Contradictory Futures



Business Developer


On the futures markets, metal prices have recently fallen sharply. This is not an all-clear for inflation, because if you look at longer-term price development, the problem becomes more than clear.

When it comes to inflation, energy and food prices are receiving special attention. Natural gas in Europe costs five times’ the average of the past six years, while the prices of corn, wheat or soybeans are one-and-a-half times the average of the past 60 years. But the prices of industrial products are also rising, partly due to high energy prices.

According to the US Federal Statistical Office, prices for intermediate goods rose by a quarter in May compared to the previous year. Metals, in particular, have become significantly more expensive with an increase of 38 percent – iron and steel cost 50 percent more than in the previous year, rebar steel 70 percent, and raw aluminum 42 percent more.

Futures market developments seem to have recently been completely contrary to this. On the London Metal Exchange, prices have fallen by an average of around a third over the past three months, and the price of nickel, which is mainly needed for steel production, by more than half.

However, looking at the longer-term price development in perspective, starting from the lows that metal prices had reached in March 2020, they had initially more than doubled.

The price of tin rose by a factor of 2.7, and that of nickel by a factor of 3.4. It is no surprise, then, when the prices of these metals have recently fallen the most. The bottom line, however, is that the prices of industrial metals are currently more than 20 percent above the average of the past 15 years.

This contradictory development involving the prices paid by consumers, producers and commodity exchanges can be attributed to the interruptions in the supply chains. Manufacturers repeatedly lack the raw materials they need.

The uncompromising zero-COVID policy of the Chinese leadership seems to be responsible for it. The closure of ports and the widespread, and sometimes sudden, imposition of curfews leads to a lack of raw materials elsewhere. In this situation, companies reduce orders and use falling futures prices to hedge.

The fundamental situation is quite different, but this will only come into play when China moves away from its COVID policy.

Since China’s demand for raw material is lagging at the moment, recession worries are currently dominating the commodity markets. The turnaround in price developments on Western stock markets also began at the beginning of March, when the US Federal Reserve began to tighten its monetary policy.

The rising prices of end products are primarily the result of continued strong demand. The motor vehicle market is a good example of this. Tesla has already raised prices several times this year. And the German used car market is more expensive than it has been since reunification in 1990.

In particular, the prices of new electric vehicles have risen significantly. This is due to higher prices for battery raw materials such as lithium, nickel and cobalt. Due to the high battery costs, the profit margins for electric cars were already comparatively low in the past. Ford announced the company had earned nothing more on the model Mach-E.

But there is extremely robust demand, and we have the opportunity to set prices, said Ford chief executive, Jim Farley, in April. “We live in a world in which there seem to be almost no limits to the willingness to pay,” said Robert Scaringe, head of the e-car manufacturer Rivian, even if this will not remain so in the long run.


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