Commodities In Supercycle


    In Context

    Recently, there has been a rise in global commodity prices that is being billed as a new commodity super cycle.

    What is a Commodity 

    • A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

    What is the commodity super-cycle?

    • It is a sustained period of rising commodity prices driven by higher demand that producers struggle to match, sparking an increase in prices that can last years or in some cases a decade or more.

    Major Highlights 

    • The Steel, the most commonly used input in the construction sector and industries, is at all-time highs, as most metals including base and precious metals prices have gone through the roof over the last one year.
    • Agriculture: Commodities from agriculture — such as sugar, corn, coffee, soybean oil, palm oil — have risen sharply in the US commodities market, the effect of which is being seen in the domestic market, too. 
    • Metals :Precious metals including gold and silver are also on an upward trajectory. 

    • The surge in prices, the National Stock Exchange’s NIFTY Metal Index hit a fresh high. 
    • Prices of copper are also at all-time highs, surpassing the previous peak in February 2011.
      • Brent crude oil prices are also on a tear.
    • The domestic prices of petrol and diesel are, however, at record highs as steady increase in Central and state taxes have added to their final price to the consumers.
    • Causes 
      • A new commodity super cycle resulting from recovery in global demand (led by recovery in China and the US), supply-side constraints and loose monetary policy of global central banks.
    • Impacts 
      • The Rise in global commodity prices is leading to input cost is not only expected to have a bearing on the cost of infrastructure development in India but also have an impact on the overall inflation, economic recovery and policy making.
      • Higher metal prices will lead to higher WPI inflation and so the core inflation may not come down. However, the CPI may not get affected much and hence it won’t impact the monetary policy.

    Way Forward 

    • The decision-makers need to look at the mismatch in supply and demand and they need to find out where to invest, where to incentivise through the PLI scheme to prepare ourselves to deal with the situation.
    • Companies will have to decide between passing on the cost to the consumer or absorb the cost.

    What is Inflation ?

    • It refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing etc.
    • It measures the average price change in a basket of commodities and services over time.
    • It is indicative of the decrease in the purchasing power of a unit of a country’s currency.
      • This is measured in percentage.
    • In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively. 
      • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
      • On the other hand, the goods or services sold by businesses to smaller businesses for selling further is captured by the WPI. In India, 

    Loose and Tight Monetary Policies

    • A monetary policy that lowers interest rates and stimulates borrowing is an expansionary monetary policy or loose monetary policy. 
    • A monetary policy that raises interest rates and reduces borrowing in the economy is a contractionary monetary policy or tight monetary policy. 

    Source :IE