Cost in Commodity and Near-Commodity Markets

In most markets costs play a role, but they should not single-handedly determine prices. There are some industries in which costs play a very large role: commodity markets and cost-plus markets. In fact, even in these markets, costs do not constitute the entire driver. Special circumstances still clearly impact price. For instance, when one Ontario steel manufacturer experienced a “breakout”⁴ that shut down production, it obtained replacement product from a nearby mill to honor its contracts, but at a premium.

There are many reasons to vary price from cost in any industry, and some of the most common occasions for price premia in commodities all link to changes in context. Typical changes are:

New product. Even in the toughest industries, unique new products are an occasion to obtain higher margins. For instance, in the commodity plastic container industry, new hooking mechanisms for clamshells and resealable plastic bags both allowed material price premia for a while.