Filenews 19 September 2021 - by Xenia Tyrki
What does the skyrocketing container prices have to do with, the reduction in the quantities of gas that Russia sends to Europe, the coup d'état in Guinea and climate change? Strange as it may seem, however, all this together contributes, along with other factors, to the huge increase in raw materials that we have seen recorded in recent months and which in turn cause great price rises in the cost of living. These appreciations are creating the perfect storm for national economies, at the same time as they are trying to get out of the suffocating pressures created by the pandemic.
The restrictive measures and lockdowns imposed to stop the spread of Covid-19 have caused an unprecedented slowdown in the economy. Almost everything stopped working, as all the burden was thrown at the protection of public health. Prices plummeted as demand was minimal. Today the situation is completely different. Over the last 12 months, almost all commodity indices have been moving at multi-year highs, as a result of over-fuelled demand that exceeds supply, reduced production, supply chain problems, skyrocketing freight rates, inflationary pressures and climate change.
Starting from the first outbreak of the pandemic, the congestion problems that occurred in the supply chains, caused their collapse, which continues to this day. And this concerns all departments from production farms, plantations and factories to processing centres and store shelves.
The rise in food prices is impressive. Last week, the Bloomberg Agriculture Spot index, which tracks commodity commodities in commodity markets, rose to a nearly 9-year high after a rally in grain prices. With global food prices at their highest levels since mid-2014, this new rise in grain prices has caused concern as it is expected to affect prices on other products, from bread and pizza dough to meat and soft drinks.
But it's not just the grain that has gone up. Goods such as sugar, coffee, milk and by extension dairy products, fruits and vegetables have become more expensive, forcing households to put their hands deeper into their pockets. Already the largest companies operating in the food sector have begun to pass on these increases in part to consumers.
Part of the price rise is rather temporary in nature, as it is triggered by supply chain problems due to the pandemic, but there are also structural factors such as climate change and the relentless demand for imports from China, factors that are here to stay. The price of milk, for example, soared mainly due to increased demand from China. Coffee prices are at their highest in the last four years, due, among other things, to the drought in Brazil, which is the world's largest producer. The drought in Latin America has also had a major impact on increases in prices of maize and soya beans. On the other hand, in the summer of 2018, China was hit by an outbreak of African swine fever, wiped out a large part of the pig herd in the country, which accounts for more than 50% of the world's pig population. This has led to the increase in prices of pork, as well as meat production. The fact that world trade has increased a lot in volume, while stocks are particularly low, also played an important role, making markets much more vulnerable to cyclical declines in production (e.g. due to weather conditions).
Most predictions of where things will go are not optimistic. As calculated by research by Morgan Stanley that looks at the future of food, by 2050 the world's population will exceed 10 billion, so to meet the extra demand the global food supply must increase by 50%. At the same time, however, at global level at least 44% of wheat, 43% of rice, 32% of maize and 17% of soya production are at risk due to climate change, at the same time as the agricultural sector is expected to emit 16% more carbon dioxide, at a time when the targets set speak of climate neutrality.
It is clear that the food production model must change dramatically and with it, our eating habits must be diversified. Emphasis must be placed on investment in the area of seed development, the development of technology, the further growth of the aquaculture sector, but also the development of the alternative crops sector, as well as an end to reckless consumption and waste, so that the planet does not go hungry in the future.
From record to record industrial metals
The rapid price increases are found not only in food but also in base metals such as copper, iron, aluminium or cobalt, which are at a high of years. According to the International Monetary Fund's record, metal prices have risen by 72% from pre-pandemic levels, reaching a 9-year high last May. Copper soared to a historic record as optimism about a global recovery from the pandemic pushes up commodity markets. Its price has risen by more than 30% this year and has more than doubled since March 2020.
Moreover, the rise of aluminium in the markets has an impact on inflation and consumer pockets, as in addition to its industrial use as well as in construction, it is the raw material of many everyday products, from food packaging and beer and soft drink cans, to cars and smartphones. Its price has already jumped 26% to around $2,500 per ton, one of the best performers on the London Metal Exchange. In fact, Goldman Sachs predicts that it is coming up more, estimating that it will reach a record price at the end of next year, surpassing $3,000.
On the other hand, the global timber market looks like a roller-over, since in recent months its price has risen sharply. According to CapitalPanda's analysis, the huge increase in prices is due to the sharp increase in demand and at the same time the inability on the supply side to respond adequately.
There is no room for optimism here either. Demand will not fall and, moreover, the transition to renewable energy sources will cause an increase in demand for base metals in the coming years. In a recent report, analysts at consulting firm Wood Mackenzie said that as governments meet their commitments to limit global warming, increasing dependence on solar energy will increase demand for various non-ferrous metals, notably aluminium, copper and zinc. Which means even higher prices.
Headache for transport the launch of fares
One of the main causes of the price rises that we see recorded in too many products is the skyrocketing freight rates. Prices have skyrocketed, bringing costs to consumers, but also recording huge delays in product deliveries. Indicatively, the price to transport a container from Asia to the major commercial ports of Europe creates vertigo, as it has exceeded $14,000, recording an increase since the beginning of the year reaching 600%. The transfer of a container from Shanghai to Los Angeles has been $12,000, up from $3,800 two years ago.
During the pandemic, transport actually froze. When economic activity began again, major problems arose. Especially in the ports of southern China, there is a large traffic jam of container ships, which appears to be worse than the blockade of the Suez Canal last March. According to Bloomberg, dozens of container ships from around the world are currently anchored in major ports in the cities of Yadian, Seku and Nasa. The fact that so many containers remain tied up there longer than they would like created a problem and adequacy of the containers.
At the same time in the US, Europe and Australia the ports have been on their knees due to a lack of manpower and infrastructure. As a result, the return of empty containers to China and Asia in general is long overdue, with the result that these shortages exist. As a result, the shortage of containers leads to controversy about which companies will procure them, pushing fares to record and some exporters to raise prices or simply cancel shipments altogether.
High energy prices scare the economy and consumers
Global demand for energy has been growing continuously since the pandemic. During the first lockdown we reached the point of seeing for the first time a negative price of oil recorded. It was a development caused by the unprecedented decline in demand. Today, the situation is completely different. The prices of black gold and natural gas are rising day by day and have reached the heights. Oil prices above $70 a barrel are hurting consumers, governments and businesses as they are not facing the rise in prices only for oil, but for a multitude of goods and raw materials.
The forecasts are not optimistic, at least for consumers, because as far as the oil-producing countries are concerned, they are attracted by high prices. All indications suggest that, unless there is a big contingency, prices will not only not fall, but are likely to rise. Despite the review for the fourth quarter, OPEC estimates that oil demand for all of 2021 will be up 5.96 million barrels per day or 6.6%. "As vaccinations increase the COVID-19 pandemic will become more manageable and economic activity and mobility will return to pre-pandemic levels," OPEC estimates.
Last year the oil-producing countries limited their production by about 10 million barrels a day in order to support prices. Since then, however, they have been gradually increasing their production, adapting to the evolution of demand. They are currently pumping around 5.8 million barrels of oil into the market less than before the pandemic.
And while demand will increase in the coming period, so will supply. The oil-producing countries and especially Saudi Arabia will do as the last OPEC session showed that it can to keep prices at a high level. "There is no reason for an additional increase in the production of available oil barrels," was the response given by Saudi officials. This means that we will hardly have any surprises at the next OPEC meeting on 4 October and that most members are converging in favour of the scenario of total market price control.
Rising oil prices have turned attention to how rising costs for energy, heating and traffic are jeopardising the recovery of the global economy. Gas and electricity prices are unlikely to scale down dramatically in the coming months, as demand will rise due to winter heating needs in the northern hemisphere. Moreover, rising prices are fuelling inflation and threatening to halt the economic recovery, as high-energy industries, from the fertiliser industry to the steel industry, may have to reduce their production.
If the upward trend continues, in view of the coming winter, the situation will be difficult. The black gold price rally is scaring economies and consumers and undermining the effort to leave behind the suffering caused by Covid-19. This is because electricity and energy spending, generally of the average Western household, accounts for a significant part of income, usually the largest after housing expenditure. The picture is the same everywhere. Consumers in Spain, France, the US, Brazil and every corner of the globe have faced large increases in electricity and consumer goods. It doesn't matter if they gaze at the Eiffel Tower, the Acropolis or the skyscrapers of New York, the situation is the same everywhere.
