We have spent a lot of time recently talking about and evangelizing the concept of getting one’s arms around all of the variables that impact the price (the forecast if you will) of a particular metal. I had the opportunity to speak with a senior sourcing professional at a Fortune 50 firm last week. We began talking about forecasting and why forecasting has become so difficult for so many organizations (including research organizations). It all seems to come down to those variables and perhaps more important, those “moving variables. When we agreed that R2 values (statistics talk sorry) start to fall down when projecting prices out by even 16 weeks this individual said to me, “how much of a price change is due to supply and demand factors (e.g. the explainable) and how much is the price change attributable to an ever-growing “unexplainable portion of the total? It’s that “un-explainable portion that, quite frankly, needs some explaining!
Let’s examine five economic gauges that I caught just yesterday by reading the Wall Street Journal among other press releases I receive on a regular basis:
- Domestic manufacturing capacity it’s up by .2% from January growing from 72.5% to 72.7%. According to the WSJ, the 40-year average capacity rate is 80.6%. Bad weather may take part of the blame for sluggish numbers. So we’ll give this economic indicator an anemic thumbs up.
- Weekly raw steel production Last week utilization increased from 69.6% to 70.9%, according to the American Iron and Steel Institute in their latest news release. We’ll assume (big assumption yes) that the increase in capacity has been heavily orchestrated by the mills to match demand and not “too much capacity coming on too fast. Though for buying organizations, steel prices have increased, from an overall economic perspective, we’ll take this announcement as another thumbs up.
- Home Builders’ Home Building Index this measures “builders’ sentiment which declined from 17 to 15. Housing starts also declined. We’ll count this as “one indicator. That’s an obvious thumbs-down.
- Inflation rising steel prices not withstanding, too many parts of the economy remain sluggish (e.g. wood products remains at 52.6% capacity utilization). Consumer inflation requires less slack across the entire economy, according to the Wall Street Journal. Thumbs up from an overall economic standpoint.
- Import and Export Prices – The import price index fell by .3% largely due to lower fuel prices (this represents a second economic indicator supporting the inflation finding above)
We’ll throw in a 6th indicator for good measure. The PPI came out this morning. Finished goods prices fell .6%, however, “On an
unadjusted basis, prices for finished goods advanced 4.4 percent for the 12 months ended February 2010, their fourth consecutive 12-month increase.” PPI remains something to watch particularly because of the change in direction noted in February.
Why do we draw on each of these measures you may ask – because some of these indicators begin to explain the unexplainable. As commodity volatility has become a standard operating condition for all metal buying organizations, our forecasting tools and resources need to become more robust. The interplay of variables such as the five above along with dozens of others should become a part of every metal buying organizations commodity dashboard.
Check out our Price Forecast page to learn more about MetalMiner’s research and price forecast modeling services.