Producer and Commodity inflation are building

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by Shaun Richards

A particular feature of the year so far has been the rise in commodity and hence producer prices.Only yesterday it was the turn of Iron Ore.

BEIJING, May 10 (Reuters) – China’s ferrous prices took off on Monday, with benchmark iron ore and steel futures hitting all-time highs amid robust demand and supply concerns, as expectations of rising inflation rates also fuelled speculative buying.

Capacity utilisation rates of blast furnaces at 247 steel mills across China jumped to 90.59% last week, the highest since early March, data from Mysteel consultancy showed.

The most active iron ore futures contract on the Dalian Commodity Exchange, for September delivery, soared 10% to a record high of 1,326 yuan ($206.30) per tonne.

On the Singapore Exchange, the June iron ore contract surged 9.5% to $224.65 a tonne.

We see that the price has surged to a record high this week and that continued this morning. Having pointed out in the past that the financial sector exacerbates such moves it was hard to avoid noting this also.

“Some mills have stopped buying at such high prices, but traders are sweeping up in the spot market,” said Wu Shiping, analyst with Tianfeng Futures.

However you spin or analyse it prices are higher and this adds to the shipping issue we have been looking at.

The Baltic Dry index, which tracks rates for the three largest classes of ships, has risen to its highest level in more than a decade, soaring over 700 per cent since April 2020. Capesize vessels, the largest type with an average capacity of 180,000 deadweight tonnes, are fetching $41,500 a day for immediate hire, close to double of a month ago and almost eight times last year’s average, according to Clarksons Platou Securities. ( Financial Times)

According to the FT the factors below have added to the increased demand for Iron Ore shipping.

A host of other factors have contributed to squeezing the shipping market, from record high US coarse grain exports to the trade dispute between China and Australia, which has tied up vessels with coal and other materials outside the ports of the world’s biggest commodity importer.

There is a fair bit going on here as there had been an oversupply of container ships since many were ordered after the 2007 commodity rally. Of course, that was exactly the wrong time to buy ships but it seems that finally their are no empty ones and as it takes a while to build a ship lead times for change are quite long. Some are looking ahead to this as well.

Some owners are hopeful of further tailwinds, pointing to global regulation under debate that could force ships to slow steam to reduce carbon emissions from 2023, which would constrain fleet availability.

The Green Agenda is always raising prices as opposed to the rhetoric that it will cut them.

See also  Inflation Alert! US Producer Prices Soar At Record Pace In May (0.8% MoM) Core PPI Rose 0.7% MoM, CPI Purchasing Power Keeps Declining

As the Baltic Dry Index can be unreliable many look at the Harpex Index and this too has been surging. If we look over the past year or so we see the low of 412 of May last year has been replaced by 1777 in the latest reading. This compares to its all-time high of 1839 back in 2005. So it is also picking up quite a rise.

So we can move on with the impression that the world economy is picking up with much of it coming from China. That is good for growth especially for commodity producers ( we looked at Australia or if you prefer the South China Territories only on Friday). But it also is posting at least an amber light for inflation if we add it too the other rises we have seen such as lumber and this.

The FAO Food Price Index (FFPI) averaged 120.9 points in April 2021, 2.0 points (1.7 percent) higher than in March and as much as 28.4 points (30.8 percent) above the same period last year. The increase marked the eleventh consecutive monthly rise in the value of the FFPI to its highest level since May 2014. The April rise was led by strong increases in the prices of sugar, followed by oils, meat, dairy and cereals. ( United Nations )

There are two points of note here.India produces more sugar than you might think and  the dreadful Covid problems there have created fears for the crop. Also meat prices have risen by much less ( 5.1%) in spite of this ongoing issue.

Pig meat quotations firmed on continued high purchases by East Asia, despite increased overall shipments from the European Union, while Germany continued with no access to the Chinese market over African swine fever concerns.

China Producer Prices

Earlier today the National Bureau of Statistics released this.

Ex-factory prices for industrial producers in April 2021 increased by 6.8% year-on-year and 0.9% month-on-month.

This means that the push which began last December when there was a monthly rise of 1.1% goes on. The monthly numbers are erratic but we have seen rises of the order of 1% since then. In terms of detail then the leader of the pack is below.

Among the ex-factory prices of industrial producers, the prices of means of production rose by 9.1% , an increase of 3.3 percentage points from the previous month , affecting the overall increase in the ex-factory prices of industrial producers by about 6.76 percentage points.

Breaking that down further you will not be surprised to read this.

Among them, the price of mining and quarrying industry increased by 24.9% , the price of raw material industry increased by 15.2% , and the price of processing industry increased by 5.4% .

I note that the subsistence section only has food prices rising by 1.8% which is very different to the message from the United Nations.


In terms of the monthly change it fell from 2% to 1.2% but continues the sequence of stronger numbers and if this week is any guide May will bring more of this.

Among the purchasing prices of industrial producers, the price of ferrous metal materials increased by 3.0% , the price of chemical raw materials increased by 2.6% , the price of non-ferrous metal materials and wires increased by 2.5% ,

On a monthly basis the food measure completely diverged from what the UN is telling us.

Among them, the price of food fell by 0.3% ,


The situation regarding inflation expectations has swung several times in 2021. This is rather different to the pattern from producer and commodity prices which has been on the lines sung about by Jackie Wilson.

Higher (lifting me)
Higher and higher (higher)

Only yesterday the New York Fed reported that people are noticing this.

Median year-ahead inflation expectations increased to 3.4% in April from 3.2% in March, while remaining unchanged at 3.1% at the three-year horizon. The one-year ahead measure is now at its highest level since September 2013.

Perhaps that is why the European Central Bank has just issued a working paper on inflation expectations.

A novelty of the study is its use of data from Google
Analytics on ECB website traffic as proxy for visitors’ attention to its communication…………Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation

I think that can be called navel gazing.

What we do not yet know is how persistent all this will be. But we do know with central banks determined to look the other way that if it lasts they will be at best too late.

“That will cause inflation to pop in the next several months, probably through the end of the year, even achieving levels above 2%, but that’s going to be transitory in my judgment,” Daly said. ( Yahoo Finance reporting on the head of the San Francisco Fed)

Charles Evans of the Chicago Fed went further according to CNBC.

In addition to the weak jobs number, inflation remains below the Fed’s 2% average target. Evans said it likely will take months to hit that goal, adding that he would be comfortable if inflation ran a little hot for a while.

“To average 2% you’ve got to be above 2% for some period of time,” he said. “So inflation rates of 2.5% don’t bother me as long as it’s consistent with averaging 2% over some period of time.”


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