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Speculators Driving Commodity Prices? Think Again

Everyone wants to blame “speculators” on the rising price of oil, steel, iron ore and various other commodities.  It is an easy way to explain soaring commodity prices. However, the credit crisis may well be the culprit and the problems may continue to exist to years to come.

The way to get prices down for steel and other commodities is to increase supply relative to demand.  Unfortunately, as many large companies already know credit agencies and banks are not willing to take the risks necessary to fund large venture steel and mining projects (thus increasing supply).

Mr. Dan DiMicco,president and CEO of Nucor, brought it home when he told the audience in New York last week, “…the credit agencies have tightened up their sphincters so much that they’re not even willing to talk to the highest-rated investment grade mining and metals company in the world and keep their rating if we borrow $3.  So, we are paying the penalties of the bankers on Wall Street and the other banks around the country and rating organizations that were broke and hopefully will be fixed.”  Nucor recently had to do a secondary stock offer to raise $2 billion dollars.

If you read my articles last week about the growth of the demand for steel in the world at between 3%-6% meaning as much as 90 million tons of new capacity will be needed each year, then you are aware the need for iron ore, metallurgical coal, coke and other steel making inputs will be necessary.  What hasn’t been explained to the steel using community is the devastating affects the credit crunch is having on large companies such as Rio Tinto, BHP Billiton and even more damaging to smaller mining concerns.  According to Jeff Christian, managing director of CPM, a New York based commodity advisory firm – “The financing on those mining projects has slowed to a trickle.”  He believes at least two years of development work and perhaps as much as five will be lost before the credit crunch is over.

This will keep commodity prices high for years to come.

That will keep steel prices much higher than we can now imagine – for years to come.

Don’t be tricked into believing the current weakness in U.S. prices (mostly related to galvanized) is going to be a long term trend. (Resource: TheStreet.com)

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