The construction materials price index dropped 7.8% from September to December and is expected to decline, albeit more slowly, through the winter as worldwide commodity demand continues to shrink. Commodity prices fell in January again for metals, lumber and some energy based products because construction activity and manufacturing production are now declining in most major countries and commodity inventories are well above normal levels.

Preliminary data put the January price decline at more than 20% for aluminum, 10% for steel and 10% for lumber, 7% for diesel, less than 5% for copper but no decline for cement. Futures prices and inventory levels suggest that spot prices will continue to fall for several more months. Lumber futures prices are 30% below spot prices. Crude oil storage facilities are full with some product now being stored on anchored tankers.

The intensity of the commodity price collapse parallels the suddenness and depth of the worldwide cut backs in construction and manufacturing production. These cutbacks are much larger outside the US. Industrial production in the US dropped 2.0% in December from November bringing the drop since June to 7.0%. Both Japan and Korea reported a 9.6% fall in industrial production in December from November. The drop in Malaysia was 7.7%. The exact drop in china is not clear but other data suggest that it is in the same range as other Asian countries. Production cuts are accelerating in Brazil with December output down more than 12% from a year ago. German production dropped 2.5% in November and almost certainty dropped at least as much in December.

The cutbacks in manufacturing export countries will continue for at least a few more months because product inventory in North America, Japan and Europe to far above target levels in the past few months. In the US, the overall inventory sales ratio has jumped from 1.25 — a five week supply — to 1.41 which is the most rapid increase in several decades. Production will have to remain above consumption for several months to absorb the surplus. So commodity demand and commodity prices will continue to decline. Prices will overshoot on the downside this spring, leading to some recovery in commodity prices in the second half of the year while the economy remains at the bottom of the recession.