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issue: January 2009 APPLIANCE Magazine

Materials Forecast
Materials Forecast: A Commodities Pause?

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David Simpson Contributing Editor

Expanded Coverage:

•    Steel: will China boost demand?
•    Copper: costs come down.
•    Aluminum: cost factors improve.
•    Glass: pricing and availability remain volatile.
•    Insulation: some easing in raw materials prices.
•    Expanded polystyrene: prices should be lower in 2009.
•    Polyurethane: raw materials supplies are in-balance.

A lurching global economy at least provides some welcome temporary relief from recent sky-high commodities prices.

Until the international financial meltdown began last September, materials used in making appliances were generally still at high price levels compared to a few years ago. This was true even though there were signs of economic weakness, particularly in a U.S. economy pockmarked with defaulting sub-prime mortgages. Balanced against this were rapidly expanding Asian economies, especially in China. To meet the market needs, many suppliers were working full out, and there were plans for new mines and processing facilities. Also, amazingly high oil prices—over $145 a barrel in July—had broad inflationary effects on transportation and energy costs, as well as directly on chemicals and plastics.

But by late 2008, the picture was radically different. With decelerating demand, oil prices slumped, falling below $50 in November. This had a salubrious effect on transportation as gasoline and, to a lesser extent, diesel prices dropped. And, with reduced demand for commodities such as iron ore, the Baltic Dry Index, a measure of shipping costs for bulk cargoes, fell 86% from May to October.

In general, the widespread recession and lower oil prices have boosted availability and provided a strong tamping effect on commodities’ prices. However, there are countervailing forces. Supply has been cut as some materials companies have shut operations due to unprofitability or bankruptcy. Some large steel and plastics suppliers are temporarily reducing output. Also, suppliers who had margins squeezed during oil and commodities price spikes may still feel the need to recover “lost” profits.

Appliance companies need to bear in mind that it may take some time for the full effect of reduced commodities prices to work through the system. For instance, a stainless steel supplier might assess surcharges for January based on November nickel prices. In addition, appliance companies should realize that their suppliers are also concerned about volatility and may be unwilling to commit to long-term contracts.

Post Recession

Appliance producers should enjoy lower commodity prices while they can. Once the recession ends, it may not be to return to a time with relatively moderate prices and stable availability. Compared to a half-dozen years ago, there will be more aspiring populations in developing countries, greater pent-up demand for goods following the recession, and a dwindling supply of easily procured commodities. Cast-off capacity will need to be restarted, and new sources developed. Oil and energy prices are unknowns, but suppliers that have seen economies survive $145 prices are going to want more than $50 a barrel.

Are we simply in a commodities pause, to be succeeded by a return to the sometimes-spotty availability and higher prices of recent years? Perhaps. Accurate forecasting depends on a lot of things, including not being ambushed by factors like financial meltdowns. But appliance companies might want to plan ahead and consider how they will adapt to a post-recession world in which commodities are not quite so common.


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