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Saturday, June 12, 2021

Commodities in super cycle: Hit highs but cast cloud over recovery, inflation

Steel, the most commonly used input in construction sector and industries, is at all-time highs, as most metals including base and precious metals prices have gone through the roof over the last one year.

Written by Sunny Verma , Sandeep Singh | New Delhi |
May 11, 2021 3:20:40 am
Economists and experts say the rise in commodity prices have now become a macroeconomic monitoring variable.

An across-the-board rise in global commodity prices is leading to input cost pressures and is a growing concern, as it is not only expected to have a bearing on cost of infrastructure development in India but also have an impact on the overall inflation, economic recovery and policy making.

In what is being billed as a new commodity super cycle resulting from recovery in global demand (led by recovery in China and the US), supply-side constraints and loose monetary policy of global central banks, most commodities are on an unprecedented bull run that is expected to extend.

Steel, the most commonly used input in construction sector and industries, is at all-time highs, as most metals including base and precious metals prices have gone through the roof over the last one year. Commodities from agriculture — such as sugar, corn, coffee, soy bean oil, palm oil — have risen sharply in the US commodities market, the effect of which is being seen in the domestic market, too. Precious metals including gold and silver are also on an upward trajectory. Mrinal Singh, CEO & CIO, InCred Asset Management, said the sharp jump in commodity prices is a result of money starting to hide in assets that are store of value as there is an expectation that inflation may rise. So “it is fear of inflation that is leading to jump in prices and it is not demand driven,” he said.

Mirroring the surge in prices, the National Stock Exchange’s NIFTY Metal Index hit a fresh high of 5,503 on Monday, surging from a low of 1,501 on April 1 last year — a jump of nearly 265 per cent. “I haven’t seen such an unprecedented increase in steel prices in just a short span of time, with prices nearly tripling. This has come with volatility and raised construction/production costs significantly. With the economy amid a slowdown, such a sharp rise is a bit difficult to comprehend,” said a mid-sized metals trader. Hot-rolled coil steel futures prices, for instance, have shot up from around $450-500 in April to over $1500 now (for a contract of 20 short tonnes).

Prices of copper are also at all-time highs, surpassing the previous peak in February 2011. Copper futures on COMEX have more than doubled from $2.1 per pound on March 19, 2020 to $4.87 per pound on May 10, 2021. “Bullish investors bet that demand for copper will increase further as the world economy recovers from Covid slumps and as investments into green energy sectors ramp up,” said Sriram Iyer, senior research analyst at Reliance Securities.

After bottoming out in April, Brent crude oil prices are also on a tear, nearing around $69 to a barrel with any potential rise above $72 being seen as taking it further up till $85 a barrel, according to analysts. Compared to other commodities that are hitting fresh highs such as steel, the recovery in crude oil prices though are lackadaisical, with prices barely managing to reach 2019 highs. The domestic prices of petrol and diesel are, however, at record highs as steady increase in Central and state taxes have added to their final price to the consumers.

Economists and experts say the rise in commodity prices have now become a macroeconomic monitoring variable. “The decision makers need to look at the mismatch in supply and demand and they need to find out where to invest, where to incentivise through PLI scheme to prepare ourselves to deal with the situation,” said Davinder Sandhu, advisor at Primus Partners and formerly advisor at The World Bank group.

As India has outlined a big infrastructure development plan, Sandhu also feels that the sharp rise in prices of steel and cement is a bit of a worry. “For every percentage point growth in GDP, this would lead to a backward increase in cost on account of increase in price of steel and cement. Also, if we increase the cost of building infra, it will lead to increase in costing of the project and then the toll prices among others,” said Sandhu.

CARE Ratings chief economist Madan Sabnavis said commodity prices are going up on account of global cues as recovery in big economies like China and the US are driving the prices of metals, which is also translating into higher agri products prices.

“Higher metal prices will lead to higher WPI inflation and so the core inflation may not come down. However, the CPI may not get affected much and hence it won’t impact the monetary policy,” he said. He added while India is not a huge metal importer, it is a price taker and not a price setter and, in that sense, it will lead to rise in prices and input cost for many companies, ultimately leading to higher WPI inflation.
“Companies will have to decide between passing on the cost to the consumer or absorb the cost. I think most of them would pass it through as they have been facing stress for second year now,” he said.

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