Index vs. Assessment

American Metal Market” (“AMM”) has been reporting news and pricing for a wide variety of scrap grades for 130 years. Last year, however, marked a first for the publication as it launched its first empirically calculated price indices.

For more than six months, “AMM” has published five separate indices, all in the scrap space, and in doing so has generated what we believe to be a robust indicator of market prices for No. 1 busheling, No.1 heavy melt (HMS) and shredded scrap in the Midwest as well as for HMS 80:20 for East and West Coast export markets.

To many readers, the lauding of these index prices as something new might sound confusing. A brief look in the back of the “AMM” daily PDF product or monthly magazine, as well as at www.amm.com, reveals well more than a thousand pricing data points that many will think of as an index. However, those prices—while extremely robust and objective—are not indices as defined by “AMM.”

What is an index?
At “AMM,” “index” has a very particular meaning. For most of its history, AMM has been printing price assessments. That is to say that our network of expert reporters speaks to a wide variety of market participants and then makes an assessment as to the current pricing level of the market. With our five indices, “AMM” collects transactional data in many of the same ways as it always has. Our team talks to participants on both sides of the transaction and gathers as much specific data as possible. This includes volume, financing terms, exact grade and, of course, price. We also collect this information by email.

It is what we do with the information next, however, that marks the major departure from our assessment methodology. Once all the data is collected, it is entered into a data model. The model normalizes the data to treat them consistently and then calculates a specific number, with little or no editorial interpretation or judgment.

The normalization process works by considering reported transactions that fall outside the boundaries of the standard specification—perhaps it is a smaller lot size than is typical, for example. The model then makes a standard adjustment to compare prices on a like-for-like basis.

From there, a volume-weighted average is generated, which is to say that we average the prices for all the transactions we collect but give proportionally more weighting to the larger deals.

This weighted average is not the final product, however. Once we have this preliminary number, we will go back to the normalized data and remove any data point that is outside a 4 percent band around the average. This is designed to ensure that a nonrepresentative transaction does not overinfluence the index. Once done, the weighted average is recalculated and the final index number is generated and published at www.amm.com.

Are there other differences?
The “AMM” ferrous scrap assessments, which are widely used by the industry as a contract reference, differ in two other significant ways to the three Midwest indices and two export indices the publication launched in 2012.

First, in the case of the Midwest indices, there is an important distinction indicated in the name of the indices themselves. Most of the “AMM” price assessments are based around specific cities. We carry prices in cities across the United States and Canada, from Birmingham to Pittsburgh to Chicago. For the purposes of the indices, however, “AMM” reports domestic prices for only one region: the Midwest. This is a much broader area than any specific city and is defined as including Illinois, Indiana, Michigan, Wisconsin, Iowa and the northwestern portion of Ohio.

A broader catchment area is essential for the index methodology to work properly because its functioning is entirely dependent on sufficient liquidity. The model is dependent on enough data points to perform the calculation to generate the final index numbers. The Midwest region is sufficiently large and active that in any given month a large number of mills will be in the market for the major grades of scrap, and an even larger number of dealers and brokers will be active in supplying them. Given these conditions, the index method generates an extremely objective indication of the market price.

The other key difference between the AMM indices and the assessments is that the monthly indices are published on a specific date—the 10th—of each month. If the 10th falls on the weekend, the index is published on the following business day. The export indices are updated once per week, in the Tuesday issue of the “AMM” daily edtion, which hits subscribers’ inboxes each Monday night.

This is a departure from the practice with our ferrous scrap city assessments, where the price is published in the “AMM” daily product every day and could in theory change on any or every day. In practice, however, the current nature of the scrap market means that most often these numbers are actually adjusted only once per month, but the exact day that will happen will be determined by when the bulk of the business has been completed in each city market. If the Detroit market “settles” on the third of the month, the next edition of “AMM” will reflect that change. If Chicago then moves on the fourth, “AMM” will make the corresponding adjustment in the next issue.

Each method offers clear advantages. A flexible schedule means that when the market moves, “AMM” can report the new price in a short time rather than waiting for a fixed date. But that flexibility also leads to uncertainty and can be difficult for companies that have contracts based on a specific “AMM” publication date.

A clear market need for a regional Midwest index led “AMM” to launch these new indices. The combination of the publication’s history and reputation for scrap pricing and the new empirically based, robust methodology made the “AMM” Midwest Scrap Index for No. 1 busheling ideal for use as a settlement price for the CME’s new Midwest busheling contract. (See “The Value of Hedging” in the January 2013 “Scrap Metals Supplement,” available at www.RecyclingToday.com/rt0113-hedging- ferrous-scrap.aspx.)

Will city assessments continue?
“AMM” has been successful with its long-held scrap pricing assessment model, but when and where it makes sense, we will roll out additional indices for any metals that “AMM” covers. Indices will never be the right answer for every market, however. Where there is limited liquidity, the assessment methodology remains the preferred choice, and, as such, as long as there is demand in the industry for our city price assessments, “AMM” will continue to deliver them.

David Brooks, dbrooks@amm.com, is senior vice president, publisher and editor-in-chief of American Metal Market.

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