Volatility time for commodities | The star


THE post-pandemic recovery promises to be solid. Many countries show strong quarterly growth, especially developed countries. In line with the strong growth, the global economy is expected to remain in the recovery phase for the remainder of the year. The outlook for world gross domestic product for 2021 is projected at 6.0%, while world trade is expected to grow by 16%.

Vaccination programs around the world have reduced the severity of Covid-19 infections, allowing governments to ease restrictions and let the economy breathe a little easier.

However, improving economic prospects and signs of increasing pressure on prices have raised concerns in the markets of tightening monetary policies. In addition, several officials at the US Federal Reserve (Fed) have said they are prepared to consider reducing asset purchases in the coming months.

Against the backdrop of improving economic prospects and strong pressure on prices, market participants began to assess the possibility of central banks tightening their ultra-accommodative monetary policies. The Fed has said it is ready to cut its bond buying program by US $ 120 billion (RM 502 billion), possibly as soon as its next meeting in November. This could prompt other central banks to follow the reduction movement by this year.

However, market concerns and uncertainties persisted despite mixed economic data and accommodating comments from major central banks. Weekly jobless claims in the United States rebounded after falling to March 2020 low: indicating that the labor market has not stabilized as the third consecutive decline in pending home sales added to disappointing housing data.

On the commodity front, China voiced concerns about volatility and soaring commodity prices and its willingness to contain prices.

According to China’s 14th Five-Year Plan (2021-2025), Beijing will tighten price controls on iron ore, copper, corn and other commodities to curb abnormal price fluctuations.

To further regulate crude oil imports, China has asked its five state-owned companies to report their use of imported oil in recent years, given that they are the world’s largest oil importers. China is committed to achieving carbon neutrality by 2060 by reducing its dependence on energy produced from coal.

Looking at the movements in commodity prices over the past two years, the post-pandemic profit accumulation may have started slowly in 2020, which suddenly turned into a ‘gold mine’. Due to the recovery in demand globally, the commodity tightening has gradually increased and increased with supply problems, causing a shortage and further pushing up prices. The S&P GSCI, a commodity index, which consists of 24 exchange-traded futures contracts, climbed 36% at the end of September, reflecting the current surge in commodity prices.

Brent, for example, hit US $ 80 (RM334) a barrel on September 28 before settling at US $ 79 (RM330) at the end of the day. Additionally, West Texas Intermediate (WTI) closed at around US $ 75 (RM313) a barrel. Year-to-date, Brent has jumped 53.5% while WTI has jumped 55.5% before closing at its highest level in three years. In addition, the upward trend in crude and natural gas prices may have been prolonged by the effects of Hurricane Ida, which hit energy production in the Gulf of Mexico, dampening supply.

Another commodity, ethanol, has seen an increase of 47.6% this year. Falling demand last year put pressure on the ethanol blending process, which helped set a low base for a price rally.

Meanwhile, natural gas peaked more than seven years at US $ 5.84 (RM 24.41). The other commodity of note is lean pork, where high prices were due to strong domestic and export demand, although demand is expected to slow for the remainder of 2021 as shipments to China slowed. Since the start of the year, lean pork prices have climbed 120%.

As for lumber, at the end of September, prices were down 10.4% from the start of the year and after hitting a record US $ 1,670 (RM 6,980) per 1,000 feet. board in May. Currently, it is trading below $ 900 (RM 3,762). Supply chain logistics issues and shortages of building materials had led to a drop in lumber consumption.

Although the global economy is starting to recover and the adverse effects of the pandemic are gradually abating, a sudden increase in demand, coupled with supply problems, will continue to generate uncertainty. Thus, in the short and medium term, commodity prices will remain volatile.

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