Image Source: Pixabay

Whether it is war or accidents at major mines or weather or trade disputes or political upheaval or power shortages, every large rise in the price of any commodity will have its own unique drivers. However, there are periods when many commodities experience large price rises. Even though each of these price rises will have its own fundamental reasons and will seem special when viewed in isolation, a broader view will indicate that they are related.

One reason for the existence of periods during which many commodities experience large price rises, each for a seemingly unique reason, is that long periods of under-investment in commodity production due to low prices make the markets far more vulnerable to supply disruptions. Consequently, an issue (for example, a drought, a mine collapse, a civil war) in one part of the world that during some periods would be taken in stride and result in a relatively small rise in the international price, can lead to a globally important shortage and a huge price rise.

A second reason is the macroeconomic/monetary backdrop and a feedback loop involving commodities and conflict. Monetary inflation eventually leads to economic hardship by raising the cost of living and getting in the way of economic progress. As the inflation problem becomes more obvious, commodities are hoarded both for insurance and speculation purposes, putting additional upward pressure on prices throughout the economy and exacerbating the hardship. This leads to conflict within countries and between countries. If the conflict involves countries that are important in the global supply chain for any commodity, which it often does, then the price of that commodity will rise in dramatic fashion.

The current situation in the tin market is a relevant example. Over the past year there have been supply disruptions due to decisions to curtail production in Myanmar, where 10%-15% of the world’s tin supply originates, and conflict between government and rebel forces in the Democratic Republic of the Congo (DRC), where about 6% of the world’s tin supply originates. These supply issues have led to the price surge illustrated below. While a short-term price peak probably will be set soon, this market will remain acutely vulnerable to supply disruptions due to the combination of additional demand from the building of datacentres and long-term under-investment in mining.
 

There have been several dramatic price rises in commodity markets over the past six months and we expect to see many more over the next two years. Each will have its own unique drivers, but almost all of them will be related to the underlying influences outlined above.

More By This Author: