Why are commodity prices soaring?

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The increase in commodity prices continues across metals, energy and agriculture markets, scaling multi-year highs. Nearly all commodity prices rose in the Jan-March quarter and are trading higher than pre-pandemic levels. The given scenario is also being billed as a new commodity super cycle by many economists.

Steel, the most commonly used input in construction sector and industries, has hit all-time high. The prices of most metals including base and precious, have soared sky high in the last one year. The given trend is clearly visible in Nifty Metal index, posting over 68% returns year-to-date.

Copper is at an eight-year high. Tin, and iron ore prices have reached 10-year highs. Energy commodities, natural gas and coal also saw sharp price increases in Q1CY21.

Agri-commodities like such as sugar, corn, coffee, soy bean oil, palm oil too have surged sharply. Precious metals including gold and silver are also on an upward trajectory.

After bottoming out in April, Brent crude oil prices are also on a tear, nearing around $69 to a barrel.

Why are commodity prices rising? There are several reasons pushing commodity prices higher, the most important one being the global economic recovery. The vaccine-led recovery fueled by massive global stimulus into green energy and infrastructure projects is boosting the demand for raw materials.

Another reason is liquidity pumped in by central banks which has flown into commodities as well.

Supply disruptions across the globe especially constraints put by China, the leading exporter of raw materials is a big factor. A combination of low inventories and a strong rebound in global growth  is fuelling the demand for commodities.

There is a negative correlation between the US dollar and commodity prices because commodities tend to be priced in dollars and the weakness in dollar is a supporting an upmove too.

Crude oil prices too continue to bet on a bright outlook for demand Organization of the Petroleum Exporting Countries (OPEC) has given a forecast for a strong recovery in world oil demand in 2021.

What should you make of the sharp surge in commodity prices? An across-the-board rise in global commodity prices is causing input cost pressures which 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.

Experts are  the rise in commodity prices have now become a macroeconomic monitoring variable as following this rise, the core inflation may not come down. India is not a huge metal importer and input cost for many companies will rise and this may ultimately be passed on to the consumers. We are already seeing auto companies raising prices of cars and two wheelers. FMCG companies, paint companies have started to hike prices too.

What is the outlook on commodities? Goldman Sachs in its recent report had mentioned that expects commodities prices to stage double-digit rallies over the next six months as coronavirus restrictions ease across the world, aided by lower interest rates and a weaker dollar.

The World Bank commodity price outlook report also had indicated that 2021 will be a bull run for all commodities in general, after which there will be tapering down in 2022.