Producer Prices: Rate of Rise Turns Sluggish in September

Written by David Schollaert

Producer prices posted the smallest advance year-to-date in September, according to data released by the Labor Department. Despite supply chain snarls and shortages that have driven up manufacturing and shipping costs, the negligible expansion kept the historic climb for the index and subcategories for final demand going.

Since the fall in early 2020, the composite Producer Price Index (PPI) of all commodities from the Bureau of Labor Statistics (BLS) has gained ground month-on-month for 16 consecutive months, fully recovering from the pandemic-driven collapse and overtaking pre-pandemic levels. September’s index registered a 0.5% gain against the prior month, seasonally adjusted. Additionally, the index is up 8.6% for the 12 months ended September 2021, the largest advance since 12-month data were first calculated in November 2010.

The PPI data, which covers more than 10,000 goods and services, is helpful in comparing the direction of price changes in the short and medium term. In specific, this analysis is intended to provide subscribers with a view of the relative competitive positions of sheet steel, aluminum, plastic and wood. It also includes some downstream products and a comparison of truck and rail transportation.

The composite PPI for all commodities (Figure 1) tumbled by more than 4.0% at the onset of the pandemic last spring. The recovery has been remarkable for the U.S. economy and historic for the steel industry. On an unadjusted basis, the final demand index moved up 20.2% for the 12 months ended in September. The PPI is presently at 235.4 in September, up from 232.2 in August, and from 195.4 one year ago.

SMU’s benchmark hot-rolled coil price range stood at $1,870-1,970 per net ton with an average of $1,920 per ton FOB mill, east of the Rockies as of Oct. 12., edging down $35 per net ton over the past month. The past year’s surge in steel prices, which may have peaked, aligns with a slowdown in the rate of growth across producer prices.

PPI Figure1

A summary of each segment on a year over one-, two- and three-year basis is shown in the table below. The gain/loss pattern is shown by the color codes; rising prices are considered positive. The positive swing on a 12-month basis would be expected, especially after the initial pandemic-driven slowdown and subsequent rebound. The astounding growth at the 24-month and 36-month level, and still trending up, further cements this historic recovery and growth trajectory for the overall economy. Through September, all 16 sectors are on the rise at the 12-month level, with HR and CR carbon steel sheet and strip showing huge increases of 241.3% and 222.1%, respectively. The 24-month and 36-month increases are of even greater impact, as they include pre-pandemic periods.

The table includes direct comparisons where possible between steel and competing products, while also including plastic products, transportation, warehousing and storage to further highlight current market conditions. Even though there may not be a direct or specific comparison of steel, these PPI numbers clearly match the trend of rising demand and prices seen across the steel market. Construction-related products are up anywhere from 15.0% to 84.8% at the 12-month level, with similar increases for the 24- and 36-month periods as well. The marketplace has been resilient, surpassing every speculated high. The recent slowdown in the rate of rise, may indicate that the upward momentum is running out of steam and nearing the top.

PPI Table1

Both steel and aluminum products (Figure 2) have now easily overtaken pre-pandemic PPI figures and reached recent highs. Steel products, however, have begun showing signs of slowing down, while aluminum products have already started a descent. Comparing the price changes of cold rolled steel sheet and flat rolled aluminum, both recovered from last year’s losses and reached historic highs. The trajectory in cold rolled steel sheet prices has certainly overshadowed the impressive rebound in flat rolled aluminum. Cold rolled steel, though, has shown signs of slowing momentum of late.

Cold rolled steel prices reached positive territory in December for the first time since May 2019 and have since jumped by 226.1% through September. Flat rolled aluminum, by comparison, is presently at 27.4%, down 8.1 percentage points from August’s total. Cold rolled steel price gains have shown significant growth since July, and had overtaken greater growth on a percentage basis over hot rolled steel prices. That trend shifted in September, as the rate of rise eased faster for cold rolled prices versus hot rolled. In September, cold rolled had a more ordinary 2.5% increase month on month, compared to an 8.7% increase for hot rolled. Despite the changes, the price peak seems to be near.

Although aluminum prices are still well behind steel in terms of growth, they had a strong run, improving month on month for nearly a year since last October. In contrast, steel tinware and aluminum cans have remained largely stable over the past 14 months, as their gains and losses have not been as accentuated. Steel tinware was sideways in September, while aluminum cans slipped by 1.7% over the same period. Nevertheless, they remain up 12.2% and 7.5% year on year through September, respectively.

PPI Figure2

Prices of prefabricated metal buildings and prefabricated wood buildings have both seen significant increases since the beginning of 2021, but the rate of growth has slowed over the past few months, with prices for prefabricated wood buildings edging down for the first time in nearly a year. Prefabricated steel building prices fell to a negative 3.5% last June, but rallied to a positive by 49.0% over 15 months. A similar trend was seen for prefabricated wood buildings over the same period, at 25.3% growth. Momentum has slowed since, as a 2.2% decrease was seen for prefabricated wood buildings in September, while prefabricated metal buildings edged up 1.3% month on month.

The prices of steel and plastic pipe have both experienced big swings due to COVID-19 as well. Steel pipe prices dropped to a negative 8.0% through September last year, but rallied to a positive 80.8% year on year, with a 3.7% increase in September. By comparison, plastic pipe has rallied by more than 61.0% since January, reaching a positive 84.8% growth in September on a year-on-year basis. Figure 3 is a side-by-side comparison of prefabricated buildings and pipe price dynamics.

PPI Figure3

The growth of truck transportation prices has far exceeded those of rail (Figure 4) since they both bottomed out in June of last year. Rail dipped to a negative 1.7% last June and has since slowly corrected to a positive 6.7% through September 2021. Long distance trucking, on the other hand, recovered to positive 21.3% in September after falling to negative 7.5% last July. The increased freight pricing over the past year has been a compounding factor to steel buyers already wrestling with historically high finished steel prices. Even though long-distance grew by 1.6% month on month, freight costs have experienced the most significant increase in more than a decade.

PPI Figure4

Warehousing and storage prices also have risen. After initially falling to a negative 2.3% at the onset of the global pandemic, they had rebounded to a positive 6.6% through July. After slipping 1.7% in August, they have recovered slightly by 1.1% month on month through September.

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 changes 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 Schollaert

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