Pedal to the metal

Tom Traill - 17 May 2018

If you hadn’t noticed, we’re in the middle of a growth cycle for the global industrial economy, with annual production up 4 per cent and US production up 4.5 per cent (April data). The S&P GSCI commodity price index is up 10 per cent, year to date, as against a measly 2 per cent for the S&P 500. The rising oil price has been the major contributing factor, but industrial metals have contributed another 4 percentage points of annual growth (figure 1). At what point do rising commodity prices constitute another inflationary warning sign?

The GSCI index is divided into five subcategories of which energy is by far the largest (58.58 per cent weighting in 2018), agriculture makes up 18.25 per cent, and the rest is divided between industrial metals (10.91 per cent), livestock (7.53 per cent) and precious metals (4.28 per cent). The index is weighted according to global production, and reweighted each year. The industrial metals sub-index is up 17.2 per cent compared to 12 months ago, and has averaged 17 per cent annual growth since the beginning of 2017, a trend we highlighted in our previous blog commentary “Hold your nose and buy industrial commodities”, 21 September 2017. This subsector is made of aluminium, copper, lead, nickel and zinc (3.63 per cent, 4.43 per cent, 0.87 per cent, 0.69 per cent and 1.3 per cent, respectively). Figure 2 shows the contributions of each to the growth of the sector index.

Since the beginning of 2017 only the lowly-weighted nickel has made a negative contribution. Despite intermittent weakness through 2017, the nickel price has rallied strongly and is now up 43 per cent on annual basis. A recent report from Scotiabank suggests that there are currently supply constraints in the nickel market, and much of the current supply is coming from inventory depletion, implying a positive pricing bias over the coming year. Even the rebound in the US Dollar seems not to have had a discernible negative impact on commodity prices.

Figure 3 shows the close correlation between our 53-country measure of global CPI inflation, and the annual change in the GSCI. In 11 of the past 12 years there has been a tight relationship, but not in the past year. Past correlation is of course no guarantee of an ongoing relationship, and the pre-crisis period shows that the two series are not eternally bound. Most likely, the close connection will resume, either via a correction in commodity prices or a pick-up in global inflation. In the context of rapid industrial production growth and still-lean inventories, we think it will be the latter.

Figure 1

Data source: Thomson Reuters Datastream

Figure 2

Data source: Thomson Reuters Datastream

Figure 3

Data source: CEIC and Thomson Reuters Datastream



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