What's going on?
The prices of industrial commodities (i.e. metals, like copper, that are used to build things) have jumped significantly over the past few weeks – and it looks like they have both Trump and China to thank (tweet this)!
What does this mean?
Copper hit its highest price since 2015 on Tuesday, and the overall Bloomberg Commodities Index (a broad measure of commodity prices) had its best three-day gain since May. Donald Trump’s plans to boost short-term US government spending on infrastructure projects (e.g. bridges, airports, roads etc.), which require lots of industrial metals, is at least partially responsible. But price increases have also been driven by buying in China – perhaps as Chinese companies seek shelter from the yuan, which continues to weaken versus the dollar. By using their yuan to buy commodities that are tied to the global market, Chinese companies are protecting themselves, to some extent, from the falling currency.
Why should I care?
For markets: Mining stocks are loving it.
Stock prices of miners like BHP Billiton and Rio Tinto have been boosted by higher metal prices (since their income goes up if the prices of their products increase). One thing to note is that much of the commodity buying has been driven by speculators (e.g. traders rather than actual users of copper). There’s an expectation that real demand from manufacturers and builders is coming – but the speculators (and the prices) are at risk if that doesn’t happen.
The bigger picture: With higher commodity prices come higher manufacturing costs – and higher inflation.
Higher commodity prices make it more expensive to produce goods that use those commodities as their components. That is one reason why manufacturers have begun to see their costs increase after having decreased over the past few years. As those increases feed through to finished goods, expect prices to start increasing globally, helping to push overall inflation higher.