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A tale of two commodities

Transitory is a “dirty word” according to Federal Reserve Bank of Atlanta president Raphael Bostic, who said recently that the current inflation surge is more stubborn than policymakers anticipated.

The Fed is changing its rhetoric after months of intimating that rising costs would soon pass. The problem is that supply-demand skews are, in many cases, not resolving themselves quickly. For example, the ongoing semiconductor shortage that has wrought havoc on countless industries, from automotive to electronics, persists.

What should corporates be looking out for when it comes to fundamental commodities that might have an impact on the bottom line, like lumber and oil and gas?

1/ What goes up usually comes down, eventually

One bottleneck that has worked itself through is the lumber supply. The commodity's futures bottomed out in early April last year at US$264 per 110,000 board feet per random length, before climbing steadily as COVID-19 outbreaks in plants reduced production and truck driver numbers fell. Lumber peaked in mid-May this year at US$1,711, a 550% increase in little over a year but, since then, it has fallen precipitously.

2/ Oil prices may still have you over a barrel

While lumber prices look good for corporates, oil is not playing ball. The price of black gold hit the floor around the same time as lumber but has since continued ticking upwards. Could the oil price chart a similar trajectory, falling back to earth?

Currently the price per barrel of West Texas Intermediate (WTI) is at a seven-year high of above US$80. Unlike lumber, which is exposed to more localized price pressures in specific industries, oil is being fueled by a revival in economic demand. In Q2, US GDP was up by a weighty 6.7%.

That rate of growth is unlikely to be sustained, but there are still a few bumps in the road ahead. The National Association for Business Economics Outlook, a consensus forecast, recently revised down median economic growth for the year to 5.6% from 6.7%. Similarly, the International Monetary Fund expects global growth this year to fall slightly below its July forecast of 6%. But that's still more than enough to keep oil high.

OPEC+ members are weighing a supply increase to temper the oil price, which is feeding inflationary pressures across the world economy, dampening the recovery. It estimates global oil demand is growing by 5.8 million barrels per day and will continue at 4.2 million bpd through 2022.

3/ Many companies will be counting the cost of a slow return to business

For businesses that are seeing customers flock back and can pass these rising costs on, there's little to worry about. But many face the squeeze of a slow rebound in customer demand and continually rising input prices.

For these, tight cash flow and cost forecasting is a challenge that will need to be carefully managed for some time yet. With the price of gas having soared even higher than oil, some industries have begun to make the switch from an excruciatingly expensive fuel source to a merely very expensive one. Some even say that WTI could top US$100 before it comes back to more manageable levels.

Transitory is a dirty word indeed.