After the peaks reached last year, many raw material they register now falling prices, configuring an almost "counter-shock" scenario compared to the last two years. He writes it Ref Searches in the latest publication, and explains that these reductions were favored above all by the improvement in the conditions of the European energy market, but also by the relative weakness of industry worldwide, above all by the recovery of industrial activity in Asian countries, after the reopenings in the Chinese economy, less intense than expected.
This is a very rapid change, which modifies the terms of trade between countries, to the advantage of importers of raw materials, and among the productive sectors, with a reduction in production costs in the manufacturing sectors with a higher content of raw materials.
La income redistribution from producer countries to commodity importing countries it also has effects of shifting demand, with positive consequences on the growth of the latter. Furthermore, the slowdown in raw material prices could favor the easing of tensions on prices, and therefore allow central banks to interrupt the series of increases implemented in recent months to mitigate inflationary pressures. In general, according to the Ref researchers, the positive effects, which initially should mainly concern the supply side, could also gradually extend to the demand side.
But it will be a trend uncertain: the risks associated with the evolution of the scenario in fact remain Ukraine, and the possibility of new waves of the pandemic. Furthermore, for a few years the path that had just begun of the energy transition it will lead to instability in both energy supply and demand, given the change in the mix of sources and the associated technological innovations. This could lead to moments of disequilibrium and price instability on the energy markets, with repercussions also on non-energy commodities.
The demand for commodities is still weak
La recovery of the Chinese economy, following the abandonment of the “zero-Covid” strategy, has been less dynamic than expected. But as happened in Western economies, the reopenings in China are reactivating above all the service sectors. In particular, Beijing has recorded a recovery in exports, but not in imports. Furthermore, the demand for goods from advanced economies is slowing following the weakening of US imports. The generalized signs of a reduction in the supply of credit – especially in the United States, but also in other economies – point to a relatively subdued phase for various sectors that use raw materials, above all construction, and producers of consumer durables.
Commodity prices fall
In line with the dynamics of the end of 2022, commodity prices continue their phase of reduction from the anomalous levels recorded in the first part of 2022. First of all, the picture has improved on the side of energy raw materials. On the oil market, the quantities extracted approximated pre-Covid levels in the first months of 2023, stabilizing stocks of Petroleum after a long period of contraction. The most significant aspect of energy market trends is the contraction in energy prices gas on the European markets. Europe, which had paid dearly for the economic consequences of the war in Ukraine, is now registering a rapid reduction in the costs of energy commodities.
I metals, after an initial rally triggered by Chinese reopenings, started to fall again, thus confirming the relative weakness of final demand from the industry.
On the side of agricultural raw materials, quotations have been at low levels for some time. Above all, timber prices have fallen, which weigh on the costs of the construction sector and which had reached very high levels during the pandemic period. Textiles, wool and cotton are also down.
Finally, an important point in this phase is that of food commodities, also in light of the still high dynamics of food inflation, especially in European countries. Food commodities are conditioned by the price trend of energy commodities, primarily gas. The slowdown in energy prices is favoring a progressive drop in prices, especially in the cereal sector, which had reached their highs after the invasion of Ukraine. Although still at high levels, the prices of maize and wheat are also starting to drop, while the prices of rice have recorded a phase of growth over the last few weeks. The same trend is found in the case of soybeans. On the other hand, the prices of meat and beverages are still at relatively high levels.
Finally, a separate discussion applies to i precious metals. Gold prices have in fact benefited in recent months from economic uncertainty and high inflation rates. Among the most important buyers in the recent phase were the central banks of emerging countries, which instead reduced the accumulation of reserves in dollars, also with the aim of limiting the depreciation of their respective currencies.
One aspect to remember is also the greater intensity of the reduction in commodity prices for the euro area. In the case of the euro area, this means that the commodity price cycle has been further amplified by the exchange rate trend, with a greater upward push last year, and a more pronounced contraction this year, since the dollar it started to lose positions.
Europe has overcome the gas crisis
The European energy market has come through the winter with flying colors compared to what was expected in the autumn period. Overcoming the energy crisis depended on a number of factors: the replacement of gas imports from Russia with gas from other countries (especially LNG from the USA) and the reduction in gas consumption by households and businesses thanks also to the relatively myths.
The result is that EU countries have overcome the winter period with high levels of gas stocks.
The return of inflation to production has begun
The easing of tensions in the upstream phases of the production processes has begun to show its effects on industrial producer prices and on the expectations of manufacturing companies. The slowdown is more evident in sectors with a higher content of raw materials, above all producers of intermediates, and more gradual in the downstream phases, closest to the final consumer. The most important sector is that of the food industry, which still has very high inflation rates. The production process in the food industry also follows in several cases the seasonality of the agricultural products subjected to processing; this means that lower prices, for example of energy or packaging, influence the costs of processes that will be carried out during the year and only subsequently will they lead to price list changes. For this reason, the effects of the slowdown in raw material prices will reach the final consumer with a further delay.
Other consumer goods-producing sectors instead recorded less marked accelerations in prices than the food sector, and on the other hand they do not seem to have even begun the slowdown phase, as for example for products of the clothing industry or of pharmaceutica. A deceleration in prices has instead already characterized the products of the furniture industry.
Cost deflation and profit inflation
One of the themes that have characterized the debate in recent months is the possibility that the drop in the prices of raw materials does not correspond to a similar trend in consumer price inflation. In particular, an increase in the contribution to inflation deriving from the growth of domestic income, labor and profits is possible in the coming months, which could replace the increases in import inputs, resulting in a persistence of inflation at relatively high values. So far, the focus has been mainly on the wage dynamics. In any case, the growth in the cost of labor has remained for the moment at a moderate pace overall in most of the economies of the Eurozone, to the extent that wages have greatly reduced in real terms.
The data highlight how the phenomenon ofprofit inflation was anything but uniform, both between sectors and between countries.
From a country perspective, there is a clear misalignment in unit profit dynamics in Germany. In 2022 they also increased a lot in Spain, where, however, they had contracted in 2019 and 2020.
As regards the sectors, in general, increasing margins characterized above all the sectors ofmining industry andagriculture, reflecting the increase in international prices; profits in the energy sector have increased significantly (in France, Spain and Italy, but not in Germany), where the mechanisms for setting the market price based on the costs of the marginal producer obviously count, in the face of various producers with costs decidedly inferior. If, on the other hand, we focus attention on the sector alone manufacturing, characterized by a greater weight of raw materials in production costs, and more exposed to the pressure of international competition, significant increases in margins are observed in the case of Germany and Spain, but not in Italy and France.
The comparison between countries can also be extended to the differences in terms of unit labor cost dynamics. Also in this case, differences between countries emerge, with Italy once again in the black jersey. The data show that our country is characterized by a slower acceleration of unit incomes in response to higher imported inflation, compared to our major European partners. On the other hand, Italy is also the country that has recorded the greatest impact of the terms of trade on prices, being more dependent on the costs of imported commodities, in particular as a result of our greater dependence on gas. The wider loss of terms of trade of the Italian economy would therefore have entailed a cost for businesses and households which is reflected in the lower dynamics of unit profits and del Clup observed last year.
