Commodities across the board- hard, soft, and tender- have all been obliterated in just a day and a half as rumors go around that hedge funds who were leveraged up trading commodities have to unwind that leverage, causing a run on commodity profits like a run on Bear Stearns last week. Others are pointing to the strong (i.e. less weak) dollar makes commodities less attractive as a place to hide from the falling dollar. Under all this volatility is the fundamentals, and here’s what the fundamentals are saying (from the Reuters piece “Rio says “takes notice” of iron pellet price hike“):

Brazil’s Vale said on Wednesday it secured an 86.67 percent increase in pellet prices for 2008 from Italian steelmaker Ilva. This compares with a 65-71 percent hike negotiated recently for its non-pelletized iron ore.

“We believe most investors expected pellet price increases to be equal to or less than the 65-71 percent increase on iron ore fines announced in February, and this news could come as a surprise to the market,” Morgan Stanley said in a client note.

If the end demand in steel products using these iron pellets weren’t strong, steel producers would not be willing to agree to a 86.67% price hike.  If things were bad, a price hike like that would squeeze a producer out of business.  Again, I feel like this would put pressure on the steel producers, but this is bullish for industrial commodity prices.

**Disclaimer: Author owns CVRD (RIO) as of this post** 

This entry was posted on Thursday, March 20th, 2008 at 9:56 am and is filed under Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.