By Jim Haughey, Reed Construction DataChina’s weekend move to again permit its currency to resume a managed appreciation against the $US is clearly positive for world economic growth and hence construction demand. World stock markets soared on the news from China. But a stronger Chinese and world
economy is even more positive for commodity demand. Higher world commodity demand and the anticipated 5% depreciation of the $US against the Chinese currency, after no change in the last two years, means sharply higher commodity prices later this year, especially for metal and energy based products.
This new boost to commodity prices comes just as US contractors were enjoying a brief respite in rising commodity prices in the late spring and early summer. The end of the homebuyer tax credit dropped housing starts and commodity demand, especially for lumber and the public deficit problems in Europe contributed to an off-trend appreciation of the $US in the last few months which reduced import prices, especially for oil.
China’s currency move postpones expected actions by the Chinese government to slow their overheating economy with tighter monetary and fiscal policies. Such actions in the past have produced abrupt spending cuts in China’s tightly controlled economy. Currency appreciation will let off excess steam more gradually through reduced exports, permitting Chinese GDP growth to continue only slightly below the 11.9% pace in the first quarter.
Manufacturing and building investment is the growth driver in China. The reprieve from higher credit costs and new taxes will spur investment and raise Chinese commodity use. A sizable share of this will be imported. Note that the Chinese currency move immediately appreciated the currencies of Australia, Brazil and Canada, the dominant commodity exporting countries, while the exchange value of the $US fell 0.4% early Monday morning.
For cost estimating, the immediate risk is higher prices for diesel, gasoline and plastics. Fuel and many petrochemicals are sold in auction markets so the price impact will be quick. There will also be a relatively quick impact on copper prices. The impact on steel will be somewhat slower because distributors more frequently offer term prices. Also watch for an impact on lumber, where prices have been recently dropping. Asia will import more lumber. And the Canadian economy will get a bigger economic boost than the US economy, immediately, but briefly, making less lumber available for shipment to the US. While demand will also rise for cement and concrete products, there is enough slack in US domestic supply to absorb this for a considerable period.
The late 2010 materials price spike will be similar to earlier price spikes early in 2010 and in 2004 and 2008. Suppliers can not add capacity instantly so prices jump well above a sustainable level for 3-4 months then subside when more supply reaches the market.