The Price of Nine Commodities drops an Average 62.5% from Peak to Trough

The world economic slowdown has meant a drop in commodity prices. Actually, the word "drop" is inadequate and does not begin to convey the extent of the decline for those commodities with prices that are highly variable. "Plunge" is a better term, but even it falls well short.

The accompanying charts show the history of some commodity prices since January 2002, a period of seven years. This basically encompasses the last business cycle expansion, followed by its recent retreat. The following sets out the declines for nine major commodities from their peak levels in the cycle to their lowest points so far.

The commodities set out below are those with the most dramatic price shifts. They are arranged from highest to lowest. The declines are all -50% or greater, with the average for the 9 commodities being —62.6%.

1. Nickel, from May 2007 (peak) to November 2008 (trough), -81.5%.
2. Oil, July 2008 to December 2008, -69.7%.
3. Copper, April 2008 to the present, -66.5%.
4. Uranium, June 2007 to November 2008, -65.9%.
5. Lumber, August 2004 to the present, -58.9%.
6. Coal, July 2008 to November 2008, -57.6%.
7. Wheat, February 2008 to October 2008, -55.5%.
8. Natural gas, June 2008 to the present, -55.4%.
9. Aluminum, July 2008 to the present, -52.4%.

Lumber Prices a Leading Indicator for Housing Starts
Six of the nine commodities had their peak levels in 2008. The exceptions were nickel (May 2007), uranium (June 2007) and lumber (August 2004). Lumber prices started falling quite a while ago, well in advance of when U.S. housing starts began to decline.

Lumber prices are usually an advance or leading indicator for housing markets. They are likely to pick up again in advance of a housing start increase. The fact that they are continuing to fall does not augur well for a quick turnabout in U.S. housing starts.

Commodities as Building Blocks for Construction Materials and Processes
Consider the part that commodities play as components or base materials in construction building products: electrical wiring and plumbing pipes (copper); kitchen fixtures and appliances (stainless steel with nickel alloys); electric wiring, ductwork, doors, windows and siding (aluminum); rebar and wide-flange shapes, ductwork and doors (structural and galvanized steel by way of iron ore and metallurgical coal); paint, vinyl siding, insulation, sewer and water piping, roofing tar and road-surface asphalt (natural gas and oil).

In addition there is the role played by natural gas and oil in providing heat during the production process for many construction goods — e.g., brick and cement. Plus oil, diesel fuel and gasoline costs are a big part of transportation expenses for contractors and subs.

Elasticity of Prices to Costs

The declines in commodity prices will have a marked downward impact on construction costs. The only questions are how quickly that impact will be felt and to what degree. There is the issue of how inelastic prices downstream are to costs upstream.

For example, it always takes a while for the full impact of an oil price decline to be felt at the gas pump. Strangely and maybe it's just a matter of perception, but the lag factor in the other direction − an increase in international oil prices followed by an increase in gasoline prices − always seems to be much shorter in duration.