What is behind the commodity price boom of 2021?

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by Shaun Richards

A feature of 2021 so far has been the rise in commodity prices that has been seen. This was reflected on Friday by this from MarketWatch.

Copper futures scored a third-straight weekly gain on Friday to notch their highest finish in more than nine years, with the Biden administration’s plans to improve U.S. infrastructure and growth in renewable energy feeding expectations of higher demand for the industrial metal.

The push for green energy, on the second day of President Joe Biden’s summit on climate Friday, has provided support for copper, which “plays a big roll” in renewable energy given its “conductivity qualities,” said John Caruso, senior asset manager at RJO Futures.

So Dr. Copper was on the march and it has been repeated so far today with the July futures contract up 1.5% at US $4.40. That in itself provides food for thought as I recall the copper price falling below US $3 in response to the impact of the Covid-19 pandemic. In fact looking at the chart it fell into the US $2.30s.

One place which is a driver of such trends is of course China as we note this from earlier.

(Bloomberg) — China’s economy continued to boom in April from the record growth in the first quarter, with strong exports and rising business confidence supporting the recovery.

That’s the outlook of an aggregate index combining eight early indicators tracked by Bloomberg, which remained unchanged from March in strong expansionary territory.

I have to say I am a less convinced than them about this as whilst annual growth in China was strong this was a pandemic effect and as we note back on the 12th of this month the actual growth within the quarter showed a slowing. Also China is supposed to be reining back growth in the housing market.

Of course whenever there is a sniff of money we see the Vampire Squid muscling in on the action.

Copper continued its rally last week on a bullish report from Goldman Sachs, which sees the red metal climbing to an all-time high of $15,000 per metric ton by 2025 on an unprecedented supply-demand imbalance brought on by renewable energy. According to the analyst group, current copper prices of around $9,000 “are too low to prevent a near-term risk of inventory depletion.” Only a price point of around $15,000 is enough to incentivize the development of new copper projects. ( etftrends.com)

One never knows whether its research is genuine or whether it is looking for some muppets to sell to.

We can widen the perspective to metals overall via the World Bank Commodity Markets Outlook.

Metal prices are expected to give back some of this year’s gains as stimulus-driven growth fades in 2022. A faster-than expected withdrawal of stimulus by some major emerging market economies could pose a downside risk to prices; however, a major infrastructure program in the United States could support prices for metals, including aluminum, copper, and iron ore. An intensification of the global energy transition to decarbonization could further strengthen demand for metals.

If we look through their factors we see that US President Biden is looking to push through his infrastructure programme and is there anything more fashionable than decarbonization?

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The criminal community seem to have caught on if this from the BBC is any guide.

Catalytic converter thefts have surged in lockdown amid a spike in the value of precious metals, research shows.

The RAC and insurer Ageas found the crime now accounts for three-in-10 thefts from private vehicles in the UK, up from two-in-10 before the pandemic.

Catalytic converters contain metals such as platinum and rhodium which fetch high prices on the black market.

When values of these metals go up it usually leads to a spate of thefts, the RAC and Ageas said.

They pointed out that prices of rhodium hit record highs earlier this year, having climbed more than 200% since March 2020.

If we look at Platinum we see that the futures price of US $1242 is up 59% over the past year confirming that the criminal class are usually well informed as to what to steal. Regular readers will recall past commodity price booms involving the theft of copper pipes and lead roofing.

Food Prices

Returning to the World Bank we are told this.

Agricultural prices have risen substantially this year, particularly for food commodities, driven by supply shortfalls in South America and strong demand from China.

If we look at their numbers we see this.

The World Bank’s Agricultural Price Index increased
more than 9 percent in 2021Q1 (q/q), building on
the previous quarter’s momentum. Prices have risen
20 percent over the past year and are close to a seven year high.

Grain prices led the way with this in the van.

Maize prices increased sharply for six consecutive
months to reach an average of $245 per metric
tons (mt) in February, its highest level since July
2013, and remained steady in March

If we switch to meat prices the first that comes to mind due to the Swine Fever issue in China is pork. Looking at the Lean Hogs future we see that it has doubled over the past year. It is an ill wind that blows nobody any good and ThePigSite.com is understandably enthusiastic.

Last year at this time we were at the start of the Covid crisis in our industry. A year ago Lean Hogs were 39₵ lb. Last week they were $1.01 lb. on a 215 lb. carcass an increase of $133 per head. We certainly noticed our cheques are bigger, as we expect you have to.

There is an interesting view on China as well.

China hog prices pushed down by rapid liquidation (sell before they die) putting more pork on market for now. $275 U.S. small pigs in China are a real indication of where their pork supply will be real soon. China will continue to import more pork.

Although we need a vested interest warning here.

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Energy

Measuring the change here is more difficult because around a year ago oil prices dipped into negative territory for a while. A 204% rise for Brent Crude Oil over the past year is influenced by that. If we look back over the past 5 years oil prices do look above average.

Next comes the issue of how energy prices are raised these days by the various green projects which are invariably badged as cheaper but keep working out as more expensive. Offshore wind is like that as I note people pointing out that the promises that the new  projects will be cheaper have turned out to be only promises with contracts for around treble the present UK electricity price.

Comment

We see that there has been a commodities price push. This has begun to filter into the producer price numbers in the UK, US and China. However care is needed because so much of those numbers is energy as industrial production needs little or no food. We did get a hint of a build up of food price inflation in the US CPI numbers.

The food at home index increased 3.3 percent over the past 12 months. All six major grocery store food group indexes increased over the period, with increases ranging from 1.6 percent (dairy and related products) to 5.4 percent (meats, poultry, fish, and eggs). The index for food away from home rose 3.7 percent over the last year. The index for limited service meals rose 6.5 percent, the largest 12-month increase in the history of the index, which began in 1997.

If we switch away from inflation the commodity price rises are good for producers like Australia and Canada but bad for heavy importers like Japan. Also there will be good news for emerging economies around the world who rely on commodity prices. This has been reflected ( sort of ) by some research published by VoxEU today.

Vulnerability to commodity prices is a pressing issue for many developing countries. In this respect, the sharp decline in commodity prices and their increased volatility after 2014 have already translated into worsening bank balance sheets and episodes of distress. In this environment, the Covid-19 pandemic crisis could put further pressure on the financial systems of developing countries through worsening fiscal conditions and heightened uncertainty and volatility in financial and commodity markets.

I say sort of because their research looks as though it has not allowed for the U-Turn in commodity prices. The new phase should be good news if it lasts……

Oh and last time around the rises in commodity prices were driven by bank trading desks and hedge funds. Are we being played again? I often wonder this when the Vampire Squid is on the scene.

Might trick me once
Waoaoo
I won’t let you trick me twice
Might trick me once
Woah oh
I won’t let you trick me twice, no ( Kelis)

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