Is the Commodities Chokehold Over?

At noon today, the spot price for oil had recovered about half its losses to sit at $97 and change per barrel. Earlier the price had plunged to just over $93. Gold was up to $780 an ounce, but that level is some $300 below its mid-summer high.  Copper was down to $3.13 per pound, almost a dollar a pound off its summer high (which was almost a record level). After more than a year of rapidly increasing commodity prices, the world’s cooling economic outlook may finally have broken the fever tht has infected basic materials and buildings products for construction.

About the only thing looking up today is diesel, and even that is trending back. Hurricane Ike had plowed into literally the worst spot in North America for the refining business, the channel that runs from the Gulf, through Galveston Bay and into Houston’s refinery row. But as the storm receded another day it looks like damage will be minimal. Some enterprising sorts in the Gulf and Florida have jumped prices at the pump by 50 cents or more (one group of knuckleheads added a buck on Saturday and are now in possession of indictments from the Florida Attorney General’s office), but locally the price of diesel has gone up a dime or less.

The parts of the world that were driving high prices for oil, steel, copper, aluminum, etc. are beginning to slow down. China expects to become a net exporter of steel by 2009. India’s infrastructure needs to catch up to its growth again. The European Union nations, which consume roughly two-thirds what the US does, is experiencing the same kinds of problems (housing slump, reeling financial firms) our economy is, and will be in a recession by the start of 2009. So there is a real decline in demand for the pereviously overheated commodities worldwide. And, as usually happens, the rising prices spurred expansion of supply capacity, which will come on line just as demand craters for a lot of basic materials.

Don’t be surprised to see oil below $75 after Christmas. If the illiquidity in the financial markets continues until that time, there will likely also be a double-digit decline in non-residential construction nationally, which will further pressure prices. None of this is new, of course. After the last oil crisis in the late 1970’s triggered a global recession, prices of commodities gradually and steadily declined until they hit record lows in the mid-1980’s (remember gold at $300/ounce, oil at $10/barrel?).

In Pittsburgh, some of this nonsense will have an effect on our economy, but overall we have become insulated by skill and luck from this economic wretching. Perhaps PNC Bank is the best example of our good economic fortune: as the rest of the banking business was being clobbered today, PNC’s stock prices fluctuated with 5% of its 52-week high.

There are some potential bad consequences to a commodity bubble bursting, but all-in-all a pull back shows that markets will swing back towards equilibrium. At the very least, falling commodities will mean falling building components. For a region which continues to have demand for new construction at high levels, cooling commodities makes pro formas that much more appealing.

Don’t panic.

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