Markets will find a way to cure this overindulgence – but it might take awhile
Commodities tend to run in long cycles. There was a huge run-up in their prices that peaked in 2011, which then degenerated into a rout. But for much of 2021 and 2022, we’ve seen another huge run-up. People who think that this situation will stabilize and turn around anytime soon are kidding themselves.
Going back to when the world started to emerge from COVID shutdowns, all sorts of commodities surged. Steel, copper, corn, lumber, oil (yes oil is a commodity) all hit levels not seen in years. Then Russia invaded Ukraine and other commodities leapt – think nickel, wheat, tin, soybeans, aluminum, zinc, etc. And oil again. The list is long.
Commodities Surged in February
From the World Bank on March 2, 2022:
“Both energy and non-energy commodities continue to soar in February, rising 7.7% and 4.2%, respectively. In January, they rose 7.9% and 4.6%, respectively. Over the past twelve months, energy commodities have surged 63.4% and non-energy commodities 22.7%. Among key groups, only fertilizer prices fell (-1.9%) in February 2022. Agriculture commodities rose 4.5%, metals and minerals 4.7% and precious metals 2.2%.”
And many might suggest that there’s little reason to expect a change in direction.
“Agricultural commodity prices stabilized during 2021Q3 but remain at their highest level since 2013. Declines in some food prices (e.g., rice in response to good yield in South-East Asia) were offset by higher beverage prices (especially coffee due to frost in Brazil). After several years of below-average growth, grain and oilseed supplies are expected to grow at historical levels in the current, 2021-22, crop season.”
“The rally in energy prices, especially coal and natural gas, have sharply increased agricultural input costs, including fertilizers which have risen more than 55 percent since January.
High energy prices forced some chemical companies to halt or reduce production capacity. Rising input costs along with the emerging La Nina pose significant upside price risks to agriculture while with ambitious biofuel targets may boost some grain and oilseed prices in the longer term.”
Base Metal Prices
“After reaching an all-time high in July, iron ore prices have since fallen rapidly, driven by China’s reduction in steel production in order to meet zero-growth targets for the year. In contrast, most base metal prices continued to increase, driven by the global economic recovery, while production has been disrupted by energy shortages and lockdowns. Tin prices have reached all-time highs amid strong demand for electronics. Aluminum and zinc prices have also been boosted by high energy prices which saw some metal refiners reduce or close production.”
We’ve Seen this Before
When you go on an eating binge, especially with food that’s rich in calories, the body finds a way of correcting your overindulgence. Remember when the world adjusted to the aftermath of a 10-year feast of infrastructure spending in emerging markets which commodities underwrote? Consequently, commodity prices in those markets retreated.
In the capital markets, the implications from the commodity surge continue to reverberate. Some might suggest that oil is the biggest problem. And maybe they are right.