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OFFON

Commodities: A backlash and Beijing's iron ore offensive

06/29/2021 | 10:52am EDT

The first half of the year has been full of twists and turns for commodity markets. Timber is certainly the most interesting case. Its price, which has doubled in a few months, is now back to levels not seen since the end of 2020. This high volatility has the merit of illustrating the transitory nature of inflation, a term hammered home by the Fed to justify its monetary policy. Or else it will be much more durable, like the robustness of the price of iron ore, which continues to climb despite the many restrictions imposed by Beijing to halt its rally.

Backlash. The price of lumber, which has been much talked about in recent months, is back to its levels of the beginning of the year. The market is easing as supply improves. Even though demand remains robust in the US, with housing starts stabilizing at high levels, the industry is maximizing capacity utilization to take advantage of the price surge. In other words, sawmills are running at full capacity, allowing supply to gradually adjust to demand.

The main players in the industry have been lining up in battle, including West Fraser Timber, Louisiana-Pacific Corporation, UFP Industries and Canfor Corporation, among the largest North American companies.

Lumber prices are easing as a result. After peaking at over USD 1600 per thousand board feet in early May, futures are now trading 50% lower at around USD 840.

Change in lumber in 2021 - source: Marketscreener.com

Beijing is going on the offensive. After banning access to commodity markets for individuals, Chinese regulators have shifted into high gear to limit the surge in metal prices and the speculative bets that go with it. A series of measures have been taken, including investigations into malicious speculation in the cash markets, sales of strategic stocks to avoid shortages and other trade restrictions to limit price inflation.

These interventions apply to the market for iron ore, a key input in steelmaking, whose price has been rising steadily since April 2020. For the time being, these announcements have a limited effect on prices, which are still moving at high levels, above USD 200 per metric ton. It should be remembered that these high prices are a boon for the heavyweights in the downstream sector, notably Vale, Rio Tinto and BHP Group.

Daily iron ore prices - source: Bloomberg

ę MarketScreener.com 2021
Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.51% 0.7258 Delayed Quote.-5.16%
BHP GROUP -1.72% 37.72 End-of-day quote.-11.10%
BRITISH POUND / US DOLLAR (GBP/USD) -0.37% 1.36698 Delayed Quote.0.34%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.01% 0.7897 Delayed Quote.0.57%
CANFOR CORPORATION 2.96% 28.53 Delayed Quote.24.15%
EURO / US DOLLAR (EUR/USD) -0.18% 1.1718 Delayed Quote.-3.88%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.01% 0.013548 Delayed Quote.-1.04%
LOUISIANA-PACIFIC CORPORATION -0.21% 61.56 Delayed Quote.65.62%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.73% 0.7012 Delayed Quote.-1.60%
RIO TINTO PLC -0.57% 4830.5 Delayed Quote.-11.69%
UFP INDUSTRIES, INC. -1.13% 68.53 Delayed Quote.24.77%
VALE S.A. -1.55% 77.69 End-of-day quote.-11.16%
WEST FRASER TIMBER CO. LTD. 2.21% 104.68 Delayed Quote.28.00%