Global Commodity Prices Have Surged In CY21

According to the India Strategy report of Motilal Oswal Financial Service, global commodity prices have surged in CY21, with the CRB core commodity index rising 70% YoY in Apr'21. The recent comments of Chinese policymakers have resulted in some moderation and volatility in prices.

Nonetheless, the rise in global commodity prices in CY21 has brought the focus back on inflation. While food/agri prices have shown a faster increase, the CRB index is supported by a lower base of Apr'20. The rise in prices comes amid an increase in COVID cases and restricted economic activity. With the uncertainty in the demand environment, it would prove challenging for companies to pass on the rise in commodity costs.

"In a constrained demand environment, due to broad-based lockdowns and macro uncertainty, corporates would be reluctant to pass on the higher input prices to consumers and would first exercise other P&L levers to manage margins. Sectors that are likely to be most impacted include Auto, Consumer Staples, and Consumer Durables. On the other hand, Metals and O&G (upstream companies) would be the clear beneficiaries of the surge in commodity prices," India Strategy report of Motilal Oswal Financial Services says.

Global inflation back in focus; implications for policymakers

Although the CRB index is partly supported by a low base (35% YoY decline in Apr'20), food/agri prices and base metals are showing a much faster and more robust increase vis-à-vis fuels and precious metals, according to the report.

"With the low base setting in up to Dec'21, inflation may continue to trend upwards. However, central banks across the world are likely to continue to look past this. If the high inflation trends sustain in CY22, this is likely to pose a concern for monetary authorities.

Another trend, however, may pose a concern for India. In the past decade or so, inflation trends in base metals and fuel commodities have followed each other very closely. Although global food prices have firmed up, the impact on India's fundamentals remains limited. Furthermore, the share of industrial metals is also low (~10%) in WPI. Nevertheless, if fuel prices also start rising, similar to base metal prices, the situation for India could turn unfavourable very quickly," says the Motilal Oswal Financial Services India Strategy report.