How to keep track of steel price volatility with SteelMint index?

Role of SteelMint index in times of steel price volatility

• Commodity price volatility to stay amid geopolitics, energy transition challenges
  
  
• Strong correlation between govt's Wholesale Price Index (WPI), SteelMint's Index (SMI)
  
  
• SMI keeps you updated with price volatility and can be used as a tool to settle contracts
  
  

Morning Brief: Global commodity markets are facing increased price volatility amid lingering geopolitical concerns while the rush to lower carbon energy continues to stress supply-demand fundamentals. A volatile price eco-system forces market participants to take short-term positions. In such a scenario, a reliable tool for price discovery becomes imperative for settling contracts. An index is an obvious mechanism for price intelligence but at times comes with its own challenges.

However, the latest data collated by SteelMint finds a high correlation of 0.98 (on a scale of 1) between the SteelMint India Steel Composite Index (SMI) and the government's Wholesale Price Index (WPI).

It may be mentioned the two key benchmark products of rebar and hot rolled coils (HRCs) have been considered while computing the correlation.

How is SMI computed?

The SteelMint India Steel Composite Index or SMI is assessed on a weekly basis, every Friday at 18:30 IST, as per the weighted average prices based on manufacturing capacity and production.

SteelMint considers the SMI with the base year as 3 January, 2020 (financial year 2019-2020) and the base value as 100. SMI has within its fold several sub-indices, including the ones on HRC and rebar. Under flats, the other sub-indices include CRC, GP, and HR Plate. Longs include wire rod and structural.

How is WPI computed?

WPI is calculated as per the existing formula, whereby it is (WPI base 2010-11) = basic price (ex-factory price, ex-mine price or mandi price) - trade discount, with no weightage given to steel capacity or production.

Provisional figures of the WPI are released on the 14th of every month (or next working day). After 10 weeks, the index is finalized and the final figures are released and then frozen thereafter.

Application of WPI

WPI is collated by the government and is used in settling orders for State-sponsored projects. One advantage of WPI is, the government uses it as a hedge against price escalation or volatility. For instance, the administration can take the current month's price to settle next month's contracts. At best, it can move slightly up or down depending on the price scenario at that juncture. This is also referred to as the "de-escalation clause" and comes in handy when fixing prices for government projects which can run into a couple of years during which period prices may escalate.

Charting the correlation

It is noted, when the market is stable, the SMI and WPI lines follow very closely, for both rebars and HRCs.

However, when the market moves north or south significantly, then the SMI responds more sharply, because it tracks prices on a weekly basis and therefore the data is more detailed, whereas the WPI is computed on a monthly basis.

HRC correlation: The correlation in hot rolled coils is nearly uniform, with a slight lag since the WPI is released provisionally every month and frozen 10 weeks later against the SMI's weekly show.

In very rare instances have we seen the two HRC indices sharply diverging. For instance, in June 2022, SMI fell 11.9% whereas WPI dipped a more moderate 6.9%. Earlier, in December 2020, the SMI rose 14.2% against the WPI's 4.7%.

Here, the fact the only tier-1 mills manufacture HRCs, allows for a stronger correlation.

Rebar correlation: It may be noted, sharp movements are especially linked to rebars, and not without reasons. One is that SMI takes into account, apart from tier-1 mills, prices from the induction furnace mills too, who comprise a larger 65-70% of the market. Two, the WPI, on the other hand, tracks only tier 1 mills. Three, when prices show a sharp upturn, the government often intervenes to quell the price surge. Thus, the SMI is closer to market trends.

A strong case for SMI

1) SMI has a strong correlation with WPI, as tracked over the last three-and-a-half years, which makes it an ideal tool for steel end-users and mills for capturing price data.

2) In another common feature, interestingly, both WPI and SMI are computed at a wholesale level. While WPI, as its name suggests, gauges wholesale prices, SMI too tracks prices at the trade (wholesale) level.

3) SMI offers a large sample base and thus well represents the rebar-HRC price spectrum.

4) WPI's computing is based on the very old base year of 2010-11 and thus may not always reflect the accurate market changes that have taken place in the recent period. SMI analyzed the price data from the year 2015 and the average price is very near to the far more recent base year of January, 2020.

5) There is normally a difference between WPI's provisional and final figures and hence often difficult to factor in the prices into real time market trends.

6) SMI, on the flipside, is based on daily price assessments using its robust methodology and no provisional data is released. It is published weekly, which thus captures more efficiently spot price movements.

7) In rebars, SMI gives deeper reflection of the market since induction furnace mills' prices are factored in too. In HRCs, on the other hand, the WPI correlation is highly strong. This makes SMI a true mirror of market prices.

8) SMI indices are computed based on the weighted average method of capacity and production that is more relevant to the market - the sampling size is large and well-represented.