Price increases stir up fear of a commodity super cycle

The end product prices reflect the increasing input costs

Economic recovery around the world is still in progress, but global commodity prices have firmed significantly over the past year. While the prices of energy commodities in the last year[Oktober2020-September2021)um1065%gestiegensindbeträgtderAnstiegderPreisefürRohstoffeohneEnergie256%UnterdenwichtigstenUntergruppenohneEnergiestiegenAgrarrohstoffeum185%Düngemittelum6912%undMetalleundMineralienum366%[October2020-September2021)haveincreasedby1065%theincreaseinnon-energycommoditypricesis256%Amongthemajornon-energysubgroupsagriculturalcommoditiesroseby185%fertilisers6912%andmetalsandmineralsby366%[Oktober2020–September2021)um1065 %gestiegensindbeträgtderAnstiegderPreisefürRohstoffeohneEnergie256 %UnterdenwichtigstenUntergruppenohneEnergiestiegenAgrarrohstoffeum185%Düngemittelum6912%undMetalleundMineralienum366%[October2020–September2021)haveincreasedby1065%theincreaseinnon-energycommoditypricesis256%Amongthemajornon-energysubgroupsagriculturalcommoditiesroseby185%fertilisers6912%andmetalsandmineralsby366%

At a more disaggregated level over the past 16 months – between July 1, 2020 and November 1, 2021 – carbon steel scrap prices have increased 100% from $ 279 per tonne to $ 558 per tonne, stainless steel scrap (304 grade) by 86% from 935 euros per ton to 1,735 euros per ton. The prices of other raw materials such as nickel, ferrochrome and iron ore have also increased by 56%, 94% and 120% respectively over the same period. Nickel prices rose from US $ 12,555 per ton to US $ 19,645 per ton on the London Metal Exchange, ferrochrome prices rose from Rs 63,500 per ton to Rs 1,23,000 per ton, and chunks of iron from Rs 2,160 per ton to Rs 4,760 per ton im 16 month period.

In line with rising raw material prices, the prices of finished stainless steel products such as cold rolled coils (grade 304) increased 71% from 1,58,690 rupees per tonne on July 1, 2020 to 2,71,190 rupees per tonne on November 1, 2021. That increase however, was lower than in Europe and China, where prices rose 118% and 78% respectively. Prices in Europe rose from $ 2,091 per tonne to $ 4,553 per tonne and in China from $ 1,720 per tonne to $ 3,065 per tonne.

This rise in commodity prices has already begun to fuel fears of the commodity super cycle in the global commodity market.

However, since this increase is mainly due to the economic recovery and the pent-up demand, which is also driven by government incentives, this increase is likely to stabilize soon. Since the commodities market is cyclical in nature, prices will follow similar patterns. Other transformation changes, such as the focus on renewable energies and digitization, may also have an impact on raw materials in terms of emissions and efficiency in due course.

While the profitability of commodity-based businesses may seem good, it is primarily due to inventory growth and operational efficiency improvements due to the increase in production. In some segments, worldwide and also in India, however, the continuous price increase is now leading to market resistance, which can ultimately lead to a reduction in demand and the associated price flexibility. This will lead to valuation losses on inventories, as can be seen from historical cycles. This can lead to a typical post-boom commodity cycle bust.

It is obvious that the rise in global raw material prices has different effects in different countries. It will be a strength for those countries that are primarily commodity exporters and a weakness for those that are primarily commodity importers. As India is a net commodity importer and its reliance on oil is particularly high, an increase in global commodity prices has started to affect India’s inflation.

The Organization for Economic Co-operation and Development (OECD) believes that underlying commodity price pressures have remained modest in advanced economies, due to significant spare capacity and still weak labor markets. In the Indian context, however, inflation, particularly wholesale inflation, has strongly reflected this.

Wholesale inflation rose from 1.3% in September 2020 to 13.1% in May 2021, before falling slightly to 10.7% in September 2021. There’s a reason higher global commodity prices affect wholesale inflation more than retail inflation.

The price of the Indian crude oil basket rose to $ 73.13 / barrel in September 2020, up from $ 41.35 / barrel in September 2020. This has pushed domestic gasoline and diesel prices to historically high levels, both as central as well as the state governments (with a few exceptions) have so far not given in to lower taxes and duties on petroleum products in order to relieve the burden on consumers. Taxes and duties were raised by central and state governments in 2014 to offset the gains from the collapse in crude oil prices between consumers and governments.

The divergence in retail and wholesale inflation in response to the rise in global commodity prices also has an impact on policy. A stabilization of global commodity prices would mean higher input costs for the manufacturing sector, which would lead to higher wholesale inflation. However, the impact on retail inflation will be smaller and also with a lag. With the nominal anchor of monetary policy being retail inflation, the Reserve Bank of India is likely to stick to its current policy stance to support the ongoing economic recovery unless retail inflation causes surprises.

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