Commodity Prices to Remain Weak

Sept. 14, 2011
Threat of a double-dip recession will keep commodity prices down, say IHS analysts.

Overall, global commodity prices will remain low through 2011 as a downgraded economic outlook coupled with a manufacturing stocking cycle early in the year cut into demand, says John Mothersole, senior principal economist for IHS Global Insight's pricing and purchasing service.

Slow growth in developed nations, particularly the United States and Europe, has had the greatest impact on low commodity prices, said Mothersole during an IHS online pricing and purchasing conference Sept. 14.

Oil prices are expected to rise over the next two years but at a lower rate than previously projected, says K.C. Chang, a senior economist with IHS' pricing and purchasing service. Low spare capacity and rising production costs will support higher prices over the next 24 months.

Brent crude oil will average around $111 per barrel in the fourth quarter and will rise to $112 per barrel in 2012, Chang says. By 2013 it could reach $117 per barrel.

Gasoline demand fell in the United States at its fastest rate in the second and third quarter of this year since late 2008, Chang says.

But strong demand in emerging markets should help sustain higher prices in the next two years.

Natural gas prices will remain low in the United Sates as drilling activity continues in shale-gas region, Chang says. The increased supplies should keep prices in the $4 to $5 per million BTU price range in 2012.

Liquified natural gas demand will be strong in Japan where the country faces electricity shortages from the March earthquake and tsunami.

Meanwhile, steel prices have likely bottomed out and should rebound in 2012, says IHS senior economist Paul Robinson.

Supply chain inventories are low and competition from imports is expected to be less of a factor. But the industry does face some risks that could push prices lower. Capacity increases in the United States with the restart of RG Steel's Sparrows Point mill in Maryland and Severstal's expansion at its Columbus, Miss., plant could drive down prices. In addition, the auto and construction markets continue to struggle.

Low steel prices should reduce the amount of imports coming into the United States from emerging markets.

"If you can't make up the difference on freight, you're not going to export," Robinson says.

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