Producer Price Indexes of Sheet Steel, Aluminum, Plastic and Transportation

We start this report with comments made by Jun Wei Yeo on iron ore and coking coal. “In April to May alone, there was an over 30 percent drop in the price of iron ore. Iron ore mining companies such as Rio Tinto, BHP Billiton, and Brazil’s Vale are suffering simultaneous stock price declines. Most articles claim that the slowdown in Chinese growth and consumption are the major cause of this decline, but there are more forces at play. China is developing its iron ore mining capabilities, resulting in a decreased reliance on Australian ore imports. Mining.com recently released an article stating that once-shuttered iron mines are re-opening, adding another 30 million metric tons to the world supply. Additionally, another recent headwind is the increase in the usage of scrap in China, where Platts reports basic oxygen steelmaking plants have nearly doubled their use of scrap to as much as 17.5 percent (Mining.com). The next most essential export from Australia is coal briquettes, the price of which is rapidly declining to normal levels after cyclone Debbie disrupted the supply of coal required by China. The Australian dollar will gradually track these declines in commodity prices.”

On Tuesday this week, the Bureau of Labor Statistics (BLS) released its series of Producer Price Indexes (PPI) for more than 10,000 goods and materials. For an explanation of this program, see the end of this piece. The latest release reported results through May. We run this analysis every three or four months to provide information for subscribers on any changes in the competitive position of steel against other materials and rail vs. truck transportation. The PPI data are helpful in monitoring the price direction of steel and steel products against competing materials and products. As far as we at SMU can tell from comparison with known transaction prices, these PPIs are a reasonable representation of the real world, though there may be a lag between the BLS reports and spot prices for steel products. We have also concluded that the actual index values of the PPIs of different products cannot be compared with one another because they are developed by different committees within the BLS. We believe that this data is useful in comparing the direction of prices in the short and medium term, but not the absolute value.