Commodity prices, which serve as a leading indicator of global inflation, are surging across the board from the metals, minerals and energy sectors to agricultural markets.
In the first two quarters of 2021, Bloomberg’s general commodity price index rallied more than 20%, largely driven by the rise in energy prices (44.5%), along with increases in agricultural goods (20.5%) and industrial metals (17.6%).
US Federal Reserve Chair Jerome Powell recently acknowledged that “inflation pressure is likely to last longer than previously expected”.
However, the US Fed, Bank of England and major central banks around the world are holding interest rates steady, defying investors’ expectations about rate hikes.
Fuelled by expectations that the era of cheap money will hang around for longer, commodity inflation is expected to keep ticking up.
Oil price: will it hit US$100?
Oil prices have more than doubled over the past year as the global economy rebounded from disruption caused by the COVID-19 pandemic.
It is likely to stay at higher levels and may hit US$90 per barrel by end of this year, according to Goldman Sachs (NYSE:GS).
The price of Brent crude is expected to surge further by early next year and reach as high as US$110 per barrel.
Output gap
Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) and its allies are not ready for quick production increases after severely cutting output in the early stages of the pandemic.
A shortage of natural gas in Europe and Asia has also increased the demand for oil for power generation.
Goldman Sachs (NYSE:GS) estimates that switching from gas to oil will contribute at least 1 million barrels per day to oil demand.
After 18 months of COVID related weakness in oil demand, growth in gas-to-oil switching will boost crude oil demand used to generate power this coming winter, particularly in Europe and Asia.
“Acute shortage of natural gas”
Rising natural gas and coal prices are pressuring power-generation companies and manufacturers to switch to using oil.
A report by the International Energy Agency (IEA) noted that “An acute shortage of natural gas and coal supplies stemming from the gathering global economic recovery has sparked a precipitous run-up in prices for energy supplies and is triggering a massive switch to oil products and direct crude use for power generation.”
Demand dynamics
With travel bans being lifted across several countries like the US, Australia, Singapore, Thailand and India among others, demand for jet fuel and gasoline will rise this winter.
Asia-Pacific countries are also gradually easing border restrictions resulting in a surge in flight bookings and on-road travel.
With supply constrained across coal, gas, power, zinc as well as oil, and OPEC+ unwilling to increase supply, oil prices are still too low for any meaningful impact on demand.
According to Goldman Sachs, oil prices will have to rise to US$110/$125/$150 for fuel expenditures as a share of income to reach the same levels as during 2012, 1975-85 and its 2008 peak respectively for any meaningful demand destruction to occur.
Metal prices
Metals production is a critical segment of the global economy which has felt the impact of soaring gas prices, which are pushing up energy bills for manufacturers.
Natural-gas stockpiles have decreased while concerns about a cold winter in the Northern Hemisphere are prompting stiff competition between buyers in Europe, Asia and North America to secure supplies.
Last month, zinc for delivery in three months on the London Metal Exchange (LME) jumped to its highest level in more than three years after Nyrstar, a major producer, said it was reducing output by half.
Nyrstar said that rising energy bills and the added cost of the European Union’s taxes on carbon emissions meant it was no longer feasible to operate its three plants in the Netherlands, Belgium and France at full capacity.
Aluminium prices on the LME jumped to US$3,117 a tonne in October, their highest level since 2008.
China has been cutting back on aluminium production, a heavily energy-intensive process, as it works towards reducing carbon emissions and easing the strain on its power grid.
Gold
Two of the biggest names in Canadian mining -- former chiefs of Goldcorp Inc. (TSX:G) David Garofalo and Rob McEwen, have predicted investors will catch on soon that global inflationary pressures are less transitory than central bankers insist.
Gold’s inflation-protection appeal could send prices to US$3,000 an ounce, from about US$1,800 now, according to Garofalo, who now heads Gold Royalty Corp (NYSE-A:GROY).
The founder and former chairman of Goldcorp, McEwen, said: “The global monetary and debt expansion to cope with the pandemic, as well as secondary drivers associated with supply disruptions, will have people turning back to traditional methods of protecting wealth.”
He added: “It’s not just the dollar, all currencies are buying less than what they were buying a year ago.
“So I look at that as an unprecedented development at least in our lives that is going to affect the value of fiat currencies around the world.”
Gold’s universality and 4,000-year-old history could mean it is better positioned than crypto-currencies as a hedge against an inflationary environment.
Mining boom in Australia
Australia is set to benefit from the surge in commodity prices as the world’s largest producer of lithium and a global top five producer of gold, iron ore, lead, zinc and nickel.
Gold continues to be the most explored commodity in Australia with expenditure in 2020-21 amounting to A$1.53 billion, an increase of 32% compared to 2019-20.
Copper and iron ore remain the next most sought-after commodities.
Australia’s exploration for critical minerals such as lithium and rare earth elements has also been increasing the last four years and accounted for A$222 million of mineral exploration expenditure in the 2020-21 period, according to an Australian Mining report.