Producer Price Indexes Trending Positive in January

Figure 1 shows the composite PPI of all commodities since January 2008. The index has seen some noteworthy peaks and valleys over the past six years. Prior to tumbling by 4.0% from February through April 2020 because of COVID-19 shutdowns, the composite had already been slipping, albeit, slowly. The turnaround since May has coincided with strong steel demand that has resulted in historic HRC prices. Final demand increased 1.3% in January, seasonally adjusted, according to the BLS. This advance is the largest since December 2009 and the fourth consecutive increase month on month.

Table 1 is a summary of each segment on a year over one-, two- and three-year basis. The gain/loss pattern is shown by the color codes; rising prices are considered positive. The table was predominantly green at the 24-month and 36-month level through September 2019. Since December 2019, eight of the 16 sectors had been in decline at the 12-month level. A shift that began late in Q3 prompting 14 of the 16 sectors to report positive marks has continued, with 12 of those now unchanged or on a positive scale. The table includes direct comparisons where possible between steel and competing products, while also including plastic products, transportation, warehousing, and storage. Regardless of whether there are direct or specific comparisons of steel, the PPI numbers clearly match the trend seen across the steel market and growing demand. All positive marks of a resilient market. Please note the Y axes on Figures 3 through 7 are not to the same scale.

Figures 2 and 3 shows the year-over-year comparison of steel and aluminum products. Figure 2 compares the price change of cold rolled steel sheet and flat rolled aluminum, while Figure 3 shows the same comparison for steel tinware products and aluminum cans. For cold rolled steel sheet and flat rolled aluminum, the lines crossed in August 2018 when steel prices began to escalate faster than aluminum, but this relationship reversed in July 2019 when for six months the price of cold rolled declined faster than that of aluminum sheet. Significant variations have been seen throughout 2020, however, cold rolled steel sheet recovered at a faster pace than flat rolled aluminum through January. Cold rolled steel reached a positive mark for the first time since May 2019 at 5.6% versus a negative 1.1% for aluminum. Although aluminum is still reporting a negative percentage change, it has been improving since October, and improved from a negative 4.6% in December. In contrast, there has been no relationship between the price of steel tinware products and aluminum cans (Figure 3) with their raw materials prices. This year has brought about varying changes as aluminum cans haven’t been nearly as impacted as steel tinware products. Aluminum cans were even in the 12 months through January, while steel tinware prices were negative 3.9%.

Figure 4 compares prefabricated metal buildings with prefabricated wood buildings. In this analysis, the price for steel buildings has been far more volatile than its wood counterpart. Similar to Figure 3, prefabricated steel buildings fell to a negative 3.1% in June, but have since rallied to a positive 12.3% through January, outpacing prefabricated wood buildings, which now stand at a positive 7.2%, up from 5.6% month on month. The price of steel buildings has escalated by nearly 10.0% since September.

Figure 5 compares the price changes of steel and plastic pipe, which moved in opposite directions to the detriment of steel in 2018. In 2019, the rates of price escalation came back in line by July where they stayed through February 2020. The global pandemic had a greater impact on steel pipe, dropping to a negative 8.0% through September, but rallied to a positive 3.2% in January. By comparison, plastic pipe had rallied by more than 15.0% since September, reaching a positive 18.4% in January.

Figure 6 compares the changes in the price of truck and rail transportation. The escalation of truck transportation prices exceeded those of rail almost every month from January 2015 through April 2019 when the lines crossed and trucking began a plummeting trend, reaching bottom at a negative 7.5% this past June. Since then, however, trucking has rallied to a positive 7.3% in January, while rail rose slightly to a negative 0.2% during the same period.

Figure 7 shows that the rate of change in the price of warehousing and storage declined steadily from April 2018 through March 2019. Despite largely holding stable throughout 2019, warehousing and storage were initially impacted by the global pandemic, falling to a negative 2.3% through June. They have since rebounded steadily to a positive 1.8% in January, the highest mark since December 2018.

SMU Comment: As expected, continued growth reported in January’s PPI and the general positive trend seen across all indices over the past four to six months support the overall positive sentiment in the steel industry. Although there is still uncertainty on the horizon regarding the health pandemic and the impact of the Biden administration policies on the steel sector, the upward momentum aligns with hope many have for a post-COVID boom. 

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.

By David Schollaert, David@SteelMarketUpdate.com