W8_TRI_ Billet Steel in Gold Equivalent Value

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 price has shown significant volatility for the last 5 years. Hence, the future cost estimation has to consider this positive trend of steel price.

Figure 1. World Average Steel Prices

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 utilize billet and scrap steel. This chapter will develop model for billet price.

3.      Development of the outcome

The objective is to convert and use billet volume (tonne) into gold equivalent (ounce), so that billet price will refer to gold price. The historical data of monthly average price of billet steel in gold equivalent (tonne Billet/oz Gold) from Jan 1996 to July 2012 is presented in Figure 2.  

Figure 2. Monthly Average Steel Prices

4.      Criteria of Selection

By applying a simple linear regression in Figure 2, the billet-gold equivalent was steadily increasing as a function of time. However, S-squared of regression was very small that means it didn’t closely fit to the data. Therefore, control chart analysis will be used as benchmark in selecting the best method that represents the data. The parameters of control chart are derived as presented in Table 1.

Table 1. Billet in Gold Equivalent (96-12)

5.      Analysis

The control chart was built according to Table 1 as shown in Figure 3. 

Figure 3. Control Chart Billet-Gold Equivalent (96-12)

The chart shows that there is a new pattern of data after January 2009 due to extremely increament of gold price . And thenTable 2 and  Figure 4 pointed that period out in a new control chart to adopt new pattern in billet-gold equivalent.  

Table 1. Billet in Gold Equivalent (09-12)

Figure 4. Control Chart Billet-Gold Equivalent (09-12)

From Figure 4 shows that there was an outlier since it was out of contol limit (UCL/LCL), thus the control chart wasn’t valid referring to Shewhart X-charts rules. On the other side, this also shows that the polynomial regresion hasn’t  produced a minimum 70% R-Squared, in which for instance the 4^th poly only produced 0.4146 R-squared.

6.      Selection of alternative

 Both methods (regression and control chart) actually didn’t fit the technical requirement to be chosen as model of billet price forecast using gold equivalent. However in my opinion, 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 price range.

7.      Performance monitoring and post-evaluation of results

The control chart will be therefore used as reference chart in linking billet 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

·         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