Drop In Demand For Commodities Is Worrying Many


Some 2,000 workers at the massive United States Steel plant near St Louis are wondering if they will still have a job by Christmas. Based in Granite City, the plant has for many years produced steel pipes for the oil industry. It obtains raw materials from the mining areas in Minnesota, and its customers are the oil drillers in West Texas.

However, with the global drop in demand for commodities, the number of operating oil rigs in the US has dropped from an all-time high of 1,609 a year ago to just 595 last week, according to industry services company Baker Hughes.

Half Blast Furnaces Operating

At United States Steel, only half of the blast furnaces are operating, and across the country the company is only using a total of less than 60% of production capacity. Since production has fallen so dramatically, it has had an effect on mining operations in Minnesota and elsewhere as well. If the company has a much lower order book, it needs far less supplies of raw materials.

The workforce has been warned by the company that layoffs could begin in a few weeks’ time, and that the plant might have to be closed.

In Texas, some 25,000 jobs have been lost this year in the oil industry, as drillers have sought to find ways to cut costs, while keeping rigs operating. Some are drilling wells simply in order to keep their leases in the hope that the turnaround in prices will come sooner rather than later.

In North Dakota, where the fracking boom of the last few years took off, around 10,000 jobs have been cut.

Not Just Oil

However, it is not just crude oil that has been feeling the pinch. Iron ore, aluminum, and some farm crops have also seen reduced demand. Alcoa only a couple of weeks ago said that it is to split its operations into two in order to cope with falling demand.

Caterpillar, also based in Illinois, is to cut 10,000 jobs in response to reduced demand for bulldozers and excavators.

Farm crops such as corn and soy beans have also faced falling demand. Corn just three years ago was $6.03 a bushel, and is now changing hands at $3.78. Soy beans today fetch $8.90 a bushel compared with over $15 just two years ago.

This has had an effect on companies which produce agricultural machinery, such as John Deere, which has cut 1,500 jobs in the wake of lower demand for tractors. Many farmers are simply hanging on to older machinery rather than investing in new.

Pointing The Finger At China

Economists have all been busy pointing the finger at China where growth has slowed. However, it is not all bad news. Over in California, farmers have been exporting ever increasing quantities of – of all things – hay to China. The Chinese have also been importing more and more foreign foodstuffs. As Chinese families become more wealthy, they are demanding better quality foodstuffs and are prepared to spend their money on them. Most of the almonds in Chinese supermarkets have a US flag on the bag, and have been grown in California.

In the US, of course, gasoline has become much cheaper at the pump. In fact, it is now some 37% cheaper than a year ago, which gives consumers more money for spending on other items. This has benefitted airlines, which have far lower fuel costs and more customers. Many are investing in new aircraft.

So it’s swings and roundabouts. Some businesses are looking at a long period of depression, while others are happy with lower prices.

In simple terms, if you are a producer you are unhappy, but if you are a consumer you are delighted.