As economists scan the horizon for signs of economic recovery, one leading indicator is conspicuous by its lackluster performance. Sensitive materials prices, which normally perk up as business starts to turn around, have been falling steadily since the third quarter of last year. "If we're on the verge of a vigorous upturn," says economist Christopher Plummer of economic consultants WEFA Group Inc., "it's certainly not apparent in industrial commodity prices."
Metals prices, which tend to respond to shifts in industrial production and to pickups in such bellwether industries as autos and housing, have been especially weak (chart). Copper prices have fallen from $1.35 a pound about a year ago to $1 despite significant supply disruptions and the threat of a strike in Chile. Zinc prices have tumbled from over 80~ a pound last summer to around 50~. Soft prices spurred Doe Run Co., the biggest U. S. producer of lead, to cut back production recently and caused Reynolds Metals Co. to unveil plans to reduce aluminum output in Oregon. And steel prices, which rose last winter because of fears of a USX Corp. strike, which never materialized, continue to deteriorate.
The positive aspect of this picture, of course, is that it bodes well for inflation, if not for a buoyant recovery. Indeed, Robert H. Lesemann of Resource Strategies Inc., a metals consulting firm in Exton, Pa., believes the resilience of metals prices in the early stages of an upturn has been exaggerated, since during recessions producers tend to build up large inventories that take some time to work off. Moreover, he notes that economic sluggishness overseas and a strong dollar are still exerting downward pressure on U. S. metals prices.
Metals economist Fred Demler of PaineWebber Inc., points out, however, that whereas world metals inventories doubled or tripled during earlier U. S. recessions, they are up only 20% to 30% over the past year. Because stocks are being controlled more intensively than in past business cycles, he thinks metals markets may already be bottoming out and could post significant price appreciation in the months ahead.
According to economists at WEFA Group, the critical issue is the strength of the upturn. "Because we expect an anemic recovery," says WEFA's Frantz Price, "we think prices of metals and other industrial materials could remain weak until the fourth quarter."