Will Rising Commodity Prices Kill the Recovery?

04/05/2010 3:42 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Ah, if it were only iron ore.

The big three companies that dominate the world iron ore market—Vale (VALE), Rio Tinto (RTP), and BHP Billiton (BHP)—have won price increases of 80% to 100% from Asian steelmakers. Like it or not, European steelmakers will have to fall in line. (The United States is a special case because it is the only major steel-making country that also exports all the ingredients needed to make steel: Iron ore, coking coal, and scrap.)

That price increase for iron ore will increase steel prices by a third, say the world’s steelmakers. And that will then turn into higher prices for everything from cars to washing machines to construction machinery to construction.
But while the price increases in iron ore are so shockingly large that they’re grabbing the headlines, they’re just part of an increase in commodity prices across the board.

Oil closed at $86.62 a barrel, up $1.75, in New York today, April 5. That pushes crude above the $70-to-$80-a-barrel price range that has held for six months. Oil prices haven’t been this high since October 2008, and have climbed more than 75% in the last year.
Copper was up today too, by 4.75 cents to $3.6315 a pound. That’s the highest price since August 2008.

Nickel, a metal used to make stainless steel, is at its highest level since May 2008.

If you tend to see the glass as half full, you’ll find these high commodity prices a heartening sign that the global economy is moving into a higher gear.

If you tend to see the glass half empty, you’re starting to worry that high prices for everything from oil to copper to iron ore could be enough to stall an economic recovery that is still very tentative in the developed countries of the world. (For my most recent take on what we know about the strength of the US recovery, see this recent post.)

Frankly, I’m more worried than elated. Higher gasoline prices for the summer driving season in the United States, for example, would take a bite out of family budgets just as consumers are starting to spend a little bit more on discretionary purchases.

But I want to wait to see if these higher prices spur increases in supply before I put on my official worry cap. OPEC (Organization of Petroleum Exporting Countries) does have unused capacity and can add to global oil supplies relatively quickly—if it wants to. Vale could settle the strike that has idled much of its nickel production. Copper producers such as Freeport McMoRan Copper & Gold (NYSE: FCX) could expand production by reopening capacity that has been shut down and speeding up plans to open new mines.

Look to see if we get news about added supply from commodity producers in the next couple of months. If not, and if the commodity producers decide that they’re not worried about slowing global growth and just want to get their profits now, then I think it will be time to really worry.

Full disclosure: I own shares of Vale in my personal portfolio.

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