5 Reason Why Commodity Prices Are Increasing and Impact on Stock Market
Last year, the prices of commodities such as crude oil, silver, copper, etc saw a significant fall due to the Covid-19 pandemic. All major economic activities were disrupted as countries went into complete lockdowns. Now, the situation has more or less turned for the better, and commodity prices are witnessing a strong recovery. Copper prices have rallied by over 60% since the beginning of the year and have hit their 10-year high. The price of Brent crude oil, which fell to $20 per barrel in April 2020, has shown a sharp rise to ~$65 (as of Feb 23). The prices of Silver and Platinum have also shown monumental gains over the past year.
Let us understand some of the reasons behind this surge in commodity prices.
Factors Behind the Rally in Commodity Prices
- During a period when countries were under strict lockdowns, China began to open up its factories. They had a headstart in manufacturing activities. In fact, the Chinese factory output in November 2020 hit a 20-month high. Thus, there was a huge rise in demand for commodities from the country, which led to a rise in its prices. There were also reports stating that China has been hoarding steel and is controlling its prices.
- As lockdown restrictions were lifted globally, the demand for industrial commodities started rising. The different sectors of the economy began to ramp up production activities. At the same time, supply chain disruptions or logistical issues continued. Commodity traders blamed the global container shortage as a major reason for high transportation costs. This ultimately led to a surge in the prices of essential commodities such as steel, copper, tin, and aluminium.
- Recently, oil-producing nations have limited their supply to energy-dependent countries such as India. This has caused crude oil prices to increase exponentially.
- The passing of the $1.9 trillion US stimulus package can also be attributed to the sharp rise in commodity prices. Financial analysts state that the package would lead to further demand for commodities as people will spend more (or more money will be in circulation).
- Investing in the commodities market is a great way to diversify your portfolio. Over the past few months, hedge funds have invested billions of dollars into this market. This is primarily due to the optimism surrounding vaccine rollouts and economic recovery. It has been recommended as one of the best asset classes to hedge against inflation, leading to a sharp increase in returns.
- As most countries are on the path towards building renewable energy infrastructure, the demand for metals is at an all-time high. This is driven by an increase in the production of batteries, solar panels, and electric vehicles (EVs).
What is the Impact of Rising Commodity Prices?
The commodities market is receiving a lot of attention from investors around the world. They are collectively pulling money from the stock markets and infusing billions into commodities (due to its high returns). Investment groups and hedge funds are also investing heavily in bonds due to higher yields. However, this may be a short-term phenomenon until financial institutions reshuffle their portfolios.
As India came out of its Covid-related lockdowns, we witnessed pent-up demand for commodities- which led to a further rally in its prices. This has caused fears of inflation in our domestic market. The high price of steel has heavily impacted the automobile and infrastructure sector. We saw companies such as Maruti Suzuki, Tata Motors, Mahindra & Mahindra, and Hero MotoCorp introducing price hikes for their vehicles in January. The continuous surge in prices of raw materials would also affect the real estate sector in the long term. Developers would face an increase in overall project costs, and homebuyers would have to pay more for acquiring assets. The general rise in demand with a fall in supply is helping no one.
One of the most serious issues that Indians face today is the continuous increase in fuel prices. The price of petrol has even crossed the psychological barrier of Rs 100 per litre in several cities. The rise in global crude oil prices and high taxes (or excise duties) are concerning. This ultimately leads to a surge in prices of essential items such as food. With no solution in sight, the middle-class and poor sections of society continue to suffer. Let us look forward to seeing how the situation unfolds in the weeks to come.