Multiple factors drive bulk commodity prices to continue to rise

Crude oil, iron ore, copper and some agricultural commodities have hit new highs in recent years, thanks to a global economic recovery and loose monetary policy. At the same time, rising inflation expectations caused by rising commodity prices are also a concern.

Commodity prices continue to rise

Commodities markets have recently reached their highest levels in nearly a decade, with the Bloomberg Commodity Price Index, which tracks the prices of 23 raw materials, rising 0.8 per cent on May 4 to its highest level since 2011. The index has risen more than 70 percent from a four-year low in March last year. At the same time, a broad index of international commodity price volatility hit a 2-1/2 year high.

Copper for delivery in three months on the London Metal Exchange rose as much as 0.7 per cent to $10,040 a tonne on May 5, its highest level since February 2011, when the contract hit a record $10,190 a tonne. Copper for three-month delivery on the London Metal Exchange rose from its peak on April 29 to above $10,000 a tonne for the first time in a decade, boosted by surging manufacturing output from major industrial economies.

Trafigura, the world's largest copper trader, expects copper prices to move into a range of $12,000 - $15,000 a tonne over the next decade as global demand for decarbonisation creates a severe market gap. Investment banks such as Goldman Sachs, Bank of America and Citigroup are also bullish on copper prices and offer similarly bullish short-term forecasts. In a report on April 28, Goldman Sachs said commodities could rise another 13.5 per cent in six months and forecast copper at $11,000 a tonne. Citi expects copper to hit $12, 000 a tonne next year.

The Thomson Reuters Core Commodity CRB Index, an international commodity index, rose to 200.67 on April 29, the highest since October 3, 2018, and up 89% from its low in April 2020, the Nikkei reported. Meanwhile, tin prices hit a new 10-year high and aluminium prices rose to their highest level since 2018. The Baltic Dry Index (BDI), a leading indicator of international trade sentiment, surged to 3, 266 points on May 4 and May 5, its highest level since June 2010.

In addition, the overseas financial market bulk commodity stocks period linkage up the characteristics of the obvious. International oil prices continue to rise. Light crude oil for June delivery rose to nearly $66 a barrel on the New York Mercantile Exchange, up about 4.5 percent since May, according to Wind data. London Brent crude for July delivery is nearing the $70 a barrel mark, up nearly 5 percent since May.

On the Hong Kong stock market, the Hang Seng energy sector gained 3.35% in three trading days in May, helped by higher energy prices. "Three Barrel of Oil" PetroChina, CNOOC and China Petrochemical rose 4.95%, 2.43% and 5.43% respectively in the same period. On the US stock market, Exxon Mobil, Chevron, ConocoPhillips and other energy stocks rose in the first two trading days of the week.

The price rise is not limited to copper. In other non-ferrous metals markets, LME aluminum, LME nickel, LME lead and other futures prices in May extended the gains of April. On the Hong Kong stock market, the non-ferrous metals sector gained 6.77 per cent in the first three trading days of May. On the U.S. stock market, U.S. Steel rose 15.73% in the first two trading days of May.

Many factors are driving prices up

The analysis points out that behind this round of sustained rise in commodity prices is the continuous easing policies of major global central banks. With abundant liquidity, commodity prices with financial attributes have also been rising repeatedly. At the same time, the overall upward trend in the global macro picture, a rebound in the world's major economies and increased travel are driving demand for metals, food and energy, which is a big part of the rise in commodity prices.

At present, the US economic recovery is accelerating. US gross domestic product grew at an annualised rate of 6.4 per cent in the first quarter, with consumer and business spending and investment picking up sharply. The epidemic in the United States has been brought under control and the service sector has restarted rapidly. The number of private sector jobs in the US increased by 742,000 in April, the largest month-on-month increase since September 2020, according to data released by the Automatic Data Processing Company (ADP) on Friday. The improvement of the employment structure in the US is beneficial to the rapid recovery of the economy, and the high economic growth in the second quarter is expected to continue. Meanwhile, the US ISM manufacturing purchasing managers' index for April came in below market expectations but remained at a relatively high level on record.

The United States and China are recovering rapidly from the outbreak, boosting demand for cars, electronics and infrastructure, the report said. Ford expects a $2.5 billion swing in commodity costs in the last three quarters of the year, including steel, aluminum and precious metals. At the same time, bad weather has damaged crops and transportation bottlenecks have constrained supplies. Droughts in Brazil, the United States and Europe have devastated agriculture, while strong demand from China has sent prices of agricultural commodities such as corn, wheat and sugar soaring.

In addition, some analysts believe that the price rise is affected by short-term speculation in the financial market. Experts pointed out that non-ferrous metals, some chemical products and other financial properties are more prominent, loose monetary policy, the global economy expected to improve the activity of global futures trading, financial market short-term speculation also has a significant magnifying effect on the price rise.

"In general, this is the result of the gradual recovery of the global economy, short-term adjustment in supply and demand, abundant liquidity and speculation," said Meng Wei, spokesman for the National Development and Reform Commission. At the same time, we also see that the world economic recovery is still unstable and unbalanced. There are no overall and trend changes in the supply and demand of bulk commodities, and there is no basis for their prices to rise in the long run."

Higher prices push up inflation expectations

According to the analysis, commodity prices have continued to rise in the past year and are expected to continue to rise in the short term. Prices of everything from copper to corn have risen sharply, adding to inflationary pressures. Complicating the market outlook, further gains in commodities could lead policy makers to scale back the extraordinary stimulus measures that have boosted the market.

Mizuho securities Asia fixed income research at reed said: "the rise in commodity prices is a double-edged sword for investors, although it is advantageous to the profit of commodity producers, is a sign of global economic growth rebound, but eventually could sow the seeds of higher inflation, and promote the central bank to tighten policy much earlier than expected."

Higher prices for a variety of commodities, such as metals and grains, will push up prices for durable goods such as homes, cars and appliances and food through higher raw material costs, the Nikkei newspaper reported. If companies pass on higher costs, upward pressure on consumer prices is likely to intensify.

The soaring prices of raw materials, such as copper, have triggered global inflation concerns, foreign media reported. A growing number of consumer-facing companies have warned in recent days that supply shortages could force them to raise prices. However, U.S. Treasury Secretary Janet Yellen said on Thursday she did not see an inflation problem, downplaying earlier comments that U.S. President Joe Biden may need to raise interest rates to prevent the economy from overheating as he spends heavily to boost it.