Most Commodity Prices are still Advancing
Alex Carrick
 |
Seed Newsvine |
It has to be acknowledged that the economies of the United States and Canada are experiencing some weakness. However, this is not leading to any slowing in the general price level in either country. Much of the explanation for this can be found in commodity markets. Frenzied commodity price increases are being fueled by strong demand for raw materials from China and other emerging nations. At this particular moment in time, most commodity prices (as monitored by TD Bank Financial Group) are still marching relentlessly upward.
Much of the story about commodity prices is most easily told in graphs. Accompanying this report are charts setting out the history of prices, from January 2002 to the present, for fifteen commodities. These are arranged in blocks of three, yielding five distinct market sub-sectors as set out in the headings beginning two paragraphs down.
Spectacular Commodity Price Increases since 2002
In quite a number of cases, it is instructive to consider the change in prices relative to the start of 2002, which was when the U.S. economy was just coming out of the last recession. Some of the percentage changes are staggering. The average increase for the fifteen commodities shown, over the past six-and-a-half years, has been 250%. In other words, they have increased by a factor (or multiple) of 3.5 on average. (A 100% increase is a multiple of 2.0; a 200% increase is a multiple of 3.0; etc.)
Over the same period of time, the U.S. all-items Consumer Price Index (CPI) is up by only 22%. In Canada, the CPI increase has been even less at about 15%. With respect to the impact of commodity price increases in Canada, remember that the gain in value of the loonie versus the greenback has muted some of the effect when the product is priced in U.S. dollars.
Forestry Products – More Strength than Expected
Lumber prices still remain depressed. They are about half of their peak level in the summer of 2004 and now stand at just about the same level as they were in early 2002. The explanation for the weakness lies in the 60% drop in U.S. housing starts over the last two-and-a-half years.
On the other hand, pulp prices are performing fairly well. They are +80% (a multiple of 1.8) versus early 2002. And newsprint prices are back on a roll, +39% (a multiple of 1.4) versus 2002. In the case of these two products, business is still creating a demand for office paper and for flyers. Also, there has been a pick-up in orders from countries in the Far East.
Base Metals and Construction-related Products
Copper prices have been on a plateau for about two years now. Versus 2002, they are up 450% or a multiple of 5.5. Two of the chief uses of copper, in electrical wiring and in plumbing pipes, are still in fairly high demand due to the strength in non-residential building construction.
Nickel prices have fallen back from their high. They now stand 270% (a multiple of 3.7) ahead of their level in 2002. Nickel is a key ingredient used in the making of stainless steel. Appliance demand has fallen along with the weakness in residential real estate markets. In early 2007, nickel prices were almost nine times higher than they were in January 2002.
Aluminum prices, like copper, have moved up and down around a set figure for the past two years. In aluminum’s case, that benchmark number has been about $1.25 U.S. per pound (+115% versus 2002 and a multiple of 2.2). Aluminum producers are closely monitoring activity levels at airplane manufacturers. High fuel costs are causing airlines to retrench and hold back on fleet additions.
Precious Metals and Minerals
Gold and silver are hedges against inflation and political uncertainty. It may be a surprise to many to discover that silver prices have actually increased more than gold since 2002. Gold prices are ahead by 220% (a multiple of 3.2) and silver prices are up by 280% (a multiple of 3.8).
Uranium prices were up by a factor of 12 in the middle of last year. They have since fallen back to a level “only” 500% ahead of 2002 (a multiple of 6.0). A slowing world economy is taking some of the heat off electricity demand. Long-term, however, the move is on to build more nuclear reactors, given their non-existent carbon footprints.
Energy Products – Record-setting Paces
Prices for coal and oil are setting new record highs and natural gas is now headed in that direction as well. Strong world-wide demand, especially from emerging nations, is a factor for all three of these energy products. Speculative money flowing into oil and gas, as an alternative to real estate and equity holdings, is also playing a big role. As for coal, steelmaking demand from China and India has caused prices in new contract signings − often with firms based in Australia − to shoot up.
In international commodity markets, the price of oil is up almost 600% (a multiple of 7.0) versus 2002, while natural gas is ahead by 500% (a multiple of 6.0) and the price of coal is showing an increase of 450% (a multiple of 5.5).
Agriculture
Wheat prices have spiked over the past year. At the beginning of 2008, they were 375% above 2002 (a multiple of 4.8). They have since eased off to only about double what they were six-and-a-half years ago. Drought has lessened in some parts of the world and the outlook for crops has improved.
Generally speaking, however, greater prosperity and a growing middle class in emerging nations is causing huge increases in demand for food staples and for food products of a more diverse nature (e.g., meat, poultry and dairy products).
However, when feedstock costs increase, livestock prices are usually stressed. Farmers cut back on herds to save money. This throws product on the market, thereby lowering prices. It may not be a coincidence that both cattle and hog prices are up only 34% from early 2002.
A Brand New World
The bottom line is that it is a brand new world out there. Emerging nations have been driving up commodity prices in a major way. Looking to the future, there may be occasional random or cyclical swings that will cause temporary relief, but the long-term trend appears to be ever upward.
For construction, the message is not just one of cost increases. It is also one of opportunity to participate in capacity expansions. The high raw material prices are a tremendous incentive for owners to explore for new reserves, to develop and improve operations at existing properties and to raise investment levels overall.
