Shortages, Resurgent Demand and Rising Inflation Expectations Lift Commodities

Commodities prices have been moving higher this spring amid rising demand and rising inflation expectations globally as economies emerge from the pandemic. Franklin Equity Group’s Fred Fromm takes a look at the implications for equity investors in the space.

The global commodities complex continued to receive strong investor support over the past month as the world economy entered unfamiliar territory. After more than a decade of worries about inadequate demand and spending power in the aftermath of the global financial crisis, signs of insufficient supply are now emerging in commodity markets and supply chains driven by a post-pandemic surge in demand.

Amid upbeat economic data, there is now strong demand for construction and manufactured goods around the world aided in part by the hopeful pace of COVID-19 vaccination in major economic centers, translating into more demand for basic commodities. Demand growth is robust because it started at relatively low levels due to the pandemic, which also led to some curtailment of capacity, explaining why consumers have seen shortages of lumber and other key products recently. Additionally, both consumer and wholesale materials are experiencing supply chain disruptions around the world.

All forms of transportation are experiencing delays (some intermittently), including ocean freight, air freight, trucking and rail. These factors have been driving prices higher with lumber, iron ore, steel, copper and palladium prices all touching all-time highs in May, while corn and soybeans traded near their highest levels since 2012.1 Backorders have multiplied as plastics, cotton, palm oil, coffee, pigs, chickens, paper products, packaging, chemicals and other items were also facing shortages tied to the release of pent-up demand and a global supply chain crunch. A recent analysis of commodity trade networks revealed inadequate supplies of numerous rare minerals crucial to the manufacture of mobile phones, electronics and medical equipment were also upsetting the global marketplace.