June 2022: Commodities cool off

The Nifty fell violently during June 2022, and was at one point down 8% for the month but recovered a little towards the end of the month to close down 4.8%. The markets have been volatile over the last 7-8 months, falling sharply at times, coupled with swift recoveries with the overall direction downwards. Perhaps the factor playing up the most on market participants’ minds is the issue of inflation globally. While there are many factors affecting inflation such as supply bottlenecks linked to lingering effects of covid and wage inflation, one of the factors has been the large run up in commodity prices and we spoke about this in our March newsletter.

Over the last few months there has been a correction in commodity prices – the below table shows the price change from 4 reference points:

Commodity price change Unit Fall from 52-week high 1 Month Change YTD Change (6 months) 1 Yr Change
Brent Crude USD/Barrel -16.9% -5.9% 48.2% 53.9%
Gold USD/Ounce -12.6% -1.5% -0.9% 2.2%
Aluminium USD/MT -38.5% -11.2% -13.4% -2.4%
Copper USD/MT -21.7% -11.1% -13.6% -10.2%
Cotton USD/lb -27.0% -20.2% -13.2% 15.1%
Sugar USD/lb -9.8% -3.8% -0.8% 5.9%
Wheat USD/Bushel -32.2% -16.4% 17.9% 35.3%
Steel (Hot Rolled Coil) USD/Tonne -51.2% -20.2% -33.6% -47.5%

Industrial and agricultural commodities have had a steep fall from their 52-week highs, over the last few months – oil is one of the commodities which stands out as not having had such a steep fall, perhaps because of the continuing war in Ukraine and the sanctions on Russia. Even on a 12-month basis the price rise in commodities which was looking large till a few months back, is relatively contained with the exception of crude and wheat which are impacted by the war in Ukraine.

Much of this price damage in commodities has happened over the last month or so and one wonders whether this is the impact of the US Fed action, specifically the Quantitative Tightening (QT) which started from 1-Jun-2022. The US Fed has started reducing the size of its balance sheet by $47.5bn per month starting 1-Jun-22 and this is scheduled to go up to $95bn per month from 1-Sep- 2022. This is likely affecting commodity prices too. Another factor affecting commodity prices is that the R word is suddenly the top news among analysts and observers with many such expecting a recession in the US in the not too distant future as the US Fed tightens monetary policy to fight inflation, which is at a 40-year high.

As the global economy slows due to monetary tightening and reduction of covid related fiscal stimulus and as supply chains slowly resolve themselves, inflation may slowly head downwards through the year. Inflation is one of the top concerns of the market over the last several months and while it may still be early to call this, any respite on this front should be welcome news for investors.