1. Problem recognition, definition and evaluation
Steel is primarily used for major material in oil and gas projects. The volatility of steel price has therefore impacted actual projects cost overruns. Figure 1 shows the steel prices has shown significant volatility for the last 5 years benchmarked to Gold Price. Hence, the future cost estimation has to consider this positive trend of steel price and use a new alternative currency reference since US Dollar value has declined significantly in recent years as shown in Figure 2.
Figure 1. World Average Steel and Gold Price Jan 96 – Jul 12
Figure 2. US Dollar Index Chart: Jan 1973- Aug 2012
2. Development of the feasible alternative
This will explore gold as alternative reference currency to be used in steel price forecast particularly in pipeline projects that install welded line pipe made from Hot Rolled Coil (HRC) and Scrap steel. This chapter will develop model for Scrap steel price.
3. Development of the outcome
The objective is to convert and use Scrap volume (tonne) into gold equivalent (ounce), so that HRC price will refer to gold price. The historical data of monthly average price of HRC steel in gold equivalent (tonne Billet/oz Gold) from Jan 1996 to July 2012 is presented in Figure 3.
Figure 3. Monthly Average Scrap Price in Gold Equivalent
4. Criteria of Selection
By applying a simple linear regression in Figure 2, the Scrap-gold equivalent was slightly increasing as a function of time. However, S-squared of regression was very low that means it didn’t closely fit to the data. Therefore, the other regression models are elaborated from January 2002 – July 2012 to jack up r-squared as presented in Table 1.
Table 1. Scrap in Gold Equivalent (02-12)
The chart also shows that there is a new pattern of data after January 2009 (global recession) as new state of gold price, thus SPC (Statistical Process Control) analysis is applied. Table 2 and Figure 5 pointed that period out in a new control chart to adopt new pattern in billet-gold equivalent.
Table 2. Scrap-Gold Equivalent SPC Parameters
Figure 5. Scrap-Gold Equivalent SPC Chart
5. Analysis
In order to forecast the value for next 3 years (36 months), regression analysis is conducted by using trend line equations provided by Microsoft Excel as shown in Table 1. Figure 5 presents Scrap-gold equivalent equation resulting polynomial 5th order formula with r-squared 0.7155.
Figure 5. Regression Model for Scrap-Gold Equivalent
As result of that, using observed data from January 2002 to July 2012 (127 data) the equation for forecasting Scrap value in gold equivalent is displayed below, in which y is Scrap-Gold Equivalent and x is monthly time unit 127 + n.
y = 8E-10x5 - 3E-07x4 + 5E-05x3 - 0.0021x2 + 0.0146x + 2.6902
Equation 1. Scrap-Gold Equivalent Forecasting Formula 2012-2016
Meanwhile, SPC chart showed that there were outliers suspected and they will therefore be taken out. Table 3 and Figure 6 presents an adjuested control chart after outliers deletion. It shows that since 2009, Scrap-gold equivalent has had statistically stability within the range (UCL-LCL) using confidence level 95%.
Table 2. Scrap-Gold Equivalent SPC Parameters Adjusted
Figure 5. Scrap-Gold Equivalent SPC Chart Adjusted
6. Selection of alternative
Compared to other models, the 5th order poly has the highest r-squared, and it is more conservative forecast model for 3 years onward that results relatively constant value in term of gold equivalent. However, the control chart is better in term of data matching and more comfortable to be used in forecast purpose since it allows plus/minus sigma as a value range. Therefore, the value of scrap steel for 3 years onward will be between 2.99 and 3.97 Tonne / gold ounce.
7. Performance monitoring and post-evaluation of results
Relying US Dollar as solely reference currency in project estimation is not valid, since Purchasing Power of USD has deteriorated dramatically in recent years. Hence this creates a need to use an alternative currency with stable and reliable value as cost reference, namely Gold. The control chart will be used as reference chart in linking Scrap price in gold equivalent. The updated chart shall be applied to check the chart validity and improve its reliability.
References:
· Brassard, M and Ritter, D (2010), The Memory Jogger (2nd Edition),Canada, GOAL/QPC
· Ming, T. (2001, Feb). An Introduction to SPC: SPC Tools - Control charts. Retrieved from: http://lorien.ncl.ac.uk/ming/spc/spc8.htm
· Steel on the net. (2012, Sep 24). Historical Steel Price. Retrieved from: http://www.steelonthenet.com/pricing_history.php
· US Federal Reserve. (2012, Sep 24). US Dollar Index. Retrieved from: http://www.federalreserve.gov/releases/h10/summary/indexn_m.htm
· World Gold Council. (2012, Sep 24). Interactive gold price chart and downloads. Retrieved from: http://www.gold.org/download/value/stats/statistics/xls/gold_prices.xls
Same comments as the last posting. You are definitely on the right track but you are going back to far. (2002) Start with 2006 or 2007 data and you will get that R2 value up.
ReplyDeleteAlso, it is very hard to read and understand the months on the X axis. Suggest you change those to actual dates and it will make your paper a whole lot easier to understand.
Other than that, you are definitely closing in on completing your paper. Once you have the graphs then all you need to do is tell the story...
BR,
Dr. PDG, Jakarta