Commodity price surges add to inflation fears

With investor anticipation continuing to build ahead of today’s Consumer Price Index (CPI) from the US, earlier this week, financial markets were faced by yet another round of commodity price increases.

Notably, this spike in commodity prices was broad-based across the commodity sphere, with noticeable price gains among energy and metals in particular. For instance, oil prices rose towards $84 a barrel on Tuesday, within sight of a three-year high, supported by a rebound in global demand, initially due to the pandemic, but now conditioned more by energy shortages in big economies such as China, thus now more skewed towards a supply issue.

With Brent crude oil price surging by over 60 per cent during 2021, it reached $84.60 on Monday, signifying the highest price gains since October 2018. In addition to Organization of the Petroleum Exporting Countries (OPEC) supply restraints, this rally has been supported by record European gas prices, which have encouraged a switch to oil for power generation.

As the global energy crisis worsened, gas prices skyrocketed recently, with these remaining four times higher in Europe on a year-to-date (YTD) basis. But why are gas prices so high? There’s been a worldwide squeeze lately on gas and energy supplies. More specifically, cold weather conditions in Europe last winter excreted increased pressures on supplies and, inevitably, stored gas levels are much lower in comparison to previous years. There has also been increased demand from Asia, notably China, for liquified natural gas. This, in addition to the aforementioned low storage levels, have significantly pushed wholesale gas prices upwards across the world.

Meanwhile, the price of coal which is used in China’s power plants has also surged to a new record high as the country’s key mining regions were hit by flooding. Shanxi Province, which produced around a third of China's coal supplies this year, was forced to temporarily shut down several mines due to flooding, although some sites are now gradually resuming operations. Inevitably, these floods further complicated China's efforts to increase fuel supplies to ease its ongoing deepening energy crisis.

Moving to metals, aluminium prices trading on the London Metal Exchange rose to their highest level since the global financial crisis during 2021, whilst Iron Ore futures in Singapore jumped +7.01 per cent on Monday, and copper was also up +2.13 per cent.

While higher energy prices should positively impact energy producers, there are a number of inflationary risks for many companies across the globe, such as airlines and other industrials, with these concerns ultimately leading towards a possible decline in consumer spending, as producers will technically try and shift the increase in input costs.

Inevitably, investors are at present weighing the impact of sharply higher energy costs on businesses and consumers after a recent surge in oil and natural gas prices. With the US earnings season kicking off later on this week, investors will want to gauge the impact of inflation on companies' bottom line, predominantly earnings.

Interestingly, in the run-up to the upcoming earnings season, a number of companies have already revised downwards their outlook expectations. For instance, Nike Inc recently lowered its 2022 sales projections, further stating that a supply-chain crunch and soaring freight costs might possibly result into delays during the holiday shopping season.

In view of the implications brought about by the pandemic, many companies adopted a number of cost mitigation procedures in recent months, enabling them to keep profit margins at record levels. However, following the sharp increase in commodity prices, investors are now anxious to see how long companies can maintain such respectable margins.

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.