High world prices both curse and blessing to U.S. firms

McClatchy NewspapersMay 14, 2008 

SYRACUSE, N.Y. — Midstate Spring has made coiled wire forms and precision springs here for nearly seven decades, and it makes them mostly for U.S.-based buyers. But the soaring price it pays for steel and copper wire is set by global supply and demand trends, and that's put Midstate in a world of hurt.

Those same global forces have sent scrap metal prices sky-high. Across town, a scrap yard operated by Metalico Syracuse Inc. is enjoying good fortune. It sells mostly to nearby mills such as Nucor Steel in Auburn, N.Y., not to foreign countries, yet it nets a rising global price.

Welcome to the increasingly complicated world of international trade. From oil and corn to steel and copper, global supply and demand forces set prices for U.S. products at home and abroad.

The United States remains the world's largest and most developed economy. But over the past decade, global economic growth — especially in huge developing nations led by China, India and Brazil — has slowly redirected the flow of international trade and the prices of products, commodities and services.

Projections for this year show world copper prices increasing almost fivefold from 2003, the year the global boom began in earnest, with aluminum prices more than doubling, lead prices growing more than fivefold and tin prices almost quadrupling.

These shifting prices and trade flows continue to force change across the United States and in this once-vital industrial region.

Despite strong demand for Midstate's products, which are used in everything from lawnmowers and rifles to autos and hand tools, the company struggles to make a profit as rising prices for nickel, copper and other raw materials erode its earnings.

"The fact that I don't know what the price is going to be next week is really difficult," said general manager John Kirby. He said he must be selective about the orders he accepts, and he's trying, with limited success, to pass higher costs along to his customers.

The prices of some of Kirby's supplies have risen 60 percent this year. When he tried recently to pass some of these costs along, a lawnmower maker who buys Midstate's springs complained that the steel it purchases for its own manufacturing will rise by at least 70 percent this year.

Kirby grabbed paperwork to show how one supplier of "hard drawn" wire made from carbon steel wants a 25-percent price increase over the prior month; Midstate needs 5,000 pounds of this wire every month. Producers of stainless steel hit Kirby in April with a surcharge of $1.65 per pound above the product price to offset their rising costs for raw materials, such as nickel. This surcharge is more than three times higher than a similar 52-cent surcharge in April 2006.

An April 14 letter from one supplier, Industrial Steel & Wire, suggests an even bleaker future.

"Worldwide demand for scrap is very strong, with export demand driving the price for this scarce commodity higher," the supplier wrote in justifying its price increases. "The shortage of carbon steel wire rod in North America continues to worsen due to the weak dollar, strong demand overseas and higher ocean freight costs. The supply situation for wire rod is widely expected to worsen in coming months."

A bustling global economy has largely shrugged off the U.S. economic slump and is drawing more U.S. metals, especially scrap, into the export market. It is, simply put, a seller's market today. A gross ton of scrap steel sold for $491 last month, compared with $82 in April 2002.

"If you look at steel exports, year over year, they're up over 70 percent," said David Huether, the chief economist for the National Association of Manufacturers. "It's not just to China. It's also to Europe."

Some of the global price rise reflects a catching-up after a long down period.

"The first phase of this story was a run-up from depressed levels to some kind of normalcy. From there, 2005 and 2006, you get a continued run-up because global demand was so strong," said Ken Goldstein, an economist with the Conference Board, a business research organization in New York. "Where we are now is most of these areas, the Middle East possibly excepted, are slowing in growth. The U.S. is close to a standstill, but that is not slowing down the price of these metals."

Goldstein believes that lightly regulated hedge funds, which invest pools of capital on behalf of the mega-wealthy, may be driving up the prices of some commodities and base metals through speculation.

Not so, said David Delbianco, the vice president of business development for Metalico Inc. in Cranford, N.J., the parent company of scrap yard Metalico Syracuse.

"The demand is real. If it is a bubble, it is going to fall when the demand falls," said Delbianco. "If there is a downturn in this country without a downturn in other countries, we'll see prices" remain high.

When the U.S. economy was in recession in 2001, global economic growth was about 1 percent. Today, the U.S. economy is near recession, but annual global growth this year is projected to be above 3 percent. That suggests demand for base metals, and thus prices, will remain high.

"Base metal prices are a pretty good indicator of global industrial demand. If the global economy was getting whacked significantly, you wouldn't see base metals where they are," said Larry Kantor, managing director of Barclays Capital, the investment banking arm of London's Barclays LLC.

At some point, prices climb high enough to quash demand. Economists call it "demand destruction."

"In the long run they're not sustainable because they are creating core inflation, which eventually will have to have an impact on demand," said Delbianco. "It's been a strong economy that has created this demand, costs are increasing and it cannot continue like that."

The pass-through of rising costs is how core inflation — the rise in prices across the economy in everything but food and energy — builds a head of steam. As the cost of steel and other metals rises, manufacturers pay more for materials, then charge more to their customers. And so it goes, all the way to the consumer, who pays more at the cash register.

That's why the Federal Reserve is nervous about cutting interest rates more, since inflation is clearly lurking; deeper rate cuts to spur more demand also would fuel inflation.

It also underscores why globalization and trade resonate so loudly on the presidential campaign trail. The world is changing, and that often means new winners and losers.

Midstate's Kirby is weighing entering the export market. The weak U.S. dollar and his firm's proximity to Canada make the idea attractive. But how do you set a price when the cost of supplies swings widely week to week?

"It's not just the price. We're concerned about whether we're going to be able to get the materials," said Kirby. "I see that Ford and GM are looking at aggressively exporting. We may be able to turn this downturn into an opportunity. We have to."

McClatchy Newspapers 2008

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