Fastmarkets proposes changing tube, pipe assessments to fixed calculations

Fastmarkets has observed a significant decrease in reported bids, trades and offers from market participants across these markets. Fastmarkets wants to preserve these prices and their data history by transitioning them into fixed calculations.

Fastmarkets has found strong analytical historical correlations between other price assessments and the affected markets. By calculating these prices from closely related, more liquid reference assessments, Fastmarkets can maintain consistent, market-reflective prices that will remain responsive to movements in the underlying markets.

Each calculation is derived from one or more Fastmarkets assessments, of which there are two types: (A) directly adjacent products that are cost inputs; or (B) a related, more liquid segment of the same market. An example would be a plate assessment from a different region.

The relationship between each reference and calculated price has been established empirically from all historical data using statistical methods. The reference prices have been selected on the basis of the strong and stable observed correlations as well as economic reasons.

Model error averages ~11% of assessed price levels across all calculated prices, ranging from 6% to 17%. All models are statistically significant at the 1% level, and all reference price coefficients carry the expected positive sign, meaning when the reference prices assessments trend alongside underlying prices.

The calculated prices would continue to be published on the same schedule and with the same specifications, preserving their data history.

The list of affected assessments, their symbols and the full calculation that would replace them is as follows:

Each formula takes one of two functional forms. Linear formulas express the calculated price as a weighted sum of reference price levels plus a constant, in the form price = a + b1*X1 + b2*X2. Log-log formulas express the relationship in proportional terms, in the form price = exp(a + b1*log(X1) + b2*log(X2)).

Where a calculated price is denominated in a particular currency (euros or US dollars), its reference price inputs would be taken in that same currency, converted from the currency of assessment using Netdania ‘Close Bid’ native exchange rates where required.

The regression model specifications and reference prices for each calculated price formula were identified using the following process:

1. For each calculated price, Fastmarkets steel industry experts identified a shortlist of related reference prices. 
2. For each shortlisted reference price, the historical correlation with the calculated price was calculated. Within each reference category (e.g. steel plate), only the most strongly correlated reference price was retained. Using at least three years of data.
3. Then, reference prices from step (2) were jointly tested for multicollinearity using variance inflation factors (VIF). Candidate reference prices were removed until all remaining reference prices have VIFs below the threshold level of 5.
4. All possible combinations of the surviving reference prices were then tested as both linear and log-log functional form Ordinary Least Squares (OLS) regression models. This formed the candidate set of model specifications for each calculated price.
5. From the model specifications in (4), the specification with the lowest root mean squared error (RMSE) was selected.

Please note there are Middle Eastern steel tube and pipe assessments which have been suspended and are not included as part of this proposal or as component reference prices to the calculations. Fastmarkets continues to seek market feedback regarding alternative price references in the region for the suspended prices.

All of the calculated prices would be rounded to the nearest $5 or €5. Additionally, Fastmarkets would review these calculations for accuracy ad-hoc based on market conditions and feedback, at minimum once per year. Any changes to a calculated price formula would be communicated publicly.

1. To provide feedback on this methodology notice, please send feedback by August 21, 2006 to  pricing@fastmarkets.com and steel@fastmarkets.com. Please add the subject heading “re: tube and pipe”.
   
2. Please indicate if comments are confidential. Fastmarkets will consider all comments received and will make comments not marked as confidential available upon request.
   
3. To see all Fastmarkets pricing methodology and specification documents, go to the Fastmarkets methodology page.