Key Performance Indicators Behind Steel End-Market Segments

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Followers of this site might agree that we talk a lot about drivers of pricing for various metals.

Sometimes it helps to examine those drivers in context of the big picture for a particular metal market. Say for example, steel.

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

When we look at steel markets, we end up talking about things like: the BDI (Baltic Dry Index), the cost of iron ore, coking coal, scrap, electricity prices, auto sales, housing starts, the Architecture Billings Index (ABI), building permits, etc. We could easily name another 25 indicators that coordinate with steel price movements and market trends.

However, we sometimes forget about context.

So when the AISI published its report, Profile of the American Iron and Steel Institute, we took a look to see what bits of data would best serve a steel-buying audience. Based on our review, two parts of the report have great relevance to steel buying organizations.

The first involves a complete listing of AISI members, capabilities, locations and products (hint: a great domestic steel sourcing guide). The second relates back to our discussion on drivers and metrics within the steel industry. In particular, this chart shows where in 2010, steel shipments went by industry:

Source: AISI (American Iron and Steel Institute)

As we look at this pie chart, it becomes easy to see why certain metrics have relevance within the steel industry. But what we find most interesting involves the metrics that tend not to garner much media attention. This week, we turn to something tracked by the Gerdau Market Update site, involving state fiscal metrics (yes, quick, where does that fit in the above referenced pie chart?)

Editor Peter Wright points to state fiscal receipts. Though his report cites rising state revenues for Q4 2010 vs. Q4 2009, he concludes, “Steel business activity that is driven by state or local budgets will not recover for several years,” as this chart shows. This metric impacts the construction portion of the pie chart.

Taking an 80-20 look at the pie chart, certainly by spending some time tracking metrics that serve as the measures of the health of the construction sector (and by that we include residential, commercial as well as institutional construction, read: power plant, schools, etc.), we can get our arms around a good portion of total steel spend.

Next, we look at automotive demand. For that we regularly report on monthly auto sales, but for those of you nerds out there who like more granular data, we love the automotive reports from the Consumer Metrics Institute, particularly the weekly index:

Source: Consumer Metrics Institute

So, poring over metrics that tell the story for construction and automotive gets us about 66 percent of the way there. That leaves an additional 14 percent that we really need to pay attention to. The 12 percent of shipments that went into the machinery and equipment sectors get us nearly there. Here the drivers, or metrics, may appear a bit more elusive.

But this is where we pay close attention to the ISM national manufacturing indexes as well as the manufacturing indexes coming from the regional Federal Reserve Board offices, durable goods orders and capacity utilization.

Next week, we’ll identify and discuss a few additional metrics pertaining to the steel industry.

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

Comments (5)

  1. MCI published an econometric model about world steel prices just a few days ago. Many of the key drivers that we identified do indeed include cost items such as thermal coal, coking coal, scrap etc and mathematical models based on these parameters do show an excellent fit with historic prices. For further info, see http://www.steelonthenet.com/projections

    We have used this approach to predict future steel prices [hot rolled coil, rebar] based on independent estimates of energy and metallic prices. Some of the forecasts can be seen at http://www.steelonthenet.com/pricing_model.html

    1. admin says:

      Andrew – I think our readers would find your data very useful. In fact, we have referred to it many times. I’d be curious to know if anyone (or anyone to your knowledge) made a “correct” (read accurate) forecast of steel prices in 2008, back in Jan. To my knowledge, nobody did. Second, do you know if any organization can forecast out beyond 16 weeks with a statistical model with an R2 value above .90? My guess is no which is why I am still in the camp that forecasting steel prices is more art than science, despite all of the “science and math behind it”. Would welcome your thoughts! LAR

  2. Hello Lisa. Please see our blog entry at http://steelonthenet.blogspot.com/2006/12/steel-price-forecast-2007-2008.html dated December 2006 … which predicted a major [downward] steel price correction in the second half of 2008. Now, I am still undecided as to whether that prediction was science, art or just very good luck … but the prediction was certainly accurate.

    Our latest model of world rebar prices shows a R2 correlation of ~0.97 between actual and predicted monthly prices for the period 1996-2010. This model currently predicts rebar prices staying more or less constant from now to end-2011 [see http://www.steelonthenet.com/pricing_model.html%5D.

    Shall we touch base in 16 weeks to test the latest forecast? See you here in August! AMK

    1. admin says:

      Well then, I stand corrected! I’ll take a look at both but I’d certainly invite our readers to do the same! LAR

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