Steel Facing Stiff Competition from Other Products

Steel is becoming less competitive compared to aluminum, plastic and wood. Sheet steel is facing strong competition from aluminum, while tubular steel competes against plastic piping. Prefabricated metal buildings are losing ground versus wooden buildings, according to the latest data from the Bureau of Labor Statistics. This report is intended to provide subscribers with a view of the competitive position of sheet steel, aluminum and plastic, as well as some downstream products such as beverage cans, metal buildings and pipe, along with a comparison of truck and rail transportation.

Last week, the Bureau of Labor Statistics (BLS) released its series of producer price indexes (PPIs) for more than 10,000 goods and materials through October. For an explanation of this program, see the end of this piece. The PPI data are helpful in monitoring price direction, and compared with known transaction prices are a reasonable representation of the real world, though there may be a lag between the BLS reports and spot prices for steel products. 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 this data is useful in comparing the direction of prices in the short and medium term, but tell us nothing about the absolute value.

The headline summary from the BLS was as follows: “The Producer Price Index for final demand rose 0.6 percent in October, seasonally adjusted. Final demand prices advanced 0.2 percent in September and declined 0.1 percent in August. On an unadjusted basis, the final demand index increased 2.9 percent for the 12 months ended in October.”

Figure 1 shows the composite PPI of all commodities since January 2008. The index has risen steadily for 2 1/2 years, but is still not back to the peak of 2014. The composite has risen by 4.8 percent in 12 months through October and by 9.4 percent in 24 months.

Table 1 is a summary of each category on a year over one-, two- and three-year basis. The gain/loss pattern is shown by the color codes; we interpret rising prices as positive. We began this bimonthly analysis in January 2016, and June, August and October 2018 were the first times the whole table was green. The table includes direct comparisons where possible between steel and competing products, also some other plastic products for which there is no direct steel comparison, and a measure of price changes for transportation, warehousing and storage. Some specific comparisons of steel and steel products with their competition are as follows. Please note the Y axis scales are not the same.

Figure 2 shows the year-over-year comparison of the price change of cold rolled steel sheet and flat rolled aluminum. In the 12 months August 2017 through July 2018, aluminum prices escalated faster than steel. In the three months through October 2018, the situation reversed.

Figure 3 shows the same comparison for steel cans and tinware products and aluminum cans. There is a lag between price changes of sheet and the price change of cans. We can expect steel cans to lose ground against aluminum in the next few months.

Figure 4 compares prefabricated metal with prefabricated wood buildings. From mid-2017 through February 2018, the price of wood buildings escalated faster than steel, but since then there has been an abrupt change to the detriment of steel’s competitive position. 

Figure 5 compares steel and plastic pipe. Carbon steel pipe is currently experiencing a high rate of price escalation, but plastic pipe has been trending down in 2018.

Figure 6 compares the changes in the price of truck and rail transportation. The escalation of trucking prices has exceeded those of rail almost every month since January 2014. The differential widened through July this year, but has since closed. In October, year-over-year trucking costs rose by 7.8 percent as rail increased by 6.3 percent.

Figure 7 shows that the cost of warehousing and storage has declined significantly this year.

The official description of this program from the BLS reads as follows: The Producer Price Index (PPI) is a family of indexes that measure the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI). CPIs measure price change from the purchaser’s perspective. Sellers’ and purchasers’ prices can differ due to government subsidies, sales and excise taxes, and distribution costs. More than 10,000 PPIs for individual products and groups of products are released each month. PPIs are available for the products of virtually every industry in the mining and manufacturing sectors of the U.S. economy. New PPIs are gradually being introduced for the products of industries in the construction, trade, finance and services sectors of the economy. More than 100,000 price quotations per month are organized into three sets of PPIs: (1) stage-of-processing indexes, (2) commodity indexes, and (3) indexes for the net output of industries and their products. The stage-of processing structure organizes products by class of buyer and degree of fabrication. The commodity structure organizes products by similarity of end use or material composition. The entire output of various industries is sampled to derive price indexes for the net output of industries and their products.