It’s a “topsy turvy” world. The U.S. is virtually, if not yet officially, in a recession. Yet costs and prices keep going up. There are food riots around the world and even when demand falls for a product, there can be surprising side effects. The following looks at some of the key influences on shifts in demand globally.

Diverging Interest Rates Internationally
One factor that is continuing to pump up demand arises from different approaches to interest rates internationally. The U.S., Canada and the United Kingdom have been lowering interest rates. However, the European Cental Bank (ECB) has refused to lower its main benchmark rate, keeping it at 4.0%. The ECB is worried about fueling inflation. Other nations have placed economic stimulus ahead of worries about pricing.

The result of widening interest rate spreads between countries has been a large increase in the value of the Euro. The Euro recently climbed to a record high $1.59 U.S., then eased a little. Over the past two months alone, the Euro has appreciated by 10%.

This has significantly altered world trade. The 15-nation group that uses the Euro has moved up in the ranking of China’s major customers versus the U.S. The Euro’s gain against the U.S. dollar has also meant a significant increase in value relative to the Yuan. Chinese goods have become even cheaper to buyers with Euros in their wallets.

The Spotlight is still on World Steel Markets
In turn, continuing high rest-of-world demand (i.e., outside the U.S.) for Chinese goods is keeping up the pressure on raw materials pricing. China, despite its surfeit of labor, is becoming a more capital-intensive economy. A growing middle class in China, with more sophisticated wants and needs, is one factor and some labor market rigidity is another. One result has been to keep the spotlight on world steel markets.

Last week, the South Korean steelmaker, Posco (Asia’s third largest) agreed to pay Australian metallurgical coal providers 200% more than last year. In other words, the cost of coking coal will triple after April 1 of this year. The new price will be over $300 US per tonne. Supply contracts in the steel industry are re-negotiated as of April 1 each year.

Global steel prices are at a record high. Posco raised prices 11% in February and is likely to implement another increase in the near term. The price of hot-rolled steel, which is a benchmark for other steel products, has hit $1,000 US per ton for the first time ever. AK Steel Holding Corp. just raised prices by $150 US per ton. Nucor has raised prices for structural shapes and rebar for May delivery.

Even When Demand Falls, By-product Prices Go Up
Even when demand weakens for a commodity in this “upside down” world, that can still mean higher prices. For example, due to the collapse of the U.S. housing market, lumber production at sawmills is way down. As a result, there has been weakness in lumber prices for several years.

However, sawmill operations generate more than just lumber. As by-products, most of the waste material finds a use. For example, bark is used in landscaping; sawdust is used in particle board and bedding for poultry; and wood chips provide biomass for power plants. Less lumber means less sawdust. Because production is down, the price of sawdust has doubled from a year ago. It’s hard to catch a break on costs and prices in these “topsy turvy” times.

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