From SCDigest's On-Target e-Magazine

May 11, 2011

Supply Chain News: Commodity Price Crash is Short-Lived, while Import Prices Continue to Rise

Most Commodity Prices Back Up after Sharp Drops Last Week; All Due to Change in Margin Requirements on CME? Import Prices up 11% Year over Year

SCDigest Editorial Staff

Late last week the market saw steep drops in the price of most commodity categories, led by a sharp plunge in silver and then oil, but this change in the direction in the long run-up of commodity costs was short-lived, with prices back up this week.

Towards the end of last week, silver prices dropped as much as 27% while oil costs were down about 10% to under $100 per barrel. That led to less sharp price drops in nearly all metals and agricultural commodity categories.

SCDigest Says: It's the first time since June, 2008 that import prices increased by more than 2.0% for two straight months. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

While some were suggesting this at long last signaled the pricking of what some see as a commodity bubble, with huge price increases year over year in most categories, the immediate catalyst instead seems to have been new requirements by the CME (formerly the Chicago Mercantile Exchange), where commodity futures are traded. The CME significantly increased last week the "margin requirements," or the amount of cash commodity traders must have versus the amount they can borrow to purchase commodity futures, on both silver and oil contracts.

That led to some combination of a real drop in demand for silver and oil futures contracts plus a perception that it would lead to a drop in demand, causing the sharp pullback in silver, which has had an incredible run, and oil.

Other commodities appear to have fallen in sympathy to silver and oil.

But as this week began, most commodity prices once again turned upward, if not all the way back to recent highs. Oil has moved back over the $100 mark. Wheat was up 31 cents per bushel on Monday, for example, as most other agricultural categories rallied.

There are conflicting trends. Many sense a softening of the US and global economy that will push down demand and therefore most commodity prices. On the other hand, China announced that its GDP growth in Q1 came in at 9.7%, indicating still strong demand from what is the number 1 consumer of many commodity categories, such as metals. The continued weakening of the US dollar should also serve to keep commodity prices near current high levels if not increasing.

However, some analysts believe we may have reached the high tide in commodities for now.
"Yes, there will be rebounds; they are inevitable. But something has changed. There is a sense of 'something is indeed different' here," Jon Nadler, senior analyst with Kitco Metals Inc., wrote in a report to clients Monday on the mood amongst commodity traders.

He also noted a report from late last year from the Russian Academy of Sciences that predicted commodity prices would start to fall in the second quarter of 2011.

(Sourcing and Procurement Article Continues Below)

Meanwhile though, the effect of rising commodity prices and overall inflation across much of the globe is putting strong pressure on US import prices.

Prices of goods imported into the United States rose 2.2% in April, the Labor Dept. announced Tuesday, well above the forecast, as a slumping dollar and growing economies overseas pushed up the cost of fuel and food.

The April increase came after a revised 2.6% gain in March. It's the first time since June, 2008 that import prices increased by more than 2.0% for two straight months.

Compared with a year earlier, import prices increased 11%.

Most of the increase in import costs, however, was related to rising costs for oil.

Import fuel prices rose by 6.7% in April, accounting for about 80% of the overall rise in import prices. However, other raw materials also are contributing to the increase. Excluding oil, import prices on all other goods increased a monthly 0.6% in April. Imported food was 1.8 % more costly last month, and is up 20% from a year April, 2010,,the biggest 12-month increase since records began in 1977.

“While many policy makers have described recent commodity cost increases as ‘transitory,’ the reality is that even at the small-business level, producers are increasingly more confident in their ability to pass on costs to customers,” Joseph LaVorgna, chief United States economist at Deutsche Bank Securities in New York, said in a note to clients.

Do you think this recent action is the start of a strong pullback in commodity prices or not? What are you forecasting for the rest of the year? Let us know your thoughts at the Feedback button below.