Tuesday, February 8, 2011

Commodity Prices And Supply and Demand

From the WSJ:

Much of the $30 billion U.S. timber industry is still depressed because of weakness in the housing market, but some companies have found relief in a nontraditional customer: China.

U.S. timber exports to China are suddenly surging, especially from mills around the Pacific Northwest, giving a boost to companies like Weyerhaeuser Co. and Plum Creek Timber Co. Helping to spur the increase: One of China's biggest timber sources—Russia—increased tariffs on its wood exports in 2007, leading Chinese buyers to turn increasingly to the U.S. and Canada for wood amid the country's construction boom.

"Everybody in the Northwest is talking about China," said Dan Fulton, chief executive of Weyerhaeuser, a timber company in Federal Way, Wash.

On Friday, Weyerhaeuser said it had swung to a fourth-quarter profit from a loss a year earlier. It noted that a tripling of its Chinese log exports in 2010 helped offset a 10% drop in its total logging volume in the same period.

Mr. Fulton said the Chinese are mostly using wood for nonresidential purposes such as crates and pallets.

The story highlights a very important issue: prices are being driven by final demand. While the dropping dollar has done something to increase prices, a big part of the increase has been caused by demand.

From Marketwatch:

Copper’s supply picture is not expected to change any time soon. “Supply is likely to be constrained in the foreseeable future as the mining industry has not responded quickly enough to recovering demand and is also battling against declining ore grades,” analysts at Commerzbank said in a note to clients Monday.