Why commodity prices are rising

By Morningstar |  21-06-21 | 

Prices for the building blocks of the economy have surged over the past year.

In What commodity prices are saying about inflation, the writers question how much of the climb in commodity prices can be attributed to transitory, temporary shocks that should ease as the world's economy moves further from lockdown, and how much of the rise will last and spread to other things.

In many markets, the factors driving up prices appear fleeting. The economic reopening has been bumpy. Inventories are depleted, leading to big restocking orders and putting premiums on near-term deliveries of raw materials. Supply lines are jammed, creating pockets of scarcity and adding costs that are passed on to consumers.

Lumber is a market in which demand is tied to interest rates and home prices.

Prices for lumber soared to more than four times their normal level during the pandemic. Fiscal and monetary policies that have padded American bank accounts and kept money cheap have propelled the rise. The Fed has stoked the hot housing market by holding interest rates to near zero, keeping mortgage payments low. Rising home prices and low rates have helped those who owned homes refinance and pocket cash without adding much to payments.

Copper is closely linked to global growth because of its use in housing and electronics.

Copper has never been more expensive. Prices have soared above $10,000 a metric ton and recently topped the previous high, from 2011. Record imports by China initially powered industrial metals higher. Now Americans are spending their savings and stimulus checks on houses, renovations and consumer goods that make use of the metal. Some analysts also see a rush into speculative bets on everything from reopening to electric cars.

Bottlenecks in the shipping industry are giving some commodity prices a leg up.

The pandemic -- and the surge in demand for goods sparked by stay-at-home orders -- threw supply chains into disarray. In the container shipping industry, the disruption remains acute. That feeds into higher prices for commodities such as tin and sugar. The cost of transporting commodities such as iron ore and coal in bulk is climbing, too. The Baltic Dry Index, which tracks rates along 20 sea routes, recently touched its highest level since 2010.

Corn was soaring due to low supplies and transportation problems.

The drought in South America has left the global market short of supply. Meanwhile, demand is rising. U.S. drivers are returning to the road, meaning more corn blended into motor fuels as ethanol. China is expected to import about four times what it normally buys from abroad as it races to fatten millions of hogs to replace those killed to fend off an outbreak of African swine fever before the coronavirus pandemic.

Gold isn't marching higher, just when you might think it would.

Gold has fallen about 1% this year to $1,881.30 a troy ounce, despite a recent uptick in prices. Gold surged to a record in August, lifted by supply disruptions and investors' worries about the pandemic's duration. Big-name investors including Ray Dalio and Paul Tudor Jones touted its potential protection against a stimulus-fueled inflation spike. It has fallen about 8% since.

Analysts said that is mainly a sign that investors aren't anticipating that consumer prices will surge beyond the Fed's control. After adjusting for inflation expectations, yields on 10-year Treasury notes have climbed for much of this year. Since gold pays no income, some investors said, it tends to struggle to compete with yield-bearing assets when so-called real yields on Treasurys rise.

You can read the detailed report in What commodity prices are saying about inflation.

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