Input Prices Stable Thanks to Weak Demand

August 2013

 

 

 

Energy and commodities prices and volatility are key issues for global businesses. On the left hand side of this page, you will find links to The Conference Board research and activities related to this key issue. In a series of charts on our Data & Analysis pages we will occasionally feature analytical insights and comments from experts at The Conference Board associate companies. We welcome your responses and feedback at indicators@conferenceboard.org 

 

In order to manufacture products, businesses must purchase raw materials, and these raw materials can exhibit considerable volatility (for example, copper). The chart above shows an index of copper spot prices (orange) and an index of raw industrial commodities (gray) [1]. Commodities prices have a strong inverse relationship with the exchange rate of the dollar, so we include an index of the dollar against a trade-weighted basket of other currencies (green). Many of the factors currently exerting downward pressure on precious metals prices act similarly upon raw-input prices. We identify several below.

U.S. GDP faces sequester and QE doubts

The U.S., still the largest economy in the world, accounts for significant raw materials demand. According to a report by the U.S. Geological Service, in 2010, the U.S. consumed 2.57 billion metric tons of raw materials . The weakness  (relative to previous recoveries) of the U.S. recovery since the Great Recession ended in June 2009 is currently acting as a constraint on demand for commodities, as we have yet to recover to pre-recession usage levels and growth rates.

  • While the economic effects of the fiscal austerity program in the United States (i.e. the sequester) were originally thought to have been mitigated by increasing confidence, stable jobs growth, and the recovery of real asset prices, the U.S. Department of Commerce Bureau of Economic Analysis recently revised the 2013 Q1 GDP growth from a healthy 2.4% to an anemic 1.8% due to sequester effects.
  • Given the improbability of new fiscal stimulus, the sequester is expected to hold GDP growth back,  despite resilience of the U.S. economy. The Conference Board is forecasting U.S. GDP growth at 2.4% in Q3, and 2.7% in Q4 (see Economics Watch).
  • Uncertainty remains about the future of monetary policy, particularly with regards to when the Fed will be tapering back quantitative easing and who the next Fed Chairperson will be.

The strong dollar in 2013

Because commodities are priced in dollars, increases in the value of the dollar tend to decrease commodity prices and vice versa, primarily due to supply and demand. An increase in the value of the dollar lowers the purchasing power of other currencies, thus decreasing demand and real prices. Additionally, on the supply side, increases in the value of the real dollar relative to other currencies can, in some cases, represent productivity gains, which also result in lower commodity prices.

  • The dollar, measured against a trade-weighted basket of currencies is up 3% on average year-over-year in 2013, and year-over-year changes have been positive since January.
  • While Europe’s economies may be out of crisis mode for the time being, with the Eurozone finally registering positive output growth, their economic woes are far from over (see Economics Watch: European View). Even though The Conference Board Leading Economic Index® for the Euro Area rose consecutively for three months, increasing 1% in July, it is still too early to conclude a strong recovery is in the works. High credit constraints, record-high unemployment, and slowing growth in emerging markets are providing headwinds to a more rapid recovery in Europe. The contraction and weak investment growth in the Eurozone have contributed to a stronger dollar, up 1.6% against the Euro since January.
  • In December of 2012, Shinzo Abe took office as Prime Minister of Japan and instituted a series of structural reforms in order to spur economic growth. Prime Minister Abe’s economic policies, which are based on radical quantitative easing and fiscal stimulus, are commonly referred to as “Abe-nomics.” These policies have succeeded in reversing the deflationary trend in Japanese prices, and since January, the dollar has strengthened 12% against the yen.

Emerging markets growth slump

The commodities boom of the last decade was fueled by strong growth in emerging markets. The common hypothesis was that as their economies grew, they would need increasingly large amounts of ever-dwindling scarce natural resources. Built in to these prices were pre-slowdown expectations of sustained high-octane growth rates in emerging markets, especially China.

  • Once thought of as the growth engines of the 21st century economy, emerging markets have not been able to maintain the impressive growth rates that characterized their last decade, with average growth rates slowing in Emerging Asia, Latin America, and Europe. The Conference Board’s Global Economic Outlook projects “a long-term global slowdown, driven largely by structural transformations in the emerging economies.” As emerging markets switch over from investment-heavy ‘catch-up’ growth to a more balanced long-term growth, “the structural ‘speed limits’ of their economies are likely to decline.”  (see Global Economic Outlook 2013)
  • Adding to the current emerging markets anxiety, fears of a Chinese credit crunch are percolating as new data shows credit expansion slowing in China.

In the coming months, raw input prices will partly depend on how governments address their economic and financial woes and what happens to business and consumer confidence. Until businesses clear inventories and rekindle growth along the supply chain, these commodities will continue to muddle along around their tepid moving averages, much as they have been doing for the past year.


[1] CRB raw industrials index consists of: burlap, copper scrap, cotton, hides, lead scrap, print cloth, rosin, rubber, steel scrap, tallow, tin, wool tops, and zinc.


 

 

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