Commodities Watch: Iron Ore Prices Hit China's Steelmakers; Caterpillar Soars; Lumber Prices Remain Soft; Coffee at Near-Record High (BHP, RIO, VALE, CAT, WY, DHI, SBUX)

Today’s report on commodities begins with some sobering news from Chinese steel makers and some roaring news from a maker of heavy equipment. Lumber prices remain low, but arabica coffee beans are at their highest point in 34 years.

A steel industry association in China reports that profit margins among 77 large and mid-sized steel makers reached a paltry 2.91% in the first calendar quarter of 2011. Across China, the all-industry profit margin average was 6.2%. Ten of the country’s steel makers actually posted losses.

The culprit is the price for iron ore. Prices for iron ore are up more than 62% year-over-year, averaging about $156/ton. Iron ore producers like BHP Billiton plc (NYSE: BHP), Rio Tinto plc (NYSE: RIO), and Vale (NYSE: VALE) are reaping the rewards.

Another company reaping the benefits of higher metals prices is Caterpillar Inc. (NYSE: CAT), which this morning reported record profits of $1.225 billion and record EPS of $1.84. Revenue rose to $12.95 billion. The company cited significantly higher sales volume, including demand from commodities producers that are now scaling up spending in order to produce more.

In stark contrast, Weyerhaeuser Co. (NYSE: WY) posted EPS of $0.18 this morning, but the gain was due almost entirely to the $96 million after-tax gain on a sale of timberland. Without that sale, the company’s earnings would have been a weak $3 million.

Weyerhaeuser’s problem, as the company so baldly stated it, stem from “anemic housing market conditions.” As if to add support for that, homebuilder D.R. Horton Inc. (NYSE: DHI) reported a positive EPS surprise of $0.09, or net income of $27.8 million. A tax benefit of $59.2 million provided the gain. The company’s homebuilding revenue fell by about -18%, from $897 million in the same period a year ago to just $733 million this year.

Homebuilders have been coaxing every dollar they can from every conceivable item on their balance sheets and income statements. Everything, that is, except building more houses. Until the demand for new housing turns around, lumber companies and lumber prices can’t expect to improve much.

Finally, the price for arabica coffe has climbed above $3.02/pound for the first time since 1977. The steady rise in coffee prices appears to be primarily down to the old reliable — supply and demand. Coffee supplies are expected to trail demand in 2011 for the fourth consecutive year, and prospects for 2012 include another year of short supply.

Dollar weakness is contributing to demand for coffee because it is priced in dollars and weaker dollars buy more coffee for less money in other currencies. Some traders think arabica coffee could approach $3.30/pound by summer.

The CEO of Starbucks Corp. (NASDAQ: SBUX) said yesterday that he does not believe that the current high prices are sustainable, and that he is hopeful that prices will come down. Starbucks expects coffee prices to lower its profits by $0.22/share in 2011.

Paul Ausick