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Economic Forecasts

Key Industrial Resources
Face a Tepid Recovery

Good old supply and demand are back in control of the prices of industrial metals, cement and lumber.

Recession-slammed prices for metals, cement and lumber are slowly clawing their way back up, and won’t be subject to any speculator-driven price spikes anytime soon.

Prices in the foreseeable future are more likely to be determined by demand and supply fundamentals than a return of investor-stoked futures bidding of the kind that drove up costs for aluminum, copper, lead, nickel, tin and zinc, creating a bubble that burst in mid-2008.

The prerecession investment frenzy was fueled by individuals and hedge and pension fund managers. They were betting that demand for metals in the U.S., China and elsewhere would continue at a heady pace, with no slowdown in sight.

They were wrong. The selloff, which came amidst the worst recession since the 1930s, deflated prices by 50% within less than a year -- from May 2008 to February 2009 -- based on an International Monetary Fund index.

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Going forward, metals prices will be tempered by what we expect will be a long and tepid economic recovery. The odds are that it will take five years for the prices to approach the highs reached in late 2007 through late spring 2008.

Take aluminum, for example. Its use soared to around 23 million pounds in the U.S. and Canada during 2005 and 2006, and just slightly less in 2007, before tumbling to 15 billion pounds as the recession hit. Look for aluminum demand to inch up to 16.5 billion pounds this year, but it will be 2015 or so before aluminum consumption approaches the levels of a decade earlier.

Ditto for U.S. steel production, which, like aluminum, is tied closely to the consumption demands of the automobile, appliance and construction industries. Recovery by the latter two will stagnate for several more years. Automakers will slowly boost production through mid-decade, but U.S. mandates to increase vehicles’ fuel efficiency will prompt them to use more lighter-weight materials, especially plastics and composite fiber materials.

But even though steel output won’t approach its prerecession levels until 2015 or so, more steelmakers will be able to make a profit with lower production from more-efficient steel plants.

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Cement manufacturers and lumber mills can also expect incremental production growth, tied as they are to the fortunes of the housing, office and commercial development sectors. It will be at least five years before they see companies in those sectors buy as much product as in the years immediately preceding the downturn.