After we spoke out edible oil yesterday, multiple people wrote to us asking about the general increase in commodity prices. We are talking about things like iron ore, copper, and wood. And while we’ve already written stories about some of these items in the past, we still thought it would make sense to look at some of the other factors affecting the demand-supply equation. So in today’s story, we talk about the global economic recovery and how it’s pushing commodity prices to stratospheric levels.
The Recovery Hypothesis
As countries began opening up their economies, they realized they had to kickstart the growth engine. They needed more copper to meet the needs of the renewables industry. They needed more steel to reinvigorate manufacturing. They needed more lumber to reignite the housing markets. The US alone has planned to spend $2.3 trillion on infrastructure — from fixing bridges to revamping its public transit systems. From overhauling their airports and waterways to investing in the EV market. The infrastructure boom is real.
Besides, there’s also this pent-up demand. People haven’t had a really good chance to go out and spend money in a while. They’ve had to defer their purchase decisions — furniture, outdoor equipment, vehicles, gaming consoles, etc. Demand for all these items is likely going to skyrocket and the input materials will also follow the same trends.
Take for instance lumber— a vital component in home construction, Homes in America use a lot of processed wood. And usually, there’s always demand for new homes in the country. However, prospects in the realty sector took a nosedive as the pandemic made landfall last year. Nobody wanted to invest in the real estate sector. So big builders were forced to take a break. And lumber prices started tanking pretty quickly. This feedback loop put the timber industry on the back foot. Processing wood was now an afterthought.
But then, all of a sudden, there was a surprising new boom in the US real estate market. People that had deferred their purchase decisions were now back in the market looking to buy new homes. Even others were looking to renovate or repair their old homes. This spurt in activity pushed the demand for lumber to stratospheric levels. Unfortunately, the supply simply couldn’t catch up. You can’t start cutting trees and processing them into planks overnight. You could do it at a certain pace. But you can’t go into overdrive. It takes time for the gap to disappear. So lumber prices are now shooting up.
In fact, it’s the same case with copper, iron ore and a bunch of other commodities. The global economic recovery has pushed demand for raw materials across the board and we’re seeing the impact play out in the real world. But there’s also something else happening in the background. As one user pointed out — While there are certain industry dynamics at play here, there’s also a lot of speculation.
Think of it this way. Traders use commodity futures to gamble on price movements. It’s like making a bet with someone you don’t know — Telling them you’d buy a certain commodity at $50,000 six months from now. Obviously, you’re not looking to buy the actual commodity. You’re only in it for the money. So if the price of said commodity breaches $60,000 six months later, you will settle for $10,000 in cash. And trades like these ultimately have an effect on the price of the commodity. They can affect future expectations and make things more expensive. They could make them cheaper as well. But right now, the fear is that prices will spiral out of control.
And it’s a cause for concern.
Because commodity price swings have a deep impact on the prices of everyday items. They can also aid inflation and push central banks to the brink. Sure, if you are a net exporter of commodities — say Brazil, Australia, and Canada, may be the current scenario augurs well for you. But if you are a net importer of commodities like India, your import bill will start looking real hefty over the next few months.
So yeah, the commodity binge is very real and now you know how it impacts us all.