ECONOMIC OVERVIEW
Method to Madness
November 2018
This month’s outlook will attempt to explain AME’s economic methodology. As a group of engineers and social scientists, AME is pragmatic about forecasting without any assistance from divine intervention. Instead, we offer robust industry models which are typically updated quarterly.

First, we would like to state that our economic and resources views are weighted to our research centres in Australasia and Asia. Given the dynamic nature of this region, our forecasts are often optimistic by 2–5 % in comparison to those originating in Europe and North America. However, we have underestimated both global and Asian growth, which has been far stronger and longer than expected. Asia is the centre of the manufacturing world and is poised to become the centre of the economic world over the next decade. There is no modern recorded precedent and the continued dominance of Asia is AME’s unassailable view. This is based upon intense education standards, internal competition, adoption of a long-term view, political stability and industry supported by government.
Second, AME always uses the mantra that demand drives supply to create inventories that determines price (DSIP).

We start modelling with the IMF’s quarterly WEO and country reviews of Central Banks and various statistical agencies. This macro forecast is first applied to steel, the closest representation of Industrial Production, to assess end-user demand over 15 years as a trend. Steel supply, inventory and price is matched to these demand expectations. To be consistent, the entire supply chain is assessed, with finished and crude steel, BOF, scrap and EAF markets, before moving on to pellets, DRI, HBI, metallurgical coal, iron ore lumps and fines. The same top-down approach is undertaken for the energy markets.

Limited cycle inputs (variations) are added when modelling future trends, as this overly complicates the task of determining the turning points of any economic changes. Modelling is revised in AME’s strategic studies each quarter whilst our industry view is updated each month in AME’s monthly outlooks. Each AME strategic study begins with the modelling of our five-year position for each commodity, and then based upon this work we forecast the next 15 years. For these longer-term forecasts, a small number of dependable key variables are drawn upon so as not to over-complicate analysis; these include population growth, political security, capital intensity, industrial maturity, substitution, barriers of entry, government restrictions, etc. Focus then returns to the short to medium-term - from year five to the current day.

Shorter-term modelling is where 90% of AME’s focus lies and tends to be where most modelling errors occur. This stage starts with assessment of global and commodity-specific news to forecast the upcoming quarter’s trends and a review of the WEO and other agencies’ work. AME does not try to set the global view forecasts, instead taking these from the big institutional research organisations such as the IMF, World Bank and OECD. Their work is of an excellent standard and defensible in court. The key to AME’s short-term analysis is trying to pick the trends that will be sustainable over the sensation—often dispensed in Tweets—that generates the gossip! Long-term global trade growth, for example, is a definite trend issue and one which AME believes will remain the single most important factor to affect   global growth in the next five years. It reflects the change in popular sentiment associated with border control, local sovereignty issues, migration and economic independence.

Price forecasting is definitely the high-excitement component of the process placing context on demand, supply and inventory. AME’s modelling is heavily influenced by the futures and forward markets. These are the prices set by real buyers and sellers as opposed to economic magicians; these represent truth as it stands today. Usually, there is a period + 2 years during which the forward markets become too thinly traded at which point AME’s longer forecasting methodology comes into play. For clarification, this monthly Outlook publication will now generally focus on a quick economic perspective and then concentrate on company and site announcements (mines, smelters and oil fields etc) in line with AME’s daily news service. AME checks the data offered and adds the implications for sites and companies and, if the impact is significant, updates our broader industry view.

Lastly, as an example of AME’s modelling methodology, we are now concentrating on the latest WEO release which has seen forecast growth tempered from 3.9% to 3.7% pa. This is also reflected in general supporting data, such as the US stock market giving up in October all the gains made in 2018. The European markets fared no better, softening 10% since May and China’s bourse is materially down by 20%. A slightly quieter world is definitely on the cards!