The current market situation

May 2021

This analysis is prepared by Sydbank. The analysis describes a number of key trends in connection with the current market situation and the development of commodity prices.

Thunderous growth and bottlenecks compounded result in skyrocketing commodity prices

World trade is growing rapidly due to the recovery and generous cheques being issued to American consumers. In addition, lockdowns in the service sector have increased the demand for goods to a level that the global supply chains have been unable to meet. This has sent prices surging. As the global economy reopens, we expect demand for services to grow at the expense of goods. This would restore some balance. However, in the short term, we have not seen the last of surging commodity prices.

Despite the crisis, world trade is near its highest level ever

Initially, the recovery has had a major impact on trade in goods because in many countries, the service sector has been subject to tight restrictions. For the time being, we note that world trade has never been on a higher level, and trade is currently growing fast. It is our assessment that world trade may be pushed further up in the near future, as more and more countries wriggle free from the many restrictions that have been imposed.

Figure 1: World trade, 2010 = index 100

The current market situation

Crisis? Not here. Global trade in goods is near its highest level ever.

Bottlenecks push prices up

Such rapid growth in world trade in a relatively short time often results in bottlenecks. This can already be observed in commodity prices (figure 2), which traditionally correlate well with global economic growth. Commodity prices have namely increased significantly in the wake of the Covid crisis. Since April 2020, commodities such as steel, copper and iron ore, which are often used as indicators for where the global economy is headed, have risen by 290, 205 and 227 per cent, respectively. Bloomberg's compounded Commodity Index, which is based on an extensive basket of commodities, is currently at its highest level in 11 years.

Also oil, which is used as a component in many types of goods, has risen rapidly over the course of the last year or so. One of the causes is that OPEC, Russia and others are holding the oil market in an iron grip by reducing the daily oil production by close to eight million barrels at a time with an increasing demand for oil. It all nevertheless pales compared to freight rates, which are growing even faster, thus illustrating the bottlenecks mentioned.

Figure 2: Development of prices in selected commodities and freight rates, April 2020 = index 100

The current market situation

The recovery of the global economy has resulted in bottlenecks, particularly in the commodity market.

Strong global economic growth will push prices slightly higher up, but a normalisation of consumption later this year could push prices back down a little

In the short term, we expect the bottlenecks in the commodity market to continue. This will contribute to maintaining commodity prices on a high level and increasing inflation. PMI indexes, which take the pulse of business activities, tell us that companies are squeezed by the bottlenecks. This actually makes the situation worse because companies order additional quantities to keep stockpiled for fear of being hit by supply shortages. Essentially, global supply chains were not prepared for a situation whereby major parts of consumption suddenly shift from a combination of services and goods to nearly exclusively goods.

We expect the global economy to grow by 5.5 per cent in 2021. This would be the highest economic growth since the 1970s. This in itself is likely to result in a continued high demand for goods. Since the Covid crisis broke out, we have noted, though, that trade in goods has been dominant because of tight restrictions on major parts of the service sector. It is our assessment that this will change as the restrictions come to an end. This could increase the consumption of services, and the demand for goods will settle on a natural level and decrease a bit, which will benefit services such as travel and experiences, thus restoring some balance. However, in the short term, it is unlikely that we have seen the last of surging commodity prices.

We therefore expect widespread shortages of goods and increasing commodity prices to continue through the summer. Later in the year, we may get closer to a situation with more normal conditions. However, we do not expect much of a price drop, as the enormous growth in the global economy will create a certain demand.

This analysis was prepared by: 

Kim Blindbæk, CFA

Senior Economist

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