Buyers in manufacturing and construction sectors may get caught in a web of reduced need but somewhat inflated purchasing costs again in 2008. As the overall economy heads toward a possible election-year recession, analysts expect high prices for energy products. They also suggest that buyers across a wide spectrum of industries will continue to be squeezed by high commodity costs through 2008, mostly because of the weakening U.S. dollar.

In a nutshell, elevated but squishy costs are expected for various commodities, materials and components. Global supply for many raw materials may expand while demand could stabilize or slide in the U.S., Europe and some parts of Asia. At the same time, high crude oil, natural gas and downstream energy prices will sustain high production costs of numerous minerals, refined metals, materials and semi-fabricated products.

"The commodity price change will continue in 2008 and perhaps even longer," says Jay Feuerstein, chief investment officer at the 2100 Xenon division of 2100 Capital Group in Boston. "The main culprit lies in the value of the dollar," he says, noting that the greenback "is particularly weak against the currencies of countries that are heavy producers of commodities."

That's why the Commerce Department believes import growth will slow to around 3.5% this year from 4.4% in 2007. In fact, the U.S.—while still a substantial buyer of the world's raw materials—isn't the trendsetter of global raw materials prices any longer. Foreign supply and demand conditions in developing nations will dictate the trends of transaction prices, analysts suggest, even if U.S. demand crumples from significant economic deterioration in the months ahead.

"It is important to recognize that the U.S. is now significantly less important in world commodity demand than it was just five years ago," says chief economist Vivek Tulpule of London-based Rio Tinto, one of the world's largest mining firms. "Even a sharp slowing in the U.S. economy would have only a small impact on Chinese and Indian economic growth and consequent demand for commodities."

In a paper released to coincide with Rio Tinto's recent investor seminar in Singapore, Tulpule points out that commodity markets are entering a sixth straight year of pricing growth, with mineral and metal prices at levels well above their long-term averages. So, with low stocks at the start of 2008, he believes that most commodity prices are expected to remain high until the supply side catches up with demand at midyear.

And, despite growing signs of a continued slowdown in housing construction and sales, slippage in consumer spending as the public starts paying down credit-card debt and moderation in business spending, the weak dollar will continue to keep cheaper materials out of the U.S. market. So, here are some inflation expectations for 2008:

	Petroleum Products: Crude oil supplies are tight as demand has continued to grow much faster than supply. Global Insight analysts see 2008 prices averaging about $75/barrel, up from $68 in 2007. Some other market researchers see $80—hovering at $90-$100/barrel through spring and then easing in the second half. These kinds of crude oil price levels will boost gasoline to $3-$3.50/gallon and $3-$3.10 for diesel.
	Natural Gas: In contrast to oil, natural gas prices remain benign. Storage levels are high and LNG imports have been strong, Natural gas could average around $11/mcf while propane is seen averaging $2.25/gallon. The Henry Hub spot price is expected to average $8.01/mcf in 2008, up from $7.30/mcf in 2007.
	Steel: Carbon steel prices ended 2007 haltingly, increasing in fits and starts because cutbacks in production, reduced imports and withdrawals from service centers brought suppliers down to equilibrium with reduced demand. A weaker dollar signals further drops in imports, which could give domestic mills some pricing leeway in the first half. If metalworking is in depression in the second half, pricing will soften again.
	Nonferrous Metals: Although a decline in the dollar is helping to support primary metal prices worldwide, a weakening demand outlook and accelerating production growth point to more balanced market conditions. Ultimately, says Global Insights, "this shift in fundamentals will send prices lower."
	Chemicals & Resins: The strength in energy prices is providing chemical producers with cost-induced justification for upward pricing moves. Reasonably good end-markets globally have allowed announced increases to stick. But, again, reduced economic growth will cut demand later in the year for chemicals and resins and push prices back down.
	Paper Products: Market conditions for forest products will remain challenging. While some pulp prices inched higher in late 2007, 2008 pulp prices may slide since end-user consumption of paper and box products will continue to be weak. Scotiabank economists say building material prices, geared to the U.S. housing market, are unlikely to mount a sustained recovery until 2009.
	Building Materials: Large declines in housing permits have soured the outlook for residential construction for 2008. At the same time, nonresidential construction looks to be sliding a bit. This will soften demand—and market prices—for lumber, clay products, concrete and cement, gypsum and flat glass.
	Electronic Components: Excess inventory, reflecting abundant capacity, and continued capital equipment expenditures will ensure softness in average selling prices. Price declines will continue although the pace of the retreat is slowing and chip prices should stabilize in the next six months. However, outright increases aren't anywhere in any maven's forecast.