Rethinking Cost-Push Inflation

[adios]

Saw this in the WSJ yesterday. Since year end 2002 changes in selected commodity prices first number is as traded, second number is excluding the decline of the US Peso. The WSJ excluded the decline of the US Peso by making an adjustment by using the JP Morgan broad trade-weighted dollar index, which measure's the dollars strength against the currencies of it's trading partners.

Copper 93.5% 78.5%
Soybeans 74.5% 61%
Silver 51.2% 39.5%
Platinum 50% 38.4%
Cotton 29.2% 19.2%
Crude Oil 22.4% 12.9%
Natural Gas 19.5% 10.2%
Gold 17.1% 8%


I guess the "horse is outta the barn" on most of these. I think Crude Oil has plenty of upside potential. Here's an article about commodity fundamentals from the WSJ:

Bottlenecks in Transportation
And Slack Production Capacity
Are Blamed Instead of Demand
By PETER A. MCKAY
Staff Reporter of THE WALL STREET JOURNAL
March 18, 2004; Page C2

A lack of new plants, pipelines and ships to deliver raw materials to keep the world economy running is helping to keep commodity prices high, adding to the effects of roaring demand from China and the weak dollar.

Supply-chain bottlenecks have gotten little attention since the big run-up in commodity prices -- including the jump in crude oil, which Wednesday hit a 13-year high above $38 a barrel -- began more than two years ago. But analysts say delivery problems may already be causing short-term price spikes and could spark temporary shortages of some items as the world economy struggles to recover.

"The economic danger here is physical dislocation of commodities, not inflation or any of the other usual suspects," said Steve Strongin, director of commodity research at Goldman Sachs Group Inc.

For commodity prices to trigger inflation at the consumer level, demand would have to rise significantly, analysts said. Companies otherwise have trouble passing along higher costs to consumers, as the airline industry's experience with rising fuel prices suggests. Commodities also play a smaller role in the overall economy than they once did, as a result of the rise in service jobs.

Still, analysts are growing increasingly concerned about production shortages and transportation bottlenecks. Aluminum-smelting capacity, for example, has grown recently at about half of its average annual rate since 1961, according to Goldman Sachs. The crude-oil market, which is dependent on tankers and refineries, shows a similar trend. And the Baltic Dry Index, a widely followed average of freight-shipping fees along the world's busiest routes, is more than triple its 20-year average, as the dwindling availability of ships has pushed the costs to use them through the roof.

In the past decade, analysts say, many companies have held off adding commodity-production capacity, even during price booms, because those periods have coincided with events that discouraged such investment.

That is beginning to change, as companies give the green light to the type of projects that would normally occur much earlier in a global economic recovery. But the game of catch-up could be a tough one. "The supply chain has just gotten so much longer than it used to be," Mr. Strongin said.

He and other analysts say capacity issues may be pushing up prices of certain commodities, which were already rising for other reasons. Through Wednesday's trading in New York, copper futures have jumped 29% to $1.35 a pound in 2004, near a 10-year high on Comex. Silver, which is used in film and other industrial applications, is up almost 22% to $7.26 a troy ounce, near a 16-year high. And soybeans, which China has imported heavily, are up 25% to $9.94 a bushel, near a 16-year high at the Chicago Board of Trade.

These jumps come on top of a broad commodity rally that was already under way. Since the start of 2003, the Dow Jones-AIG Index of 20 commodities rose 36% to 150.223. The Reuters-CRB Futures Index, which comprises 17 commodities, is up 20% to 281.23.

The dollar's weakness, of course, makes items traded in the U.S. currency, including commodities, appear more expensive and the price moves more extreme. Since the start of 2003, for instance, the euro has risen against the dollar by 17% to $1.2237. That means that oil is up only 5% in euro terms, compared with 22% in dollar terms.

The seeds of the commodity-infrastructure crunch were sown in the 1990s Asian financial crisis, which discouraged capacity-building in Asia at the worst moment, right before a boom in the region's most populous country generated demand for greater deliveries of raw materials, Mr. Strongin said. In between, the dot-com bubble diverted capital from commodities and signaled that the U.S. economy would be increasingly driven by services, not manufacturing and other traditional, resource-dependent sectors.

R. Michael Jones, chairman and chief executive of Platinum Group Metals Ltd., said it has been at least six years since small mining and metals-exploration firms such as his have garnered much interest from venture capitalists and other investors. In November, the Vancouver, British Columbia, company raised $2 million through a private stock placement, which will go toward ramping up precious-metals exploration projects at eight sites in Canada and South Africa.

But Mr. Jones estimates that it will be at least three years before any of those new mines produce significant quantities of platinum and palladium. Both are critical components in emissions-reducing car parts. For the year to date, platinum is up 13% to $906.80 a troy ounce in 2004, near a 24-year high at the New York Mercantile Exchange. Palladium is up 39% to $275.30 an ounce as auto makers have substituted it for more-expensive platinum.

A tight shipping market, meanwhile, is causing some disruptions. Robert M. Landry, marketing director at the Port of New Orleans, said demand in China, along with the weak dollar, is driving up shipping rates and causing ships that used to service his port to stay in Asia or go to the West Coast rather than to New Orleans. As a result, total cargo at the port, including imports and exports, fell last year to about nine million tons and is likely to fall 11% or so this year, Mr. Landry said. "If there were more ships, and if rates were lower," he said, "it would definitely help us."

"When you get price spikes in a market like this," said Stanley Bedows, vice president for institutional commodities trading at brokerage concern Rand Financial Services, "the sky's the limit."

In other commodity markets:

WHEAT: Futures at the Chicago Board of Trade rose sharply as a pickup in world demand triggered heavy fund buying. May rose 19.5 cents to $3.915 a bushel after Egypt purchased U.S. wheat in a tender and the U.N. World Food Program issued a fresh tender for Iraq.

CRUDE OIL: Futures at the New York Mercantile Exchange settled above $38 a barrel for the first time since October 1990, during the buildup to the Persian Gulf War. April futures rose 70 cents to settle at $38.18 a barrel, following a Department of Energy report showing U.S. gasoline inventories have tightened.

[GeorgeF]

The asian growth story has fallen appart before. This time it does seem real. Don't let the fact that chineese central planners seem to be running things while keeping accurate info away from becoming public. I have also noted that there is more commodities speculation. Wouldn't be funny if all that copper was being bought by hedge funds and not end users. Copper can't be hoarded by speculators like gold, at some point all of it comes out of storage.