As the 1st half of 2022 has already passed, we decided to look at how commodity prices have fared in this current environment.
Commodity prices have been on a roller coaster ride for the last couple of years. As the majority of the world was affected by the COVID-19 pandemic, leading to factory shutdowns, shipping delays, and subsequent increases in available transportation prices, this had an impact on costs across the board. With the supply chain systems set up in a way to achieve the highest efficiency with lower costs, the effects of the pandemic had huge ramifications, as delays in one part of the supply chain caused delays further down the line.
With this in mind, 2021 marked the year of vaccination and the lifting of restrictions on transportation, but this only created stronger demand on the already fragile supply chain system. This led to increasing demand for shipping and thus higher costs of transportation, which had a direct impact on all of the companies’ costs. Combined with the fact that China, one of the world’s largest exporters of many commodities also maintained strict zero COVID-19 policies, this meant that the disruptions were even stronger. These are some of the major factors which had an influence on commodity prices in 2021, as we can see in the graph below.
Price change of select commodities in 2021 (%)
Coffee prices experienced the largest increase during the year, with a growth of 63%. Besides the aforementioned supply disruptions, 2021 also experienced long periods of dry weather in Brazil, the world’s largest coffee producer, which had a negative impact on the available coffee quantities. Besides this, the re-opening of the major economies across the world also had a considerable impact on oil and gas prices, as they increased by 50% and 47%, respectively. It should be noted that this increase was a return to somewhat “normal”, as these prices reduced significantly in 2020 due to the pandemic. Sugar and wheat also experienced increases of 38% and 24%, respectively. This had an impact on the food production companies across the world, as well as in the region, with Atlantic Grupa and Podravka increasing their pricing at the end of 2021/Q1 2022. Finally, Cocoa increased by only 4%, while gold lost -4% of its value, which could be attributed to the fact that in 2021 equity markets across the world experienced major rallies after 2020’s dismal performance, siphoning away investments from this asset class.
This would mean that already in 2021, the majority of the impact was already felt by the companies in form of increased costs, leading them to increase prices, which of course, led to inflation in Q4 2021 and 2022. Even though at the time this inflation was supposed to be “transitory” (according to the leading central bankers), this has not proven to be the case. Of course, inflation is not only a byproduct of the aforementioned increases in prices but has also been influenced by the huge amount of “easy money” which was used as a stimulus across the world during the pandemic, as well as problems like labour shortages in the EU and the US which also had their influence.
On top of all that, the Russian invasion of Ukraine had a serious impact on prices across the world, as at the time they were the largest exporter of commodities like oil and gas to Europe. So having all of this in mind, how have the prices changed since the beginning of the year?
Price change of select commodities (YTD 2022, %)
If we were to look at the same group of commodities, we can see that the majority of the commodities either lost some of their value, which would mean that supply did catch up with demand and the supply chain disruptions were largely resolved. However, the two largest export commodities for Russia, oil and gas, experienced significant increases of 35% and 52%, respectively. Considering the EU has implemented a gradual ban on Russian oil among its sanction package, in response, Russia has also been gradually reducing the quantities of gas sold to the continent, something that is a lot harder to replace for the EU. As such, the increase in natural gas prices has been more striking. The last commodity we often hear of is wheat, of which Ukraine is one of the largest producers in the world. On a YTD basis, wheat recorded a growth of 6%. As Ukraine’s situation regarding the export of this commodity is uncertain due to the war, there is a strong probability that wheat prices could increase over the coming period. This is especially possible if other regions of the world have lower harvest due to, for example, dry weather or higher production costs.