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Sat 27 Dec 2008 04:00 AM

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Commodity curves

It has been a tough year for anyone relying on commodity prices. Copper, steel, oil and other industrial ingredients have reached some all time highs during the year, but now look to be tailing off sharply.

It has been a tough year for anyone relying on commodity prices. Copper, steel, oil and other industrial ingredients have reached some all time highs during the year, but now look to be tailing off sharply.

A few months ago there were reports about steel price hedging by suppliers, in an effort to drive up values. For a while it certainly seemed to work, as prices soared. Steel went up around 50% in the most part of the last 12 months and then came down by about the same proportion in recent weeks, as talk of a downturn sent steel the way of other market prices.

The reality is it will be a while before things level out and there is a return to consistent pricing. Contractors and consumers alike may be looking forward to some shrinking bills, but it will be a few months before current price levels appear on any invoices. This all makes planning ahead a difficult task.

Copper is a case in point and Ducab, a cable manufacturer, had endured some significant price peaks throughout 2008.

"Over the last few months the price of copper has fallen by about 60% from the highs of US $8 500-$8 800 per tonne that we experienced a few months ago," said Andrew Shaw, Ducab's managing director. Although the price falls are welcome news for consumers it will be some months before these lower prices are felt in the market and in any event the extreme volatility day-to-day is making it very difficult to plan ahead."

"Copper is the major component of our overall input material cost as it comprises roughly 50-60% of costs and Ducab has to pass the price movements onto the customers. It is company policy to fully hedge the company's exposure to copper so customer orders are backed by a hedge contract on the LME to protect both customer and producer from the price volatility (both up and down).

The company, like many others, is also hit by the price of oil-based plastics, PVC raisins and polyethylene. All of these climbed on the back of the oil price, rising 20-25% in the last 12 months. It would be fair enough to expect things to change here too, but again it will take months for the benefits to be seen.

An industry that is coming under some cash flow pressure will be looking forward to the relief lower prices will bring. Wondering how long this will last would be pure speculation.

Stuart Matthews is the senior group editor of ITP Business' construction and energy magazines.

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