Prices Headed Down for Most Commodities

At last, a glimmer of relief is on the horizon for businesses -- and ultimately consumers -- in the form of lower prices for key metals.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

July 28, 2008

Prices for many commodities will decline in 2009. Copper, stainless steel, nickel, lead and zinc will fall from highs that have crippled businesses over the past two years. Lower costs for wiring, pipes, tubing, tools and other items will raise profit margins for manufacturers. The reversal in the relentless surge in prices will also help consumers, at least a little, by easing pressures on product manufacturers to boost prices on myriad products ranging from automobiles to batteries and even the kitchen sink.

What’s causing the decline? The dynamics of supply and demand. High prices will cure high prices by triggering more production by mining companies, which will buoy supplies. Lead leads the pack in cost reductions. Prices for this battery essential and industrial chemical component should average 77¢ a pound in 2009, down 25% from an average of $1.02 this year and 35% lower than in 2007. While most consumers don’t focus on the ups and downs of nickel, a big-time ramp-up in nickel production will help keep a lid on what they pay for autos, appliances, furniture and even motor fuel. That’s because the plunge in nickel will reduce the cost of stainless steel, which is vital to the production of those products. The cost of stainless will fall 10% in 2009 to $1.80 a pound, on top of a 15% price drop this year.

There’ll be a milder price swoon for zinc, down 6%, and copper, off 5%, but this will help hold the line on prices for batteries, corrosion resistant building materials, electrical wiring that’s used by the hundreds of yards in buildings and homes, as well as for appliances and consumer electronics.

The cost outlook isn’t all rosy, though. Consider aluminum. Lower production levels in Australia, China and South Africa resulting from weather and electricity grid problems spell a 10% price increase next year. With few substitutes available, at least some of this increase will be passed through to manufacturers that produce aircraft, lighting, appliances, containers and more.

Don’t count on a break in natural gas prices, either. The huge jump that prices took this spring -- up about 66% from last year’s average -- will set a new floor. Look for prices to peak at around $13 per million British thermal units (MMBtu) this summer, then slip back to around $11 per MMBtu in the fall.

Figure on annual increases of a quarter or two through 2013. Production is rising about 1% a year, only half as fast as demand. Waning output at older sites isn’t being offset by new finds. Imports of liquefied natural gas would help augment supplies and temper prices, but most of it has been grabbed up by Asian nations, led by South Korea and Japan.

As for crude oil, we still expect prices to abate in the coming months. Demand in the U.S. and elsewhere is falling, though the supply cushion remains tight. Relative to historical oil prices, a barrel of crude will remain painfully expensive.

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