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Commodity Protectionism Drives More Volatility?

The surge in global prices for all types of commodities is having many effects from adding inflationary pressure to driving up energy and food bills. For companies like Goldman Sachs, this is good news as it declares yet again a 10-year commodity super cycle. “Currently, we are seeing record dislocations in energy markets, metals markets, and agriculture markets,” global head of commodities research at Goldman Sachs, Jeff Currie, told Bloomberg Television recently. “There is still a lot of money in the system, while investment positions in commodities are very low, which is setting the stage for further upsides in oil prices and the prices of other commodities.” For Goldman Sachs this is the beginning of a 10-year super cycle in commodities. Certainly, commodities have performed extraordinarily well recently and the Bloomberg Commodity index  has been up by as much as 35% over the course of 2021. It seems to be the asset class of choice. It has certainly meant record bonuses for Goldman partners.

For those of us in commodity-based industries, this is largely good news. For example, we expect 2022 to be a strong year for CTRM and related software sales reaching $1,858m in 2022 – an increase of 11% on 2020 according to our latest market sizing estimates (new report due out next week). But for many others, it isn’t good news at all as it means higher prices for basically every raw material and even higher prices for finished goods. Combined with a fairly strong US Dollar, commodity price inflation is a serious issue. Based on this, perhaps it is not surprising to see a number of trends towards commodity protectionism in the market, which could in of itself, have an impact on the markets.

For example, last December, ostensibly to limit rising food inflation, the Securities and Exchange Board of India (Sebi) barred exchanges from launching new futures contracts in seven food items (paddy (non-basmati), wheat, chana, mustard seeds and their derivatives, soybean and its derivatives, crude palm oil, and moong) for one year and the regulator also instructed that no new contracts will be allowed and no new positions can be taken in running contracts for these seven commodities. These “measures make it tough for importers and traders of edible oils to do business as they extensively use domestic exchanges to hedge their risk,” said Sandeep Bajoria, chief executive of edible oil broker and consultancy Sunvin Group, according to Reuters. In fact there is some discussion as to whether this ban will have much of an impact at all featuring as it does derivatives and not physical commodities.

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A second example that may have more of an impact is the actions taken by Indonesia. Indonesia is the top exporter of coal for power stations and the biggest palm oil producer in the world and it holds a quarter of all nickel reserves. Indonesia has announced a policy of resource nationalism restricting exports and seeking more processing domestically in order to benefit the country. Bloomberg recently reported on some of the effects of this policy including a temporary ban on 34 exporters from shipping coal abroad, followed by a more drastic halt on all exports in January 2022. The article also reports “the government said in January it could impose a new export tax on nickel pig iron (a lower grade of pure nickel) and ferronickel (a semi-refined product) as soon as this year.” Of course, China has pursued a policy of securing commodity supply for many years that could also be viewed as restrictive and artificial as have other countries.

The reality of such moves however may in fact to be to worsen supply and pricing issues and to create even more volatility. This is turn impacts prices and inflation and it becomes a bit of a circular issue. When we add on top of this all of the current issues and trends in and around commodities that will force price volatility and increases like decarbonization, for example, we may find in retrospect that we have underestimated the growth of commodity prices and perhaps even CTRM software!