To be or not to be inflation with commodities

Noises of inflation are coming from everywhere. Hoped for here, feared there, experts guarantee that CPI will be big, others that it will be at 2% and the last ones that it will be much lower, negligible or even negative. One thing is certain though: one of these opinions could be the right one, although inflation forecasts by economists have been mostly wrong for the last 50 years.

Are their thought patterns still marked by the shocks of past oil crises, devaluations linked to the end of Bretton Woods, unemployment, fiscal stimulus and Keynes? Or do they take into account automation, digitalization, the disappearance of small businesses, long-term unemployment and poorly paid digital platform workforce, but also inflation which reduces the debt burden and at the same time yield of an ageing population‘ saving that will be called to the polls in 2021 and 2022, as growth will be catch-up mode post Covid-19 and expected above 5%?

One fact, however, does not require forecasting. Wheat, corn, soybeans, rice, the meat market, copper, aluminum, zinc, nickel, tin, iron, steel, molybdenum, lithium, cobalt, PGM’s, silver, oil, natural gas …, are all experiencing price inflation. With the exception of hydrocarbons, they are above pre-crisis levels of 2008, and sometimes higher than the recent peaks of 2011.

This is the commodity supercycle at work, it has been going on for 50 years and corresponds to the industrial rebalancing in China’s favor.

This has had several jolts, with accelerations and decelerations in the prices of metals, energy and agricultural commodities. These movements have been more apparent since the beginning of the century, since Beijing dominated these markets. From 2000 to the summer of 2008, the price curves soared, next collapsed in the second half of 2008, then resumed their initial trajectories and peaked at the beginning of 2011. Subsequently, for ten years, prices of each natural resource evolved according to the idiosyncrasy of their fundamentals – supply, demand, stocks, cash costs – and sometimes also under the influence of epiphenomena, such as the political-economic relations between China and the United States. But since March 2020, when the health crisis officially ended for the world’s largest consumer, China, they have been experiencing a new rise in anticipation of a more digital and decarbonized Chinese economy. However, these variations, cushioned by industrial sectors, have not led to a significant increase in CPI.

Over the long term, periods of hyperinflation are the result of wars. They destroy gigantic means of production, but as demand does not diminish the imbalances are inflationary. Reclaimed peace sometimes experiences inflation out of control if the rebuilding of infrastructure, cities and lives are carried out with the same instability.

The crisis of 2008 did not have the effects of a war because for more than ten years inflation has remained confined to capital, while deflation hit labor. Similarly in 2020, the Covid crisis does not have the effect of a war either. No one has noticed any inordinate rise in consumer prices. On the contrary, despite the strong fiscal support, far from being out of balance, supply and demand contracted simultaneously and prices remained stable. A rise of only 2% at most is envisaged, and for a few months. One would think that the Milton Friedman’s beloved relationship between money growth and inflation has vanished.

However, since the management of the Covid-19 crisis in Europe imposes longer lockdown, it accelerates the digitalization of our connected lives, the construction of smart cities, the rise of electricity in our EVs and our others transportation. But it does not cause a massive deglobalization of our societies if we judge Asia’s advance in batteries or electronics, neither a real acceleration of the energy transition which is already well underway.

Taken together, however, Chinese catch-up and Western digitalization are accelerating our new electrical dependency on metals, the same metals that are taking over the old role played by hydrocarbons. What better illustration of this evolution than the oil company Total, which has become Total Energies, with one regret, however: not having replaced its oil and gas fields with mines.

Metals are indeed indispensable for the digitalization and decarbonization of the economy and a metal is emblematic of this necessity. Its consumption per capita is constantly increasing, it is everywhere essential for the production, transmission, storage and consumption of electricity from renewable energies and hydrogen to electric cars, connected homes, nomad electronics… More than others, the increase in its annual supply is critical, because it is tight compare to its continuous increasing demand. More than others, the balance between its production and consumption is at the mercy of the slightest disruption.

This metal, one of the best barometers of the world’s industrial health, is copper. Even before the U.S. stimulus package takes over from the Chinese supercycle, its price has already reached its historic highs of $10,000/tonne, barely twice its 2016 lows,

If one wants to be afraid, this factor 2 on the price of copper should be put into perspective with the multiplication of rhodium prices by 10 which accelerates the transition from the ICE car to EV. This is why, if dependence on metals is not better managed with tools of sovereignty, it becomes possible to fear the effect that future prices of these metals could have on CPI.