It seems beyond dispute that commodities are trending higher. Whether you go back five, ten or twenty years, the picture is the same – a steady move upwards across the board, even allowing for various with corrections along the way.
Given that for much of the past twenty years the policy of the US Federal Reserve has been systematically to weaken the US dollar by holding rates low and printing more money, it’s not exactly surprising.
The metals are priced in dollars, and if the dollar is worth less, the metal is going to be worth more.
This manipulation at the level of central banks isn’t always given enough credit as a major factor in the pricing of metals.
But hasn’t been the only story.
Running parallel have been two gifts for metals bulls: the story of Chinese economic growth and the emergence of the electric vehicle as a major source of demand for metals.
Now, though, the Fed has gone into sharp reverse, and one of the major planks that have been underpinning the strength in metals all these years has been pulled away.
That’s partly why, although most commodities shot up earlier this year, there’s subsequently been a significant pullback to the point where, at US$4.20 per pound, the copper price is actually US$0.40 lower than it was this time last year.
Tin too, is broadly flat on where it was a year ago.
Yes, both copper and tin are still trading much higher than they were five years ago, and yes other metals like nickel and cobalt are significantly higher year-on-year.
Nevertheless, it’s possible that the upward marching in step may be about to come to an end.
Take another case with pertinence to electric vehicles: spot lithium has risen by around 900% since the beginning of 2021.
Spectacular numbers like that set a context in which Tesla is able to raise car prices by as much as US$6,000 each in the US without much demur. The Tesla price rises hit the headlines, yes, but in a macro environment where heavy duty inflation is now considered the norm, no-one really demurred.
Indeed, prominent members of the Democratic establishment in the US have been urging voters to buy electric vehicles as a way of avoiding the crippling rises in gasoline prices that have hit the country this year.
But ask yourself: is Tesla likely to cut the prices of its vehicles if commodity prices go down?
The answer to that is likely ‘no,’ even though no less a prominent investor than Goldman Sachs (NYSE:GS) has recently turned bearish on lithium, arguing that supply is now likely to catch up with demand and put a heavy downward pressure on price.
If Goldman turns out to be right, then that vehicle price rise could in due course translate into chunkier margins than before for Tesla.
Then again, maybe it isn’t really the commodities per se that’s worrying Musk and Co. Supply chain issues continue to bedevil the US economy as the deconstruction of complex covid regulations continues only at a snails pace.
The prices of consumables and virtually every other input cost – including perhaps labour if the mooted layoff of 10% of the Tesla workforce doesn’t go through – are running very high. It costs the average Tesla worker more to get to work and to buy basic staple goods at home than it did a year ago. Shipping costs are high.
And if you’re in a seriously inflationary environment, best get ahead of the curve if you can and put your own costs up early.
It’s a helpful backdrop that commodities prices spiked earlier this year, but just don’t mention that commodities prices have actually been on the rise for the better part of two decades.
It’s actually everything else that’s catching up.