While increases in oil prices have received the bulk of mainstream attention, the prices of metals and other materials have risen much more rapidly over the past year.

As we hit the home stretch of 2007, continued sharp increases in crude oil prices have put renewed pressure on economies. Moreover, there remains no real consensus whether commodity prices will level off, let alone decrease, by the end of the year.

One thing is for sure: Strong global growth has pushed energy and industrial commodity prices to new heights in 2006 and through most of this year. This is bad news for manufacturers and consumers alike.

From the Bureau of Labor Statistics’ latest inflation report:

Thus far this year, energy costs have risen at an 11.7 percent SAAR [seasonally adjusted annual rate] after increasing 2.9 percent in all of 2006. In the first nine months of 2007, petroleum-based energy costs (energy commodities) advanced at a 20.6 percent rate and charges for energy services (gas and electricity) increased at a 1.3 percent rate.

In the first three quarters of this year, West Texas Intermediate (WTI) crude oil prices averaged around $65 a barrel. For the year, WTI prices could average as high as $67. Last week, crude oil for December delivery climbed to a record $98 a barrel. Gasoline is expected to follow.

Oil prices affect every corner of the market, of course. For instance, the containers and packaging sector — a heavy consumer of petrochemicals (basically plastic) — has been hit hard. “The higher the oil price, the higher plastic resin prices are,” Forbes recently noted. Therefore, packagers that use plastic resin in particular are suffering.

Chemical market economists are increasingly negative as 2007 draws nearer its end, and part of that is pinned to increased prices for key commodity chemicals in the face of lackluster domestic consumption. Since January, reports Purchasing’s Chemicals Flash Report (Oct. 31, 2007), “ethylene costs 31 percent more, propylene is 33 percent higher, caustic soda is 19 percent stronger and styrene had risen by 15 percent in the summer months before slipping back 5 percent in recent weeks.”

Energy will continue to be pricey next year, and that could push chemicals, plastics and some metals upward. Already, companies are increasing their product prices due to persistently high raw material costs.

In fact, raw material pricing continues to pressure and depress the overall economic outlook. Commodities’ prices continue to be somewhat seasonal, fluctuating in predictable patterns, yet they are also continually increasing on a multi-year basis.

The rapid expansion of output in developing countries is largely responsible for the rise in commodity prices over the past several years, according to the World Bank’s 2007 report Global Development Finance: The Globalization of Corporate Finance in Developing Countries. China, for one, with its unprecedented demand, is sucking up all kinds of raw materials and then manufacturing products and shipping them to the U.S., Europe and Japan.

World Bank notes:

While increases in oil prices received the bulk of media attention, the price of metals and minerals rose much more rapidly in 2006. Continued strong growth in global output, low stocks, numerous supply disruptions, and speculative demand pushed the prices of metals and minerals up 47 percent. The prices of copper and zinc, two of the metals whose prices rose most markedly in recent years, fell sharply in late 2006 and early 2007, as demand weakened and stocks increased.

The prices of many other metals continued to rise due to low stocks, strong demand, rising costs and supply shortfalls.

Although nickel prices, in particular, have soared, a panel of 14 market researchers says the nickel peak has come and gone, with average projections for world nickel prices declining in 2008. In fact, nickel prices have already begun to stabilize.

Various buyer surveys by Purchasing have found concern about future availability of titanium — “from sponge, the raw material, to final fabricated parts, which already take as long as 18 months for delivery these days,” the trade magazine reported last month. “Buyers should worry about supply of titanium and its alloys through 2010,” said one CEO of a titanium producer.

Early forecasts show carbon steel increasing only slightly next year. According to Purchasing’s Steel Flash Report:

The carbon steel market is poised for a fourth-quarter recovery in demand and a spike in prices since inventories at service centers and distributors are the lowest in months, stocks at customers’ plants have reached reorder levels, mills have reduced production and import tonnages have lessened.

Meanwhile, stainless steel, nonferrous and precious metals are expected to weaken. Market reports from buyers of stainless steel show a dramatic slide of 27.5 percent this month to an estimated average of $3,945/net ton. Worldwide usage is due to grow 5 percent per year through 2011, forecasts one commercial and services director at a Brazilian specialty steelmaker.

Aluminum is the only commodity reported by the Institute for Supply Management’s October 2007 Manufacturing Report on Business as down in price. Some analysts believe this is the beginning of a decline that will continue through 2010.

While rubber prices have gone up 42 percent since May 2007, wood products are expected to continue to be pressured downward even if there is a weak rebound in the housing economy.

The aerospace industry alone annually consumes an estimated 700 million lbs. of raw materials, which among others include aluminum, composites, steel and titanium, as we recently noted. Due to increased use in aerospace and military applications, carbon fiber is in tight supply, with a shortage expected to last several years.

In some instances, manufacturers are finding lower-priced alternatives and engineering certain materials out, World Bank notes. But substitution isn’t an option in many cases. As such, many manufacturers are buying in bulk for discounts, and some are re-examining their contracts with suppliers and establishing long-term agreements.

Despite the sluggish economic expansion in the United States, the cost of the raw materials tracked by Purchasingdata.com is on track to increase by 17 percent in 2007, the third consecutive year of double-digit inflation in commodities used for manufacturing, construction, office and maintenance, repair and operations (MRO).

According to the latest Transaction Price Commentary & Forecasts (Sept. 30, 2007):

In the third quarter, the products tracked by Purchasing showed virtually no inflation — actually 0.9 percent growth — as the expansion in GDP slowed to a crawl when residential construction slumped to a 12-year low in August and manufacturing cooled in the face of weaker orders for durable goods.

Manufacturers continue to struggle with what seems to be a never-ending trend. Over the past three years, however, dollar-denominated prices of commodities have skyrocketed and still could rise again in the final quarter.

Moreover, tight supply and high prices will likely be a concern for buyers for years to come. Several economists have written that prices of crude oil and various world commodities could rebound in the final quarter on expectations of stronger demand if the U.S. manages to avoid a recession and the global economy continues to accelerate, as Purchasing’s latest Transaction Price Commentary & Forecasts notes.

Meanwhile, the cost of shipping these raw materials across the world’s oceans has reached an all-time high, pushing up prices of grain, iron ore, coal and other commodities.

NOTE: Purchasing.com’s excellent Business Intelligence Center offers the latest materials-related market data.

Resources

Prospects for the Global Economy
World Bank, May 29, 2007

Transaction Price Commentary & Forecasts
Purchasing Business Intelligence Center, Sept. 30, 2007

Global Development Finance
World Bank, May 15, 2007

Energy Flash Report (Q3, 2007)
by Tom Stundza
Purchasing Business Intelligence Center, Sept. 30, 2007

Consumer Price Index: September 2007
U.S. Bureau of Labor Statistics, Oct. 17, 2007

Chemicals Flash Report
by Tom Stundza
Purchasing Business Intelligence Center, Oct. 31, 2007

Crude Oil Tops $98 a Barrel
by Chris Oliver
MarketWatch, Nov. 7, 2007

Steel Flash Report
by Tom Stundza
Purchasing Business Intelligence Center, Oct. 31 , 2007

Packagers Also Pounded by Pricey Oil
by Ruthie Ackerman
Forbes, Nov. 2, 2007

Big Drop Seen in Nickel Prices for 2008
by Tom Stundza
Purchasing, Oct. 3, 2007

Rohm and Haas Announces Increases in Product Prices Due to Persistently High Raw Material Costs
Rohm and Haas, Oct. 22, 2007

Stainless Steel Prices Tumble Badly
by Tom Stundza
Purchasing, Oct. 3, 2007

Acesita: Stainless steel demand to grow 6% thru 2011 – Brazil
by Roberta Pregnaca
Business News Americas, Sept. 12, 2007

Titanium Supply Will Be Tight Through 2010; Expansions Won’t Help Immediately
by Tom Stundza
Purchasing, Oct. 18, 2007

October 2007 Manufacturing ISM Report On Business
Institute for Supply Management, Nov. 1, 2007

Aluminum Prices Are Expected to Weaken
by Tom Stundza
Purchasing, Sept. 19, 2007

Michelin Skids in Third Quarter
Forbes, Oct. 30, 2007

World Supply Giants Seeking 30% Price Hike for 2008 Fiscal Year
Purchasing, Oct. 18, 2007

Carbon Fiber Fabrics
Applied Vehicle Technology

Ship Shortage Pushes Up Cost of Raw Materials
by Robert Guy Matthews
The Wall St. Journal, Oct. 22, 2007