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Commodity prices rising across the board

WASHINGTON—It's not just gasoline. Prices for many other commodities, from roofing lumber to copper to coffee beans, are surging, many to levels not seen in decades. And demand is more global than ever.

"Never has there been a commodities boom like it," the Financial Times, a British business daily newspaper, declared recently.

Rising commodity prices reached the Maryland town of Deale on Chesapeake Bay last week when the local 7-11 hiked the price of a cup of coffee by a dime. In rural Eaton, Ohio, the owner of Preble Co. Ace Hardware raised the price of an 80-pound bag of concrete mix by 15 cents. He absorbed the rest of the 23-cent increase that his wholesaler demanded.

Increases of a dime or a quarter collectively add up to inflation. Usually, price increases in some sectors of the economy are offset by decreases in others. But the almost across-the-board rise in commodity prices makes it more expensive to make and deliver products. That's fueling fears of inflation and of higher interest rates to curb it. Higher lending rates slow consumption and thus the economy.

The boom in commodities grew quietly and steadily over the three years that the global economy has been growing. Copper is trading on mercantile exchanges at its highest levels in 16 years, aluminum prices hit a 10-year high in March and iron-ore producers this month raised the price they charge many steel mills, which use the ore to make steel, by 71.5 percent.

Economists and commodities traders are asking whether the boom is a super-cycle, a traditional business cycle that's just stronger than usual. If so, commodity prices eventually will return to normal. Some economists, however, think the boom reflects a basic change in commodity consumption worldwide.

Historically, commodity prices rose or fell together depending on the strength of the world economy, which was driven largely by the U.S. economy, along with Japan and Western Europe. When it grew at a healthy 4 percent or better, the demand for raw materials and industrial metals grew too. If the supply couldn't keep up with the demand, prices rose because scarcity made products more valuable.

"It's the nature of commodities," said Allan Hubbard, the director of President Bush's National Economic Council. He thinks the high commodity prices reflect a normal business cycle.

But some economists think today's commodities boom reflects new forces, mainly the emergence of China and, to some extend, India as global consumers rivaling the United States and Europe. With three major economies competing for the same basic industrial resources, the demand for commodities could become permanently higher, along with their prices.

"China is consuming huge amounts of basic resources to try to catch up (to the United States) on 200 years of infrastructure-building," said Peter Morici, a business professor at the University of Maryland in College Park. By infrastructure-building he means new highways, ports, universities and other developments.

Chinese President Hu Jintao expects his nation's economy to grow by 9 percent this year, about the average annual rate that the Asian giant has grown since 1978. Nowadays, when the U.S. economy grows, so does China's, because it's the largest exporter of manufactured goods to the United States. When both economies are hot, resources grow scarcer and suppliers demand more money for their products. That's the main reason oil prices have surged, and that so many other commodities have risen in price, too.

Take that 80-pound bag of cement mix at Travis Earley's hardware store in Eaton, Ohio. It's gone up from $3.44 to $3.59 recently. Here's why: Imports accounted for nearly a quarter of U.S. cement consumption last year, but those imports became more costly when China gobbled up cement supplies for construction—and fleets of ships to deliver it.

"A lot of the problem with cement wasn't its availability but China tying up ships," said Michael Carliner, an economist with the National Association of Home Builders in Washington. Shipping costs for cement rose more than 200 percent last year, and that pushed cement and concrete products to record-high prices.

"China is definitely a factor but it is not the only factor. There is demand growth around the world," said Jeffrey Christian, the managing director of CPM Groups, a metals and commodities research and consulting company in New York.

Last year was a good year not just for China, he noted, but also for other growing countries with large populations, such as India, Brazil and Turkey.

Traditionally, as prices rise, factories increase production to meet demand. But it takes years to dig mines and extract ores in commercial quantities or to find new oil fields, dig wells and start pumping. That's why some experts expect commodity prices to remain high in coming years.

"My forecast is basically we still have a long-term trend that is unwinding. We might be in the 7th inning," said Mike Drakulich, a metals market forecaster for Elliot Wave International, a Georgia-based company that provides technical analyses of global commodities, currency and stock markets. "From what my charts are telling me," Drakulich said, "I really do believe it is demand-driven, especially when you have China and India and how they are building out their infrastructure."

At the Manufacturer's Alliance/MAPI, a research arm in Arlington, Va., for the nation's manufacturers, economist Donald Norman keeps a close eye on commodity prices. He thinks the boom will begin moderating later this year as new production capacity grows and demand in China slows.

"Commodity prices will not return to the low levels observed two years ago, but any moderation will limit inflationary pressures," he said. In other words, if prices don't fall, expect inflation.

Home builders are feeling the commodities pinch. The National Association of Home Builders reports that prices for construction materials rose 9.9 percent in the year that ended in February 2005. Lumber, cement, steel, gypsum and fiberglass insulation all began rising in price last year, but builders had to absorb the higher prices because the homes already had been sold. Now, those prices are being passed on to home buyers.

"This year, people who are buying a house will see it as one of the factors that pushed up housing prices," said Carliner, of the home builders' association.

Even a cup of coffee costs more now because of the commodities boom. Last month, Procter & Gamble's 13-ounce cans of Folger's coffee and Kraft's cans of Maxwell House each rose by 28 cents. Starbucks and other coffee brewers have raised their prices by at least a dime a cup.

The reason: The price of green coffee beans has recovered from record lows in 2001, when big producers such as Brazil and Vietnam flooded the market. Many farmers went out of business, which reduced the supply and drove prices higher.


(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050414 COMMODITIES

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