of Sciences. Founding member of the Society for the Study of Economic Inequality Published three monographs in economics and finances: Deterministic mechanics of pricing... More
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Stock Market Science
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Economics as Classical Mechanics
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Deterministic mechanics of pricing
  • PPI Of Metals On Decline 0 comments
    Oct 15, 2012 3:57 PM

    This is a regular revision. 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 [1, 2]. The difference between various 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.

    In this post, we revisit the trends in the PPI of three commodities related to metals: steel and iron and nonferrous metals. Originally, we reported on these items in 2008 and then revisited in 2010 and February 2012. We expected the index of steel and iron to return to the long term trend, which express a higher rate of growth of the producer price index than that of steel and iron. The index of nonferrous metals had to fluctuate with large amplitude around the PPI and grew at a lower rate than PPI during 2012.

    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. 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 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 2012 was correct - the difference has been approaching the green line. One may foresee the difference to intersect the green line in the near future as a (pendulum) return motion. 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. Accordingly, this is not a commodity to buy in 2012 and 2013.

    2. The index for non-ferrous metals (102) shows an example of the absence of sustainable trends in the difference (see Figure 3). The curve is rather a comb with teeth of varying width. Although varying, the distance between consecutive troughs is several years at least. In February 2012, we expected this index to decrease relative to the PPI and the difference in Figure 3 to rise to the level of -10. This prediction is still valid but the difference has gained only 18 points since February (from -62 to -44). Considering the observation that the rate of growth was approximately 3 points per month since February 2012 one may expect the level of -10 in approximately 10 to 12 months, i.e. in September 2013. The price of nonferrous metals will be decreasing in absolute terms as well and does not represent the best investment opportunity.

    (click to enlarge)

    Figure 1. The difference of the PPI and the index of steel and iron updated for the period between January 2012 and August 2012. As expected, the difference has been increasing during the reported period and closed the new trend (green). The price index for iron and steel will be growing at a lower rate than the overall PPI.

    (click to enlarge)

    Figure 2. The evolution of the difference between the PPI and the price index of iron and steel between January 2005 and August 2012. Green line predicts the evolution of the difference after 2008. Red circles represent the difference between April 2009 and August 2012.

    (click to enlarge)

    Figure 3. The evolution of the difference between the PPI and the index of nonferrous metals from 1985 and August 2012. There are no linear trends in the difference, but its behavior demonstrates a clear periodic structure with relatively deep but short troughs.

    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.

    Themes: commodities
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