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Commodity prices hit historic highs

Global prices for most commodities have soared through the pandemic. After the initial lockdowns disrupted spending in early 2020, the recovery in consumer and business activity – backed by extraordinary monetary and fiscal stimulus – has driven strong growth in demand for key construction and manufacturing inputs.

Supply chain constraints have supported price increases, as producers attempt to navigate a mix of COVID-related mine and factory shutdowns and challenges in transport availability, while the Ukraine invasion has resulted in a further energy price surge.

While higher commodity prices have prompted a broader inflationary upswing, Australia also receives a considerable dividend as an exporter of commodities.

Having been on something of a rollercoaster over the last two years, iron ore prices were around 50% higher in May 2022 than at the start of the pandemic (Chart 1). Prices rose through the first half of 2022 as China shifted its focus from curbing activity in its real estate sector in late 2021 to more accommodating policy, though China’s COVID lockdowns have stemmed demand from reaching levels seen in 2021.

Prices of base metals saw more sustained growth through 2021, but surged in the first quarter of 2022 as the war in Ukraine raised supply concerns. Russia is a significant global exporter of aluminium in particular, benchmark prices of which grew 30% through the March quarter as inventories were stocked up in anticipation of supply shortages. Prices for most metals softened in April and May as markets adjusted to expectations of a prolonged Russia-Ukraine conflict.

Price growth for some metals also represents refiners passing on higher energy costs. Prices for most energy commodities declined in 2020, as COVID lockdowns saw a sharp drop in transport demand, but bounced back in 2021 amid both supply disruptions and a tendency for the recovery in demand – especially in China – to rely on cheap, easily-available fossil fuels.

To a far greater extent than metals, energy commodity prices have surged since the war in Ukraine commenced. European advanced economies’ dependence on Russia for energy exports was laid bare in natural gas prices in the region, which increased by almost 600% over the year to March 2022. Oil and coal prices spiked as embargoes were placed on Russian exports, the former flowing through to higher prices for major LNG contracts linked to oil indices.

Chart 1: Global prices of selected metals (left) and energy (right) commodities, index Feb 2020 = 100

Source: World Bank Pink Sheet, June 2022

Locally, Australian exporters are benefiting from higher prices. The value of Australia’s international goods exports increased to around $497 billion over the year to April 2022, up by 32% over the preceding 12 months.

Two-thirds of that growth came from coal and LNG alone, with significant contributions from iron ore, crude oil, and wheat – the latter another commodity which has seen price growth through the pandemic and again from the Russia-Ukraine conflict, trading at around 140% above pre-pandemic levels in May 2022.

The significant growth in the value of Australia’s goods exports through the pandemic is exclusively a price story, with volumes more or less flat (Chart 2). Indeed, last week’s national accounts update showed that the volume of goods exports fell in the March quarter, detracting from GDP growth.

Chart 2: Volume and prices of Australia’s goods exports, index Dec 2019 = 100


Source: ABS Balance of Payments

That’s an important reminder that periods of higher commodity prices can mean relatively little for real growth in the Australian economy unless they translate into investment in new capacity, paving the way to higher future production volumes and higher employment. To date, there is limited evidence of that occurring – likely reflecting an awareness in the industry that the drivers of recent price spikes largely relate either to the pandemic or the Russia-Ukraine conflict, and could therefore be short-lived.