As Demand Declines, So do Prices

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It's simple economics really…as demand drops worldwide, so too, do prices for a number of materials, products, and trade dependent services.  Purchasing.com reports that steel beam prices, polyuerethane, and ABS, materials used in large volumes in the slowing construction and automotive industries, are now falling in price. 

Shipping rates have also decreased quite a bit in the last few months.  Supply Chain Digest cites some reports claiming that 20' container rates from Asia to Europe have plunged from $2800 to just $700.  From Asia to the US, rates have fallen to $1500 per container.  Interestingly, the London-based consulting firm, Drewry Shipping Consultants Ltd., expects container volumes from Asia to the US to shrink by approximately 5% in 2009, after years in double-digit annual gains.  What seems to be a modest projected decrease in container volumes is actually quite a shift for the shipping industry, which had been ramping up capacity on expectations that double-digit volume increases would continue into the future.

It's unclear how long price reductions will hold.  Many producers are now cutting supply, but cuts have not kept pace with the fall in demand.  When equilibrium is reached, the decrease in prices will likely hold and then begin to pick up again as the global economy begins to emerge from the downturn. 

Thus, falling prices can be a short-term bright spot in an otherwise doom-and-gloomy economic time.  There are worries that the short-term challenges could inflict long-term damage on some industries.  Steve Dickinson, of ChinaLawBlog, posted an informative piece on the risks the credit freeze poses to the ship building industry.  In tough economic times, waves of consolidation in any industry are not uncommon, as weaker players either go under or are acquired by larger companies.  Just look at what happened in the US finance industry this year.  A good friend of mine, who is a financial advisor at Morgan Stanley, watched two of his major competitors disappear within a matter of weeks. 

The reduction in prices, as well as the economic challenges facing us, will likely not hold.  But, for the time being, enjoy the bright spots and negotiate appropriately. 

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