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Exploring Gold Equivalency for Forecasting Steel Prices on Pipeline Projects

FEATURED PAPER 

Trian Hendro Asmoro, CCE 

Jakarta, Indonesia
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Abstract

The volatility of steel prices and international currency is an element that affects actual project costs. This situation can be mitigated by considering risk contingency as a fixed percentage of the total budget and/or by inputting an inflation factor into the cost estimation. These methods have not overcome the root problem, however, which is the decline in purchasing power of the US dollar as a base currency. As a result, an alternative currency with a stable and reliable value as a cost reference is needed.

This paper will explore the possibility of using gold as an alternative currency to be used in forecasting selected steel prices, i.e. billet, hot rolled coil and scrap steel as the main material components in pipeline projects.  The reliability of gold in terms of purchasing power compared to the USD will be discussed together with how gold equivalency can be applied for selected steels to establish a gold-based forecasting model. Finally it will be explained how steel prices will refer to the gold price forecast for the next four years. These methods will change the paradigm for estimating the cost of pipeline projects and may be developed for and applied to other projects.

Keywords: Steel Prices, Gold Price, Cost Estimation, US Dollar, Purchasing Power, Gold Equivalency, Price Forecast, Project Cost Engineering,  Pipeline Project Cost.

1.         Introduction

Project cost overruns have become a major issue for project management in recent years. The volatility of steel prices and international currencies is one of many elements that affect actual project costs. Project costs are also affected by the discrepancy between local currencies and the US dollar, the base currency.

However, in the last decade, market volatility and quantitative actions by major governments have led to large fluctuations in the value of the US dollar in terms of purchasing power. Although the US dollar has been widely accepted and used as the international currency in most countries [1], using the US dollar as a basis for forecasting prices and cost estimation for future projects is now  risky and requires further evaluation.

1.1.      Steel Prices

Steel is a cornerstone and key driver for the world’s economy [2] and is used as an essential material for key equipment in most oil and gas projects. The volatility of the steel price has therefore resulted in actual project cost overruns. Figure 1 shows that the steel price has shown significant volatility during the last 5 years. Hence, the upward trend in the steel price needs to be considered for future cost estimations.

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About the Author

trian-hendro-asmoroflag-indonesiaTrian Hendro Asmoro

Jakarta, Indonesia

Trian Hendro Asmoro is an oil and gas professional with 7 years of experiences in project management and cost engineering, i.e. project coordinator, project site engineer, and pipeline project leader. He is currently a planning & cost engineer at PT Medco E&P Indonesia. Trian holds a bachelor degree in Industrial Engineering from Institut Teknologi Bandung (ITB), and a Magister Management (MM) degree in Strategic Finance (Distinction) from Paramadina Graduate School (PGS). Trian is a Certified Cost Engineer (CCE), driven by passion to share contribution in oil & gas sector. He has published several professional papers in Indonesia and International events. He lives in Jakarta, Indonesia and can be contacted at [email protected]