Keeping up With Commodity Prices

After general decline in industrial commodity prices during 2019, resurgent global growth is poised to spur prices higher this year.

The global industrial economy is growing at a slowing pace, with annual activity through November up just 0.9% from the year-ago level. In the US, the industrial economy has been in a cyclical declining trend since late 2018. This cooling pattern has resulted in a pullback in demand for many industrial commodities, largely relieving pricing pressures during 2019.

Now, however, the tide is turning. Our system of leading economic indicators is signaling that the low point of the macroeconomic business cycle is likely to occur midyear, with recovery and growth trends taking hold in the second half of 2020 and throughout 2021. As the economic pendulum swings toward growth, increased demand for industrial commodities will result in a changing price environment.

In fact, the quarterly growth rate for prices of commodities such as copper, aluminum, and zinc are already generally rising. Oil Prices have tentatively begun to rise, and we expect Steel Prices to rise imminently.

While current events may impact the short-term prices of various commodities, it is important to understand that broader economic forces are causing the sustained cyclical rise in prices. For example, geopolitical tensions and turmoil in the Middle East are likely provoking an emotional response in Oil Prices and may result in near-term price spikes. However, the fundamental economic drivers, including the global economic acceleration we are forecasting, are primarily behind our expectation for rising Oil Prices this year.

If you are concerned that rising input costs could pressure profit margins in 2020 and beyond, consider acting now. With many commodity prices at or near their low points, early 2020 may be the optimal time to pre-buy raw materials or to hedge future costs. Review the ITR Trends Report™ to see our price forecasts for specific commodities including oil, natural gas, and steel.

Whatever your purchasing strategy, it will be important to pass along higher input costs to customers this year. Review your pricing strategy and ensure that you can protect margins while avoiding alienating customers through steep or poorly communicated price hikes. Many customers may have asked for price concessions in 2019. Ensure that these agreements will still be profitable and look to renegotiate future pricing.

Be aware that the commodity price environment is changing and that the trends of 2019 will not carry through 2020. Don’t be caught off guard.

Lauren Saidel-Baker
Economist