Posted on February, 10, 2022 at 07:02 am
Prices for crude oil, metals, grains and other internationally traded commodities are climbing at the fastest rate since 1995, raising fears of political instability in countries highly dependent on imports as seen in Turkey.
Commodity markets are being squeezed from two directions. On one hand, demand is booming as economies recover from the coronavirus pandemic. On the other hand, sufficient supplies to meet this demand are being hampered by geopolitical factors.
The Refinitiv CoreCommodity CRB Index, a composite measure of commodity prices, was up 46% on the year at the end of January. That was the largest one-year increase since 1995, when comparable data became available.
A broad swathe of commodity prices are on the rise, especially crude oil and other fuels. Among 22 major commodities, nine rose more than 50%, including prices for familiar commodities, such as coffee, which climbed 91%, and cotton, up 58%. Aluminum rose 53%.
While demand for crude oil has soared, investment in supply has been held back by the move to decarbonize economies. Natural gas prices have been pushed up by growing tensions between Russia and Ukraine. Meanwhile, disruptions to supply chains and labor shortages have exacerbated pressure on the balance between supply and demand.
The commodity squeeze has triggered a series of chain reactions in the market. Aluminum smelters, which use huge amounts of electricity, have been forced to cut back on output as production costs rise, creating shortages of the metal. Soaring natural gas prices have driven up the price of ammonia, a major component of fertilizer, which in turn is pushing up grain prices.
High commodity prices are weighing on the global economic recovery. If energy prices stay at current levels, the International Monetary Fund estimates global economic growth will be shaved by 0.5 percentage point.
Resource-poor countries are especially challenged by the surge. The cost of Japan's raw material imports in the current fiscal year ending in March is estimated to increase by about 10 trillion yen ($86.7 billion), according to Mizuho Research & Technologies.
The U.S. and other countries are rushing to tighten monetary policy in response to inflation, but "it is difficult to rein in inflation triggered by supply shocks with monetary policy," said Hiroshi Ugai, chief economist at JPMorgan Securities Japan.
The impact of the commodity surge on political stability is becoming a growing concern. Turkey, which imports 70% of its energy, saw its consumer price index rise 49% on the year in January. Since the beginning of this month, the country has experienced a growing wave of worker demonstrations demanding higher pay and people protesting against soaring energy prices.
Of the world's 143 nations and self-governing regions, 47 relied on imports for more than half their energy needs in 2019, according to the International Energy Agency. Central Asia's Kazakhstan was roiled by violent demonstrations protesting higher liquefied petroleum gas prices at the beginning of this year.
The commodity surge is also making food more expensive. In Thailand, pork prices climbed around 50% in the three months through January. The price of pork, the most consumed meat in the nation, was pushed up by higher prices for soybean and corn, both used as animal feed.
Rising commodity prices have caused political instability before. The Arab Spring in 2011 is seen as being sparked by higher food prices.
Resource-rich Indonesia has imposed export curbs, first on coal and then on palm oil, used in a wide variety of food and consumer products. This "resource nationalism," in which a country corrals its resources in favor of its domestic economy, is becoming another source of upward pressure on international prices.
Source: Nikkie Asia