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    Explained: Why are commodity prices rising and how it will impact India

    Explained: Why are commodity prices rising and how it will impact India

    Explained: Why are commodity prices rising and how it will impact India
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    By Ankit Gohel   IST (Published)


    Prices of industrial commodities, including copper, steel, aluminum, lead, nickel as well as precious metals such as gold and silver have seen a sharp surge recently in the international market.

    Prices of industrial commodities, including copper, steel, aluminium, lead, nickel as well as precious metals such as gold and silver have seen a sharp surge recently in the international market.
    As the economic activities around the world are gearing up, the production and demand for such commodities have risen.
    The price of copper has risen over 27 percent in the last year while that of steel has gained more than 17 percent. Aluminium rallied around 13 percent, zinc 21 percent, nickel 20 percent while iron ore more than 75 percent in the last one year period.
    Among precious metals, gold and silver prices have jumped over 25 percent and 53 percent, respectively.
    This rally in the commodity prices was on the back of a number of factors. These are:
    Demand from China
    An important factor behind the rally in the commodity prices from their March lows has been the rising demand from China. The manufacturing activities in the major Asian economy has been on the rise. This can be seen as the Chinese factory output in November hit a 20-month high.
    Supply disruptions
    As the demand for industrial commodities was rising with the easing of lockdowns globally, the supply chains are still disturbed and the transportation issues prevail, pushing up commodity prices.
    US stimulus hopes
    The US House of Representatives, on Monday, voted to pass a $900 billion coronavirus stimulus package. Analysts believe the package would further fuel demand for commodities as people will spend more.
    Meanwhile, the US Federal Reserve along with the other global central banks have pumped in huge liquidity into the markets over a period of time to counter the economic impact caused by the COVID-19 pandemic and the subsequent lockdowns. This has boosted precious metal prices.
    Easy money is supportive for commodity prices, especially precious metals, analysts said.
    Investment demand
    According to a report, the hedge funds had invested over $4 billion in the commodities market till October 2020.
    The fund managers are recommending commodities as an asset to invest in leading to a sharp rise in returns from some of the commodities funds this year.
    Impact on India
    As the Indian economy started its unlocking phase, it saw a pent-up demand for commodities, driving prices further. However, this price increase has spooked fears of inflation in the domestic markets along with worries over increasing raw material cost for many sectors.
    The Reserve Bank of India (RBI) also seemed worried by the rising inflation as understood from the minutes of its recent bi-monthly monetary policy. The central bank had kept the key policy rates unchanged citing a rise in inflation.
    Among the worst-hit sectors from the booming international commodity prices are the auto and infrastructure sector.
    Minister for road transport and highways Nitin Gadkari has written to Prime Minister Narendra Modi, expressing concern over a 55 percent increase in steel prices in the last six months. The spike, the minister said, was making infrastructure projects unviable.
    The recent surge in steel, aluminum, copper, palladium and rhodium prices have prompted automobile manufacturers to hike the prices of vehicles across sectors.
    Auto majors such as Tata Motors, Maruti Suzuki, M&M, Hero MotoCorp, Hyundai, Kia have already announced price hikes for their vehicles.
    The rising steel prices do not bode well for the real estate sector as well.
    Steel prices have seen an unprecedented rise over the last five months as prices of HR Coils have risen by Rs 9,000 and TMT bar (12 mm, Mumbai) prices have risen by Rs 7,450 per tonne in this period.
    Firm international prices, pick-up in domestic demand and cost-push are expected to keep steel prices firm over the remaining part of the current fiscal year, CARE Ratings said in a report.
    Real estate developers are worried that the continuous upsurge in raw material prices will increase the project cost and will have a cascading effect on homebuyers.
    Seeking urgent government intervention, the real estate developers body CREDAI, recently wrote a letter to Prime Minister Narendra Modi requesting the government to step in to curb spiraling steel and cement prices.
    CREDAI also urged the government to take note of alleged cartelisation by cement and steel manufacturers.
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