Why Commodity Prices are Rising Globally?

Introduction:

Recently, we have witnessed a remarkable rally in the stock market in the stocks which are either producing or using commodities as their input in manufacturing. The reason for such a spurt is due to a continuous rise in the prices of underlying commodities. From iron ore to steel, aluminum to copper, rice to coffee, and the price of all the commodities are rising not only in India but throughout the world. After seeing a severe fall in the market due to this whole pandemic thing, the commodity markets are making a comeback faster than anything. Even for some commodities, the prices crossed the pre-covid mark and are still surging.

Rebound in prices of Commodities worldwide:

The prices for the selected commodities have increased from March 2020 to March 2021. We can see that the prices have gone up by 64.9% in Lumber, 37.5% in Iron and Steel, 73.4% in Copper, 25.6% in Fertilizers, 26.1% in Crude Oil, 34.8% in Cotton, and 33.4% in Ethanol, whereas, the overall commodity index have grown 21% in the past 1 year.

i) Commodity Price Index (Monthly):

• The price index of all the commodities rose in the first quarter of the year, and most of the major asset classes are now beyond the pre-pandemic levels.
• The surge in the prices has been driven by the reopening of the economies globally, as well as the rise in demand for various commodities and the supply constraints from the producer’s side.
• The price of energy is now at the level of pre-covid situations, whereas, the prices of metals and agriculture have gone above the levels of Jan 2020.
• The Agricultural price index has also gone up wherein the food products have recovered very rapidly and the beverages & raw material has also marginally gone up.

ii) Agriculture Price Index (Monthly):

• The price of Wheat has gone up very rapidly.
• The reason behind a certain spurt in the prices is the poor weather conditions which led to a shortage of food that is given to the animals. So the farmers started feeding wheat to them which lead to a shortage of wheat and a rise in prices.

iii) Metals:

• Copper prices have also gone up at a shooting pace because as people are moving towards electric vehicles, the demand for copper rises gradually which led to the rise in prices.
• The price index of Steel and Iron Ore is also rising due to the rise in worldwide demand.

Why prices are increasing?

1. Faster re-opening in economies:

• The economies are getting revived with the implementation of around 2 billion vaccine doses throughout the world.
• The people were in lockdown for very long, hence, now they are going into the market and doing revenge shopping.
• With the intervention of the Government, there is good liquidity moving around in the markets.

2. Gaps in Supply due to pandemic:

• There was a shortage of availability of commodities worldwide due to delays at ports to import/export of the product.
• Manufacturing restrictions were implemented by the governments due to lockdown rules in the country and are working at below capacity.
• There were various restrictions on the travel of people globally which led to a fall in the business activities of various sectors like tourism, aviation, etc.

3. Rising hopes after US stimulus:

• The government of the United States has agreed upon a deal to provide a $900 billion stimulus package to the people which will lead to the creation of more and more demand in the market.
• The United States has also made a plan to spend around $2.3 trillion on building the infrastructure like fixing old bridges to revamping its public transit systems.

4. Increase in demand from China:

• China is getting back on track faster than any other economy in the world, the Chinese markets are opened and are working at pre-covid levels. China can be said as a major contributor in creating a demand for commodities worldwide.
• Buying up hefty amounts of grains to ensure food security for the residents of the country.

5. Return of commodities as an asset class:

• Various big Investing Firms and Hedge Funds have started re-investing in the commodities market and holding them as separate asset classes.
• Hedge Funds till October had invested over $4 billion in the commodities market and it was a clear indication that commodities such as gold, steel, oil, copper, etc. were back on their priority list

6. Poor Weather Conditions:

• Food prices are also affected by poor weather conditions in nations like the US, Brazil and France hits harvests.
• It has led to lower cultivation which resulted in a shortfall of supply concerning the worldwide demand.

7. China’s Environmental Curbs:

• China has imposed strict regulations on not to increase the production of steel and other production due to Environmental Curbs.
• This led to a rise in the prices of metals globally due to a fall in the supply of products.

8. Cartelization:

• The industry is facing the formation of cartels among 4 or 5 major players who dominate the market by manipulating the prices according to them.
• Nitin Gadkari has also blamed the Cement and Steel sector for indulging in cartelization among themselves.

Conclusion:

The rising prices of the commodities will have a positive impact on sectors like Agriculture, Cement, and Metal because the companies in this sector will gain from the rising prices as they are sellers. But the sectors like Infra, Real Estate, Auto and Jewellery will face a drawdown as the costs of purchasing the commodities as raw material will rise.

These rising prices will not have a greater impact on the Indian markets, except for crude oil which is at pre-covid levels, all other commodities will not significantly impact the inflation conditions in the country.