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Basic Materials



June 26, 2008 – Comments (2) | RELATED TICKERS: SMN

Housing used more basic materials than any industry. Combined with auto manufacturing it is a third of all materials used. Add in appliances and furniture and it is half.

 Chemicals in paints and plastics, vinyl, wire sheathing, pipes, rugs and flame retardents (we actually don't need flame retardents, they're making us sick), counters, tiles, tires and toys. Industrial metals. Steel for girders, rebar, frames, cable, and truck bodys. Copper for wires and plumbing, tin for solder, and aluminum and titanium to save weight. Mining to get all that needed metal out of the ground. Forestry and paper, wood for construction and floors and sheetrock, stairs and handrails.

 Dupont, Monsanto, Dow, Alcoa, Freeport, Nucor and a host of others. Up went the buildings and up went demand. Bigger homes, more paint and more counters, more fridges and stoves. Bigger cars and better gadgets.

 In the US and Europe, China, India and Dubai. It was beautiful to see, every lot got a giant house and two big cars. Driveways, lawns, garden blocks and decks.

 Demand drove price and escalate the prices did. Houses became unaffordable so banks closed their eyes and loaned to earn fees. They wrote car leases and loans to move wheels off the lot. And the more they loaned the more fees they earned. And the houses grew bigger and the cars got tricked out.

 And the demand drove jobs, car salesmen and real estate. Builders and contractors, architects and plumbers. And all was well.

 As the money rolled in the bank stocks went up, and the builders as well. Retail performed, and the car companys rose. And all that borrowed money trickled up from the borrower to the banker and builder and retailer and car manufaturer, finally to the miner, steel manufacturer,and chemical company at the beginning of the manufacturing chain.

 But then some borrowers could not pay back the loans,and they started giving the houses back, and the cars and the toys and the granite counters, and stainless steel stoves. 

 Then the banks stopped lending when people stopped paying back loans. And from where wealth once trickled up, now an emptiness takes its place.

 There was nothing left to pay back loans, and bank stocks plummeted. Nothing left to buy houses and homebuilders crashed. Nothing for appliances or extra clothes and retail slipped. Nothing left to pay off a car loan and auto stocks fell.

 With no one left to buy a home the builders stopped building. The retailers stopped retailing and the car manufaturers stopped building cars.

 And yet basic materials continue to rise. As though home builders are still buying wood and paint and ceramic tile. As though car manufacturers need steel for cars they don't build.

 Europe has followed us downward, too. The two largest ecomomies in the world have stopped buying and it seems that basic materials are expected to keep selling. And sell more. China is buying I'm told and they need basic materials.

 I'm also told that maybe they too, have bought too much. I find it hard to believe that a visa problem has emptied hotels. More likely it is high gasoline and airfares.

 So if cheap lending sold homes and cars, and sold homes and cars sold basic materials, what happens to basic materials when cheap lending stops buying homes and cars? Will  homes and cars stop buying materials?

Of course they will stop.

Long SMN


2 Comments – Post Your Own

#1) On June 27, 2008 at 1:04 AM, camistocks (57.82) wrote:

Despite all, China is continuing to import basic materials. Just recently Rio Tinto, one of the top three iron ore miners have managed to get a 80 - 95% price increase. This after Vale, one of the other three iron ore giants already fixed 65-70% price increases. And BHP, the third of the gang says that Rio Tinto has not asked enough.

Most basic materials have already corrected 40-50% or so. I think people should buy basic materials companies... (just IMHO)

June 24 (Bloomberg) -- BHP Billiton Ltd., the world's largest mining company, said higher iron-ore prices agreed to by Rio Tinto Group are too small to cover extra shipping costs.

Rio said yesterday it agreed to increase iron-ore contract prices with Baosteel Steel Corp., China's largest steelmaker, by 80 to 97 percent. It's the first time Chinese buyers have agreed to pay more for Australian ore than supplies from Brazil, which are costlier to ship. Melbourne-based BHP, which is making a hostile $172 billion bid for Rio, hasn't agreed to new prices.

entire article 


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#2) On June 27, 2008 at 1:45 PM, devoish (73.48) wrote:


I know. But I wanted to put it out there. Call it the contrarian in me, but "credit contraction" means less money to spend.

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