Inventories of some of the world economy’s key commodities are at historically low levels as surging demand and tight supply threaten to fuel inflationary pressures around the world.
From industrial metals to energy to agriculture, the rush for commodities and staples has been reflected in the futures markets, where a large number of commodities have flipped into backwardation — a price structure that signals scarcity.
The problems are particularly acute in metals, where spot prices for several contracts on the London Metal Exchange are trading higher than those for later delivery, as traders pay high premiums to ensure immediate supply.
“This is the most extreme storage environment,” said Nicholas Snowdon, analyst at Goldman Sachs. “It’s a completely unprecedented episode. There is no delivery reply.”
The shortages come amid persistently high global inflation, fueled by logistical disruptions and a demand slack, as economies recover from coronavirus lockdowns. Consumer prices in the US rose 7.5 percent last month, the fastest in four decades.
Copper inventories on the major commodity exchanges are just over 400,000 tons, which is less than a week of global consumption. Aluminum stocks are also low as smelters in Europe and China have been forced to cut capacity due to the huge financial strain of rising energy costs.
“Inventory levels are low, not just in the rotating depots but throughout the supply chain,” said Michael Widmer, an analyst at Bank of America. “There is a limited safety buffer in the system.” Aluminum hit a 13-year high above $3,200 a tonne last week after Goldman said inventories could be depleted by 2023.
Production cuts are just one factor behind the supply shortages that have caused the Bloomberg Commodity Spot Index, a key measure of commodities, to rise more than a tenth year-to-date and hit a record high this month. Nine of the 23 futures contracts that make up the index are in backwardation, according to data from Refinitiv.
Other reasons for the bottlenecks are lack of investment in new mines and oil fields, bad weather and supply chain restrictions caused by the spread of Covid-19.
On Friday, the International Energy Agency warned that crude oil prices, already trading above $90 a barrel, could continue to rise as producer group Opec and its allies scramble to revive production after the worst of the pandemic.
“If the persistent gap between OPEC production and its targets persists, supply tensions will increase, increasing the likelihood of more volatility and upward pressure on prices,” the IEA said.
In Europe, gas prices also remain elevated amid heightened geopolitical tensions over Ukraine and lower inflows from Russia. Gas storage facilities across the continent are 35 percent full, below the seasonal average, according to commodities consultancy ICIS.
“The risk of shortages into the end of winter is low at this point, but the market still needs to secure significant supply through the summer to prevent these concerns from returning next winter,” said Thomas Rodgers, European gas analyst at ICIS .
In agricultural markets, reserves of Arabica coffee, the higher quality bean loved by espresso lovers, have fallen to their lowest level in 22 years.
Supply disruptions and lower exports from producers in Central America have pushed inventories of arabica beans on the ICE futures exchange to their lowest level in more than two decades as coffee buyers rush to secure supplies.
Carlos Mera, a senior analyst at Rabobank, said the fall in coffee stocks so far in 2022 is “amazing”. A further decline could significantly increase “the possibility of an uncontrolled rise in prices”.
Arabica prices on the ICE futures exchange recently hit a 10-year high of $2.59 a pound, up 13 percent since the beginning of this year and more than doubling a year ago.
Supply bottlenecks are also looming in other markets. Citigroup expects demand for lithium, a key battery raw material, to exceed supply by 6 percent this year due to rising electric vehicle sales.
Battery-grade lithium carbonate surged more than 400 percent to over $50,000 per ton in 2021. With inventory constrained, analysts at Citigroup believe “extreme” prices will be needed to “destroy demand” and balance the market.
Comments are closed.