Commodities in Super Cycle

Commodities in Super Cycle

Topic: Economy

Context: Steel, the most commonly used input in 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.

Concept:

• Recently, there has been an across-the-board rise in global commodity prices that is being billed as a new commodity super cycle.
• A commodity super cycle is a sustained period of abnormally strong demand growth that producers struggle to match, sparking an increase in prices that can last years or in some cases a decade or more.

Implications:

• An across-the-board rise in global commodity prices is leading to input cost pressures and is a growing concern, as it is not only expected to have a bearing on cost of infrastructure development in India but also have an impact on the overall inflation, economic recovery and policy making.
• The sharp jump in commodity prices is a result of money starting to hide in assets that are store of value as there is an expectation that inflation may rise.
• Economists and experts say the rise in commodity prices have now become a macroeconomic monitoring variable.
• For every percentage point growth in GDP, this would lead to a backward increase in cost on account of increase in price of steel and cement. Also, if we increase the cost of building infra, it will lead to increase in costing of the project and then the toll prices among others.
• Higher metal prices will lead to higher WPI inflation and so the core inflation may not come down.

Solution:

• 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 PLI scheme to prepare ourselves to deal with the situation.