India: SteelMint HRC index, WPI show strong correlation

• WPI used as important measure of inflation in India
  
  
• SteelMint steel index captures spot prices on real-time basis
  
  
• SteelMint HRC index offering end-users alterative price tracking mechanism
  
  

Morning Brief: SteelMint has found a strong correlation of 0.97 (on a scale of 1) between the Wholesale Price Index (WPI) for hot rolled coils (HRC) and sheets and the SteelMint HRC Index, which is a component of the SteelMint India Steel Composite Index (SMI), reveals data traced from 2020.

"This implies that steel end-buyers now have an alternate price capturing index to fall back on ahead of WPI," said a source.

What is WPI?

The WPI is the national index which is used especially by government-owned companies for settling their contracts with their vendors. Thus, naturally almost all central and state government projects are linked to the WPI for price negotiations.

The government is one of the key buyers of steel in India. With steel prices belonging to the unregulated sector, are often subject to volatility. The government, to cushion the fluctuations, resorts to long-term contracts which get reflected in the WPI.

The WPI represents the price of goods at a wholesale stage, ie, goods that are sold in bulk and traded between organizations instead of consumers.

WPI is used as an important measure of inflation in India. Fiscal and monetary policy changes are greatly influenced by changes in the WPI. The inflation rate is the difference between WPI calculated at the beginning and end of a year. The percentage increase in WPI over a year gives the rate of inflation for that year.

How is WPI computed?

• Existing formula (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 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.
  
  
• However, WPI's computing is based on the base year of 2010-11.
  
  

Close correlation

SteelMint has considered data on the Wholesale Price Index (WPI) for hot rolled coils (HRC) and sheets and the SteelMint HRC Index in particular since January 2020 till March 2023, which revealed the correlation of 0.97. In 2020, the correlation was at 0.99, in 2021 at 0.95 and at 0.97 in 2022.

If the average WPI (for hot rolled coils and sheets) for financial year 2020-21 (FY21) was at 116.1 points, SteelMint's HRC index in the same fiscal averaged 119.49 points. In FY22, the former averaged 176.48 points and the WPI, 157.2 points. But in FY23, the SMI HRC averaged 161 points with the WPI at a close 155.1 points.

In March 2023, the SteelMint HRC Index was at 159.5 points and the WPI at 150.8 points.

The m-o-m changes in both indices are also quite similar, as per the data.

Benefits of SMI over WPI

Lag of two months: The WPI, while it is the benchmark for government contracts, has two disadvantages, feel many. One is the lag of two months. For instances, purchases made in May will get reflected and reported upon in July. Secondly, since it primarily reflects government contracts, at times it does not reflect the real-time market sentiments. For instance, when trade-level HRC prices had touched over INR 75,000/t around April 2022, the WPI failed to capture this price hike since government-owned steel companies did not raise prices in tandem.

However, the WPI gives an accurate price trend for the better part of the year, add sources.

Capacity, production included in computation: On the other hand, SteelMint's HRC index is computed based on the weighted average method of capacity and production which is more scientific and relevant to the market.

Captures spot prices on real-time basis: SteelMint's Composite index (comprising longs, and flats) is published on a weekly basis, which allows it to capture the spot price movements more accurately and on a real-time basis. And this factor makes these indices more relevant to the current domestic spot market and has a more immediate connect with participants.

Nearer to base year: SMI analyzed the price data from the year 2015 and the average price is very nearer to base year (1 March, 2020) prices.SteelMint's index captures more data sets to derive the prices, following all IOSCO principals.

Reflects WPI data ahead of two months: Based on the above factors, an end-user can get an idea of what the WPI data will reflect ahead of two months and plan his purchases likewise.

For instance, if prices fall in the current market, a vendor will not formalize deals now, knowing well ahead that the government will reduce the contract value once the WPI data is released, and vice-versa.

Outlook

SteelMint expects both the SMI and WPI indices to remain stable and match each other in April. Steel prices may see a fall in May and both indices are expected to capture the same accordingly.