Commodities | Aug 01 2006
By Chris Shaw
At first glance, higher commodity prices would appear to be an undeniable positive for those involved in commodity-based industries, as higher prices for your product should result in higher profits.
The reality is not so simple though, as while sales proceeds are increasing for producers of commodities, costs are also rising sharply as the prices of inputs increase too.
Steel industry consultant MEPS suggests the steel market offers a good example of this, as it notes producers have almost doubled the surcharges they have added to prices since the beginning of the year as they attempt to maintain margins in the face of higher costs and, in particular, higher nickel prices.
While these higher surcharges are allowing producers to pass on the impact of higher costs it is not without some risk, as higher prices and surcharges encourage buyers to look elsewhere for substitute materials that may be cheaper.
To date MEPS suggests the rate of substitution has been relatively low, but this is primarily a reflection of the fact other materials such as copper have also enjoyed strong price increases. This means buyers cannot avoid paying more, as even galvanised sheet prices have risen 40% since January thanks to an increase of more than 50% in zinc prices.
MEPS considers it likely the rate of substitution will increase going forward, an outlook forcing steel mills to react to maintain sales. This reaction includes better offers for buyers, with mills in some cases moving to produce lower nickel grade products to keep costs down for customers and to maintain market share, but such action has an impact on margins.
Its conclusion? The ongoing volatility in the nickel price is continuing to create problems for both sides of the steel industry, with little evidence to date to suggest the issue will soon go away.