The New Normal for Commodities Pricing

We got Japanese steel price increases last night to stay in line with the recent American price increases. We have copper at a multiple-month high and looking like it will go higher.

Do you know what the common denominator of those two prices increases is?

Little to no demand outside of China. That's right, steel capacity is running about 40% worldwide. There's been no increase in copper capacity because there is no real demand. Both steel and copper companies are citing raw costs -- iron for steel and energy for copper -- as reasons they "have to" raise prices, even though Richard Adkerson, the CEO of Freeport-McMoRan (FCX - commentary - Trade Now) admitted yesterday in an interview with Bloomberg that there isn't any "real" demand outside of China.

Logically the question is how can these prices stick? There aren't any cartels for either. Nor have hedge funds or ETF buyers to my knowledge driven up the prices of steel or copper as they have oil. I think that China's obviously the biggest driver, but I also think that if it is only China, then it will ultimately peter out or be met with production boosts that tip the scales.

Frankly, it makes no real sense and is unlike any "cycle" I have ever seen other than when we have had price fixing. Of course it is possible that copper and steel, like stocks, fell too hard and too fast and were just uneconomical to make and ridiculously cheap to buy because of the great liquidation of anything that needed financing.

Oil, again, is a different matter. If the prices are phony, the oil companies should learn their lesson and overwhelm the market with futures selling. We know that many of the natural gas companies did -- witness Michael Linn's brilliant lock-in of high nat gas prices for multiple years for Linn Energy (LINE - commentary - Trade Now), therefore insuring the prospects of its high dividend.

To me this is an odd moment. The natural gas consumers should be locking in these prices for years. The oil companies need to sell some oil forward in case it turns out to be all hedge fund and ETF buying. And the steel and copper companies need to raise production to take advantage of the bizarre spike. Somehow I think only the latter will happen, as the commodity consumers and producers have, in the vast majority of cases, not understood the new dynamics of what controls pricing: China and hedge funds/asset managers using commodities as an asset class, overwhelming and front-running demand, making everything pretty much of a crapshoot but certainly stealing the stage from all other assets and sectors.

Random musings: Frequent users of the site have seen some aggressive and (I believe) welcome changes, including some new writers and more contributions from longer-run hands on a wealth of fundamental, technical and product (ETF) news. I particularly want to point out again the new trading/investing analytical diary by Don Dion below me. I believe that not understanding ETFs and their relation to the market will soon be a cardinal sin for both investors and traders, and no one knows that world better than Dion. ... Early returns from the Las Vegas Sands (LVS - commentary - Trade Now) in the old Bethlehem Steel plant are disappointing. Worth staying on top of. ... I think not enough was made of the Apple (AAPL - commentary - Trade Now) product introductions, particular the build-in of the Microsoft (MSFT - commentary - Trade Now) Exchange product into the computers, which should help Apple crack the enterprise culture, something that is hasn't been able to do to date.

At the time of publication, Cramer had no positions in the stocks mentioned.

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