Global commodity prices have witnessed one of the best rallies in more than 50 years, a report by domestic brokerage house Motilal Oswal highlighted. Events in Russia and Ukraine are unleashing exceptional commodity price moves, which could have structural implications on long-term supply, noted MOSL.
The increase in commodity prices can be directly attributed to Russia’s invasion of Ukraine, as they are major exporters of some commodities.
As per the report, since March 2020, base metals prices except lead prices have on average rallied around 70 percent. Meanwhile, in the energy space crude has almost jumped by over 10 times after falling to negative and natural gas by over 2 times, it added. Among precious metals, gold and silver, too, have risen sharply giving returns between 25-50 percent.
Base metals have surged sharply in recent times with nickel as the biggest outperformer with over 100 percent rise in 2022 year-to-date (YTD), hitting an 11-year high. The underlying tone has been bullish, with massive demand coming from Steel manufacturing and EV battery makers noted MOSL.
"Nickel inventories in both London Metal Exchange (LME) and Shanghai warehouse are quite shallow supporting prices. Nickel, which is also used in the batteries that power electric vehicles recently hit an 11-year high as stockpiles have dwindled at the London Metal Exchange due to strong demand from automakers," the brokerage said.
It further stated that an intensification of sanctions on Moscow following its invasion of Ukraine could push prices higher. Russia is a large producer of nickel as well as copper and cobalt.
Among other metals, MOSL highlighted that Copper, used in wind turbines and power grids, hit a record high above $10,500 a tonne last year and has doubled since the depths of the pandemic. Cobalt, a common byproduct of copper mining, has climbed more than 40 percent over the past six months.
However, not everyone is convinced that metals are set for a new supercycle. The growth of renewable energy and electric vehicles will boost demand for metals but that could be offset by a contraction in demand from China, still the world’s biggest consumer of raw materials, the brokerage pointed out.
In the energy space, oil prices have surged around 30-40 percent in the last one month after Russia invaded Ukraine and supply constraints build up a sharp risk premium in prices.
In the middle of the rally, there were reports suggesting that there could be a global agreement to release crude reserves but failed talks further led to an upside move, stated MOSL.
It further noted that crude oil prices got further boost after US President Biden announced a ban on Russian oil and other energy imports in retaliation for the invasion of Ukraine. This means Russian oil will no longer be acceptable in U.S. ports.
As per MOSL, Gold is in a corrective mode, erasing off the war premium. Comex gold has support at the $1870- $1880 mark; while resistance is seen at $1990. On the domestic front, ₹50,000 could be strong support; whereas ₹53,100 could be a resistance level, stated the brokerage.
Inflation to play spoilsport?
US consumer price growth approached 8 percent last month ahead of a surge in energy prices following Russia’s invasion of Ukraine, raising pressure on the Federal Reserve to substantively tighten monetary policy.
The Fed also raised interest rate by a quarter-point today and is soon expected to move the federal funds rate closer to a level that neither aids nor constrains economic activity.
"Investors are also factoring in a hit from higher commodity costs as consumers and businesses face higher energy bills. Coupled with a tighter policy from the Fed, which is expected to raise borrowing costs for companies and individuals, the speed of the US economic recovery could slow. That means the Fed is walking a tightrope, given the central bank is reluctant to push the country into recession even as it attempts to bring down inflation," noted the report.
Impact on India
The country's current account deficit (CAD) is likely to widen to over 3 year high of $23.6 billion or 2.8 percent of GDP in the December quarter of FY22 due to higher commodity prices following the Russia-Ukraine conflict, India Ratings and Research (Ind-Ra) said in a report. It noted that although the Omicron-led COVID wave has subsided, the geopolitical risks to the global recovery have increased due to the Russia-Ukraine conflict. In Q3 FY21, the deficit was $2.2 billion (0.3 percent of GDP).
The direct effects of the Russia-Ukraine conflict have pushed commodity prices and freight and transportation costs higher; crude oil prices have been on a boil, it said.