IN THE SPOTLIGHT

Commodities in 2021

Commodities prices are rising across the board as US and global economies recover. Industrial capacity utilization is expected to pick up as we move further into 2021, increasing demand for raw materials used in the production of goods. The unprecedented scale of fiscal and monetary stimulus deployed over the course of the pandemic indicates that rising inflationary pressures will persist this year. US crude oil spot prices broke above $60 per barrel in March, a first since 2019. Oil price quarterly average is expected to reach the mid-$60s range later this year. The US Steel Scrap Producer Price Index quarterly average is at its highest level in nearly nine years. Steel prices are likely to remain at these elevated levels through at least 2021. Rising commodities prices will contribute to rise in US producer prices this year.

US copper futures prices were up 59.1% in the first quarter of 2021 compared to the first quarter of 2020, bolstered by strong demand in the Chinese industrial sector (up 9.1% year over year). While the US commercial construction sector is expected to generally decline this year, low mortgage rates and low home inventories are driving robust growth in the US single-unit housing construction sector (up 13.0% from last year). This will increase demand for and production of electrical inputs and contribute to rising prices this year. IEWC customers should expect to raise prices this year to protect margins. Ensure you are promoting your competitive advantages to justify those higher prices to your customers this year.

 
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A Closer Look at

The US Economy

What you need to know: The impacts of one-off events should not be mistaken for broader economic trends

The recovery is here for US industrial production. One preferred measure of business-to-business spending, new US non-defense capital goods orders (excluding aircraft), recently surpassed its all-time high and is expected to grow in excess of 8% this year. To some people, news of the rebound in the US economy will not come as a surprise. Indeed, compelling leading indicator evidence has specified the timing of this business cycle turning point since the second half of 2020.

However, sentiment is often backward-looking, and many businesses are not prepared to meet now-rebounding demand. Across the industrial economy, the result in many cases is that capacity limitations are hampering recovery prospects. In addition to the regular demand increase, which is to be expected following a significant global recession, many firms are ordering to replenish inventory levels that were depleted during the recession. This one-two punch of demand surge is straining capacity, extending lead times, and in some cases resulting in order allocations.

But rather than attributing these trends to the underlying economic fundamentals, some business leaders are instead focusing on short-term or one-off factors and identifying them, mistakenly, as the principal causes. While non-repeating events certainly can exacerbate imbalances, they are not the fundamental drivers. It is important to distinguish the temporary events from the underlying causes, which are greater both in magnitude and duration.

Two specific events have recently generated a great deal of news coverage and are receiving disproportionate economic attribution: the container ship blockage of the Suez Canal and the drought in Taiwan.

The blockage of the Suez Canal has been blamed for any number of shipping woes, but the fact remains that overall demand for shipping was outpacing supply even before the blockage. Shipping capacity has not yet returned to pre-pandemic levels, and this still-diminished availability is now resulting in delays. One measure of demand, the US truck freight recovery index, already surpassed the spot market recovery level in the summer of 2020 and is now more than double the pre-pandemic level. In fact, this indication of shipping demand fell for only a few short months last year. The data clearly shows a sustained trend, not a short-term impact from one stoppage event that lasted for just six days. The canal blockage may have exacerbated shipping problems, but it was not the primary cause. Crucially, the removal of this obstacle also does not imply that shipping strains and delays will now ease, as the fundamental supply-demand imbalance remains.

Similarly, market observers are blaming a drought in Taiwan for disrupting the global semiconductor market. As Taiwan faces its worst drought in decades, authorities are restricting water supply to water-intensive chip production operations. Yet the semiconductor shortage that now threatens recovery trends in many manufacturing markets, from consumer electronics production to the auto sector, is driven by deeper trends. World semiconductor shipments entered a recessionary phase in June 2019 -- long before the Taiwanese government issued its red alert on the water supply in late March 2021. Again, the drought may have come at an unfavorable time for the industry, but it should not be confused with the deeper, underlying economic fundamentals. Rather than hoping for rain in Taiwan, market participants would be better served to examine the pandemic’s lasting supply chain disruptions and reevaluate their low-cost, just-in-time logistics.

While the news flow will continue to be volatile, your management decisions should not be. Instead of chasing headlines, look to the leading indicator evidence, which is clear: demand is strengthening and will continue to strengthen across a wide swath of industries this year and into next. Firms that do not act accordingly risk losing profits. Ensure you have the people, processes, and equipment you need to meet this challenge.

Industry Snapshot

Arrows indicate 12-month moving total/average direction

  Retail Sales  

  • Annual US total retail sales are accelerating
  • Increased prices are a factor in rise in retail sales
  • Annual e-commerce retail sales up 32.4% from last year

  Wholesale Trade  

  • US wholesale trade up 3.7% over Dec-Feb '20
  • Recovery expected for wholesale trade due to rising industrial sector
  • Durable & nondurable goods sectors recovering

  Auto Production  

  • N. American light vehicle production, 23.4% below '20
  • Automotive retail sales trends indicate recovering automobile demand
  • Chip shortages are stalling N. America production, no imminent solution

  Manufacturing  

  • Annual US total manufacturing 6.2% below '20, transitioning to recovery
  • Accelerating US nondefense capital goods is good for manufacturing production
  • Supply chain issues and capacity constraints to hold back production into Q3

  Rotary Rig  

  • US rotary rig count increased 26.5% 4Q-to-1Q, largest increase in data history
  • US rotary rig counts rose in March, but still below 2020 levels
  • Higher oil & natural gas prices will incentivize more rigs this year

  Capital Goods  

  • US nondefense capital goods orders up 2.9% over 2020
  • US defense capital goods orders down 4.3% over 2020
 

  Nonresidential Construction  

  • US nonresidential construction, 2.0% below 2020
  • Warehouse construction slowing; strong online retail sales causing YOY growth
  • High residential construction demand is resulting in increased material costs

  Residential Contruction  

  • US total residential construction, 24.0% above ‘20
  • Quarterly single-unit starts, 14.2% above ’20; multi-unit starts, 29.0% below ‘20
  • US single-family-unit housing permits during Q1 of 2021 were 24.1% above ‘20

Copper Prices

Copper averaged $4.40 per pound in June 2021, up 41% from the same period one year ago.