The Big Mac Index: A Commodity Bellwether for Steel Buyers?

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Currency exchange rate volatility — or more accurately, disparity, in this case — has been coming up a lot, and metal buyers who source globally may stand to learn something from the results of an unlikely index.

You probably already know that (on paper or in practice) China, India, South Africa and Malaysia are, based on their currencies’ exchange rates, cheap to import commodities from. (See our earlier post on the Indian rupee.) But to get a deal on your commodity spend, would your brain jump right to Eastern Europe?

Based on the Economist’s Big Mac Index, Ukraine’s currency (the hryvnia) has been deemed the most undervalued currency in the world, making the country — relatively speaking, and for a limited time only! — the best place to buy.

The Big Mac Index started out as a 1986 paper written by Pam Woodall, and the Economist adapted it as a measure of purchasing power parity (PPP). From Investopedia:

The Big Mac index suggests that, in theory, changes in exchange rates between currencies should affect the price that consumers pay for a Big Mac in a particular nation, replacing the “basket” with the popular hamburger.”

See the latest Big Mac Index here.

An article in Worldwide News Ukraine notes that a Big Mac in Ukraine currently costs USD $2.11, just less than in Hong Kong. That means the hryvnia is 50.2 percent undervalued — as of yesterday, 1 hryvnia was worth $0.124.

According to the article, the Forex Club has said the hryvnia has been one of the most stable currencies in Eastern Europe, and that its value (relative to the dollar) has remained steady over the past four years.

The USD/Hryvnia rate in blue, compared to the USD/Euro rate in red over the past three years. Source: Google Finance

The hryvnia’s relative stability notwithstanding, currency volatility is still the name of the game. India, it is noted, essentially is at the bottom of the Big Mac Index ($1.62), but technically, they serve no Big Macs — since beef is too holy to eat, their Maharaja Mac” is made with chicken and not two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun”:

[youtube]http://www.youtube.com/watch?v=9UWq26V01po[/youtube]

More to the volatility point, according to the Economist: The euro, which recently fell to a 16-month low against the dollar, is now trading at less than €1.30 to the greenback. The last time we served up our index in July 2011, the euro was 21% overvalued against the dollar, but it is now just 6% overvalued.”

Other Central European currencies fell since the last index, including the Hungarian forint and Czech koruna, by 23 percent and 16 percent respectively, according to the Economist. Six months ago both currencies were close to fair value, but they are now undervalued by 37% and 18%.”

So the real question, if you’re a metals buyer, is this: why not source from Central or Eastern Europe? If Ukraine’s currency is so sorely undervalued, is it actually cheaper to buy, let’s say, steel from Ukraine (Big Mac at $2.11) than it would be from, say, China ($2.44)?

Let’s compare:

Ukraine’s domestic HRC prices peaked at $612 per metric ton last November (the latest data we could find), while for export (FOB Black Sea ports), the price peaked at $590/ton. Recent news suggests prices haven’t moved much. Meanwhile, today’s China prices for HRC stand at $667.88 per metric ton, according to the MetalMiner IndX. (China’s highest HRC price in November 2011 was $659.) On price alone, looks like we may have a ‘wiener’! — or should we say Big Mac? (Not that we necessarily endorse sourcing Ukrainian or Chinese metal over American when possible…)

Unfortunately it’s not this simplistic, and of course, a host of other TCO considerations are not being taken into account in addition to just the price per ton, but the takeaway is twofold: 1) never discount certain markets in any part of the globe to source your metal; always keep your options open, and 2) always keep an eye out for indicators and indexes that could point to arbitrage opportunities — even if the words Big Mac” are involved!

Make sure to check out the details on our upcoming conference (banner below), where a bevy of world-class speakers will provide (much more applicable) strategic sourcing, forecasting and hedging tools for your commodities spend!

–Taras Berezowsky

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