Higher Commodity Prices Already Fading
Hurricane Katrina probably won’t raise the prices of chocolate bars, copper piping, coffee, wood products and anything made from petroleum after all, economists say.
Expected shortages and supply chain disruptions sent a range of commodity prices soaring immediately after Katrina struck the Gulf Coast last week.
Apart from gasoline and natural gas, those price increases have generally failed to take hold because of a number of factors. There are ample global supplies of the affected commodities. And damage to the region’s port and oil production facilities has been less than initially expected.
“The impact on pricing is starting to fade,” said Mark Zandi, chief economist for Economy.com, a research firm in West Chester, Pa.
Coffee futures contracts, for example, jumped 7% in the days after the storm amid speculation that 1.6 million bags of Central American java stored in New Orleans might have been destroyed. The price of a December futures contract peaked at $1.0495 a pound on the New York Board of Trade on Sept. 1. The same contract closed at 94.75 cents Wednesday, down more than 5% from the pre-Katrina pricing of two weeks ago.
Even if all the coffee in New Orleans -- a major import and roasting center -- turns out to be destroyed, “it looks like the market is going to absorb it without a rise in retail prices,” said Nick A. Nickols, president of NK Commodity Brokers Inc. He said that the harvest in Brazil was just starting and that roasters could tap the South American nation’s stockpiles to replace lost beans.
Cocoa prices continue to rise, but Nickols linked that increase to political unrest in Ivory Coast, the world’s largest cocoa producer, not Katrina.
Sugar peaked Tuesday before starting to ease.
“There is ample supply of sugar in the world market,” Nickols said, “and prices will start to retrace back to pre-Katrina levels.”
He likened what happened in the post-Katrina commodity markets to a time-honored traders’ tactic of “buy the rumor, sell the fact.”
“Things can only get better from here on out, unless, of course, another hurricane decides to come through,” Nickols said.
Lumber is one of the commodities that has risen the most since the storm. Futures prices peaked Tuesday at $307.60 per 1,000 board feet on the Chicago Mercantile Exchange.
The conventional wisdom is that it will take millions of board feet to rebuild several hundred thousand homes and buildings in New Orleans and the devastated Gulf Coast.
“But it’s not like they are going to start pounding nails in two weeks,” said Ken Tennefoss, senior analyst for Portland, Ore.-based Crow Publications, which publishes wood pricing newsletters. “We won’t see demand for lumber for replacement housing until next year some time.”
Lumber prices hit a 22-month low Aug. 25 and were starting to turn up even before the storm. Lumber wholesalers have kept inventories low, figuring they can resupply quickly as they fill orders from lumber yards and home builders.
Yet when Katrina struck, they all jumped into the market worried that if they didn’t shore up their inventories right away, they might not have wood to sell. This drove prices up quickly, Tennefoss said. The temporary loss of mills in the region, along with disruptions in New Orleans as a port of entry for lumber from Central and South America, made matters worse, he added.
Now that the buying spree is over, Tennefoss expects the market to ease in the coming weeks.
“Once they have filled their inventories, the customers won’t continue to buy at these high levels and prices will adjust downward,” he said. Indeed, after running up 16% from the low two weeks ago, lumber prices started to ease Wednesday.
Even crude oil, the economy’s current boogeyman, has reversed course since Katrina struck. It closed Wednesday at $64.37 a barrel in New York, its lowest price since dipping to $63.27 on Aug. 18.
There are two places where the storm lingers in people’s pocket books.
“You are going to spend more to drive your car and to heat your home,” said Zandi of Economy.com.
The Gulf area where Katrina struck produces about 15% of the nation’s natural gas, and about half of that production is still out of action, according to the Congressional Budget Office. The region also is a gasoline refining center, and three of the larger refineries in the region are expected to be closed for at least a month, the budget office said in a report Wednesday.
Gasoline prices remain high as oil companies work to get refineries damaged by Katrina back on line. Gasoline futures closed Wednesday at just more than $2 for a gallon of regular. Although that’s down about 25% from a high hit on Aug. 31, it’s still about 7% higher than before the storm.
Natural gas prices are running about 15% above pre-storm levels.
The run-up will be felt even in sunny Los Angeles. Southern California Gas Co. said the combination of Katrina and general increases sent its cost of procuring natural gas up almost a third from August to September. A typical customer can expect his gas bill to rise $5 to $6, to about $32, this month, according to the utility.
Longer term, higher energy expenses will start to trickle through the economy and consumers will more widely feel the effect, Zandi said.
“The question is when will Wal-Mart start to pass on higher transportation costs to its customers?” he asked.
Zandi and other economists believe that higher energy prices caused by Katrina and the loss of jobs in storm-damaged areas will damp the national economy in the near term.
Katrina will reduce employment by about 400,000 jobs through the end of this year, the Congressional Budget Office estimated in its report Wednesday. The storm will shave 0.5 to 1 percentage point off the nation’s economic growth in the second half of 2005, the report said. Before the storm, most economists had expected annualized growth of 3% to 4% for the second half.
Higher energy prices will prompt consumers to cut back non-energy spending by around $38 billion at an annualized rate, the budget office projected.
But if there is a retreat in Katrina-caused energy price hikes, the economy should rebound in 2006 as rebuilding activity starts, it said.
“Last week, it appeared that larger economic disruptions might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely,” budget office Director Douglas Holtz-Eakin said in a letter that accompanied the report.
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