Commodity prices past their peak?
This year, the global economy rebounded sharply and quickly as more and more countries rebounded from lockdowns instituted because of the corona pandemic. When the global economy picks up, commodity producers notice it first. Various raw materials have therefore become considerably more expensive since the last quarter of last year. Higher inflation was thus on the cards, but central bankers reassured investors by saying that this would only be temporary. The rising inflation would mainly have to do with the special comparison basis of prices compared to last year and pent-up demand. To a large extent, the central bankers were proven right. In recent weeks, we have seen several commodity prices fall (sharply) again and inflation also seems to be declining. One of the most important raw materials in the world is iron ore. This raw material for steel has become about 40 per cent cheaper since its peak in May. The main reason for this is that China, the largest consumer of raw materials in the world, is struggling with an overproduction of steel. In addition, most steel in China is made using coal and therefore China is responsible for 30 per cent of global CO2 emissions. However, the Communist Party in China has set a goal of virtually climate-neutral production by 2060. Therefore, the party has decreed that by November, production in China must be reduced to 2020 levels. Many (outdated) steel mills have therefore been shut down, which has depressed the demand for iron ore.
Oil price continues to rise
However, there are several commodities that are still setting price records. However, the high price is often the result of a special cause rather than an improving economy. For example, the most traded commodity in the world, oil, moved back above $75 per barrel Wednesday. We had not seen this price level for Brent oil since early August. The higher oil price has several causes. First, many refineries and drilling rigs in the Gulf of Mexico and the southern states of the United States were closed due to Hurricane Ida. Although this has been several weeks, oil companies in this region are still starting up sparsely. Second, the oil cartel OPEC reported earlier this week that world oil demand would reach 100.8 million barrels per day by 2022, which is a higher level than before the corona crisis. Wednesday’s report by the U.S. energy agency EIA that U.S. oil inventories fell last week gave the final push to a higher oil price.
Aluminium and uranium through the roof
The price of aluminium (a key raw material for automakers and beer and soft drink producers) rose to its highest level in 13 years last Monday. The particular reason that caused this was a coup in Africa’s Guinea. This country holds the world’s largest supply of bauxite. The alumina in this rock is melted down into aluminium. Uranium, the main raw material for nuclear power plants, has long been in the spotlight of investors because of the energy transition underway. But since mutual fund Sprott Physical Uranium Trust started buying on the spot market, the price of the radioactive commodity has gone through the roof and we are seeing prices paid again that we haven’t seen since 2014. The mostly young, speculative retail investors on the Reddit forum r/WallstreetBets also saw this and plunged into publicly-traded mining companies that mine uranium. One of the largest uranium miners in the world, Canada’s Cameco, rose over 58 per cent last month. Previously, Reddit investors tried to do the same with silver, but on closer inspection, this market turned out to be a bit too big to have any influence on it.
Lithium producers can’t handle the demand
One last commodity I would like to mention is lithium. This commodity is again ‘hot’ among investors. Lithium is an important raw material for rechargeable batteries. The demand for electrically powered cars has increased sharply as a result of the global trend to reduce CO2 emissions. Compared to the same period last year, global sales of electric cars rose 150 per cent in the first seven months of this year to just over 3 million units. However, lithium miners cannot meet the demand from battery producers. Consequently, the spot price of lithium carbonate has risen 170 per cent this year in China, the largest market for electric cars.
In short, the proposition that commodity markets are past their prime seems falsifiable after all. Does the same hold true for inflation?