Raw material prices about to rocket up?

The weeks before the Chinese New Year holidays are always demanding, but this year beats them all:

• Big increases in raw material prices
• Soaring CNY/USD exchange rate
• Record beating container prices

These three factors affect the price directly. But not only that, as Chinese factories will close for 3 weeks for vacations, if we ask for prices now they will quote even higher, to cover the possible increases of these weeks. Thus, it is probably one of the worst times in recent years to be able to price.

Or is it?

These days I have been talking to many manufacturers of raw materials, trying to find a decent price. Current situation is interesting…..

In normal conditions I would recommend without hesitation to wait to place orders after holidays. But absolutely all the material suppliers I have talked to these days tell me that the materials will rise strongly after the holidays. And in recent weeks there have been articles in Economist, Moneyweek, Bloomberg, Reuters … about whether we are witnessing the beginning of a new sustained escalation of commodities, as happened in 2006. Most articles even talk of a new commodities supercycle.

It is true that the prices seem expensive, but when we look in perspective, we see that there is still a lot of room for potential increases. Here we see the prices of the four most representative metals (aluminum, copper, lead and nickel) from the year 2000 until today:

As we can see, prices are high compared to the last two years, but they are low compared to 2006 and some later years. It is argued that the 2006 rise was basically due to:

• Low interest rates (now they are even lower)
• Stock market at maximum and large investors looked for alternatives (current stock market valuations are through the roof today…)
• A lot of money available (now more, and Biden will probably launch a new aid package in the next weeks…)

We must add that, even though the perception of China has changed since Obama, Biden is not Trump. He cannot make concessions to China, but he will be less harsh than Trump (he has a lot of people from the Obama team on his team, good intentions and Chinese government did what they wanted). So the trade war issue is likely to get better.

And situation is even more worrying for Nickel (stainless steel reference material), as it is one of the main components of batteries. So when wall street turns its eyes from stocks to commodities, they will find a lot of articles sating that electrical car revolution is coming, batteries, nickel….. easy target.

So if we try to look in perspective, a strong rise in raw materials does not seem so crazy, and perhaps in 6 months the current prices seem like a bargain.

In a normal situation, we would buy raw materials now, and stock. But with Covid big elephant in the room, a lot can still go wrong… As we are seeing, vaccines will take a long time to make a difference, and in February, after Chinese New year holidays, we could be worse than we are today.

So the situation for the next monthes is not clear. Luckily, Mother Nature will probably come to the rescue in spring, as it did last year. So in May / June when the Covid curves goes down and optimism arrives in the Northern Hemisphere, with Europe, USA and China (engines of the world economy) a new rise in stocks and probably commodities is possible.

We will see what happens in the coming months … but current situation is too similar to that of 2006 (with Covid adding uncertainty)

Marc Torras