Why metals markets are responding differently to inflation this time round

Globalization, financialization and other key differences in today’s metals markets make comparisons to past periods of inflation potentially misleading. Fastmarkets experts discuss.

Inflation in the United States and elsewhere was last at recent lofty levels in the 1970s and 80s. So what can we learn by looking at patterns of metals pricing and supply/demand dynamics the last time overall price levels were rising as fast as they are now?

“We are not quite seeing the peak levels seen in the 1970s and early 1980s, but it is clear that we are experiencing inflation levels that have not been seen in decades,” said Fastmarkets steel and scrap analyst Alexander Kershaw. “The consumer price index in the US for example hit 9.1% over the 12 months up to June, according the US Bureau of Labor Statistics (BLS), which reports that the main driver of this inflation has been rising energy costs.”

Similarly, in Europe the inflation rate for the EU 27 countries hit 9.6% year on year in June, Kershaw said. Baltic economies that are deeply interlinked with Russia have seen inflation of around 20%.

Fig 2 inflation rate.png

Source: World Bank

What is different economically to the last time inflation was this high?

“In the early 1980s inflation came alongside recession, causing stagflation,” said Kershaw. “Looking at the current time period, there is a lot of talk about how a recession is looming, but the macroeconomic forecasts we use are slightly more optimistic with a soft landing rather than full-blown recession.”

A further difference is that in the early 1980s there was a big dip in construction output as measured by the number of private housing units started in the US, while the trend over the past year has been broadly upwards in terms of the number of units, added Kershaw.

Energy prices are a key driver of inflation in both the 1970s and 1980s, and today. “In the late 1970s, we saw an extended period of high energy prices. We have not yet experienced an equivalent length of time of high energy prices today,” he said.

Fig 3 crude oil prices.png

Source: EIA

“But what we have seen is the year-on-year change in energy prices really surge recently. Partly this is a recovery from the low energy prices seen in 2020 when Covid dampened demand. It’s also down to Europe’s search for energy sources to replace Russian gas.”

“Interestingly, in the current period of inflation there are a lot of reports of labor shortages; but when one looks at the ratio of employment to population, it is actually quite low. This could suggest that the participation rate in employment itself is low, and maybe with inflation going up people will be brought back into the labor market.”

Fig 1 employment BLS.png

Source: US Bureau of Labor Statistics

The outlook

“Looking at metal prices the last time inflation in the US was at comparable levels does not necessarily provide a pattern of what we could see going forward”, said Fastmarkets’ managing editor for the Americas Thorsten Schier. “But it does reveal how much commodity markets have changed.”

“The striking difference between metals markets today and in the early 80s was a relative lack of volatility, given the background of rampaging inflation, and it goes to the heart of how metals markets, and commodities markets more generally, have evolved with the global economy,” he said.

The last time US inflation as measured by month was higher than it is now was December 1981, when the CPI stood at 8.9%. That month, US hot-rolled steel coil prices were $20.80 per hundredweight, and aluminium delivered to the Midwest was selling for 76.50 cents per pound.

HRC started 1981 at $19.19 per cwt, and aluminium at 76 cents. Both commodities rose less than a percent in a year when inflation ended most months over 10%.

US inflation was 9.1% in June of this year, according to U.S. Bureau of Labor Statistics data, and HRC traded at $60.78 per cwt at the beginning of that month. Aluminium was 157.79-160.29 cents per pound in early June. There are three main reasons why it’s different this time:

1. Globalization

More integrated supply chains mean disruptions at one end can cause havoc at the other. But it also generally means much more real-time reaction to changing economic environments. 30 years ago, many metals markets still functioned on long-term contracts, some even multi-year. That meant there was little flexibility to change pricing despite changes in the economy.

2. Financialization

Metals as an asset class now react much quicker to macroeconomic sentiment. Trading of metals futures has become much easier to access over time, and more and bigger players are generally involved. They can move markets in an instant, especially in commodities where global exchanges, like the London Metals Exchange, exist.

3. Oil as a proxy

Oil prices have seen similar patterns despite the much earlier financialization of those markets. Historical data shows that prices were also relatively stable after an initial spike during the period of very high inflation in the 80s. Oil prices of course contributed to inflation then, as energy and metals are now. Oil is also currently more volatile than it was then, with prices already dipping based on weaker recent economic forecasts despite ongoing tight supply.

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