Commodity prices are among the most important gauges of the global economy. Prices of products like oil, natural gas, copper, iron ore, steel and plastic raw materials have a direct impact on countries’ economic growth, inflation, industrial production, and even the prices we pay in our daily lives.
What Factors Influence Global Commodity Prices?
The price of a global commodity does not move for just one reason. Prices are determined by a combination of many factors. These are factors you need to know to understand why the market is going up or down.
Global Supply and Demand
Supply and demand are the foundation of every commodity price. Supply is the amount of a product that can be made; demand is the amount of a product that is wanted for consumption. If the supply is less than the demand, the price goes up; if the supply is greater than the demand, the price goes down. For instance, if a mine has a production disruption, the supply of that metal goes down and its price goes up. Similarly, when the construction sector of a large economy like China recovers, the demand for iron, copper and other metals increases and the prices go up. There are many factors that affect the balance of supply and demand such as economic growth, population increase, seasonal changes and consumer habits.
Production and Feedstock Costs
The cost of production of a commodity affects the price of a commodity directly. Production costs are made up of raw material costs, energy expenses, labour wages and technology investments. For example, ethylene, which is required for the production of polyethylene, is obtained from oil or natural gas. When the oil prices go up, the production cost of polyethylene increases as well, and this is reflected in the prices. The key determinants of steel prices are the prices of iron ore and coal used to produce steel. When it costs more to make something, the producer has to charge more for it; when it costs less to make something, the price tends to fall.
Freight and Logistics Costs
Commodities need to be transported from the place of production to the place of consumption. Transportation plays a very important part in prices. There are costs to various means of transport, such as maritime shipping, rail, road and pipelines. Shipping costs are affected by factors such as fuel prices, vessel availability, port congestion, weather conditions and geopolitical risks. Ships are taking longer routes because of security problems in the Red Sea, which has increased shipping costs. Such developments are directly reflected in commodity prices. Also, the cost of global trade is influenced by container costs and shipping rental costs.
Currency and Macroeconomic Factors
Commodities are generally priced in U.S. dollars. Thus, the dollar value has a direct bearing on the prices of commodities. A stronger dollar makes commodities more expensive for those buying with other currencies, and that can dampen demand. Commodities become more attractive when the dollar weakens and prices may go up. Commodity prices are also influenced by interest rates, inflation, economic growth rates and central bank policies. For example, rising interest rates could cause investors to move to alternatives such as bonds from commodities, which could lead to commodity prices falling. As the economy grows, industry produces more, and the demand for commodities rises.
Geopolitical and Supply Chain Risks
Commodity prices can change suddenly due to developments in geopolitics and supply chain risks. Wars, political instabilities, embargoes, trade wars and natural disasters can hamper the production and transportation processes, reducing the supply. For example, the Russia-Ukraine war has had a significant impact on natural gas and wheat prices in Europe. Tensions in the Middle East can similarly drive oil prices higher. Pandemics, port congestion, and production disruptions have exposed supply chain vulnerabilities. Such risks create uncertainty in the markets and raise price volatility.
What Determines Copper Prices?
Copper is one of the world’s most important industrial metals. It is used in countless products such as electrical cables, pipes, automotive parts, electronic appliances, and construction materials. Copper prices are an indicator of the global economy. As the economy grows, the demand for copper also grows. That is why copper is named “Dr Copper”, as it diagnoses economic health.
Factors Affecting Copper Prices
Copper prices are affected by many factors:
- Mining production — The supply is determined by the amount of production in copper mines. The largest copper producers are countries like Chile, Peru, China and Congo. That means worker strikes, natural disasters, or technical issues in these countries limit supply and increase prices.
- Energy costs — Mining and processing copper uses a lot of energy. If the price of electricity and fuel goes up, production costs go up, and prices go up.
- Exchange rates — Copper trades in US dollars. The price of copper also changes when the dollar value changes.
- Stocks — Copper stocks on the London Metal Exchange (LME) and Shanghai Futures Exchange are important signals of the supply/demand balance. When stocks go down, prices tend to go up.
- Investment demand — Copper is also traded by money investors. Price fluctuations may be caused by speculative purchases or sales.
How Global Demand Influences Copper Prices
Demand for copper is closely related to global economic activity. The following areas are particularly directly influenced by the developments regarding copper prices:
- Construction and infrastructure — Large amounts of copper are needed to build buildings, bridges, roads and water systems. Investments in infrastructure in countries such as China, the US, and India increase the need for copper.
- Electric vehicles — Electric vehicles have much more copper than traditional vehicles. As sales of electric vehicles increase, so too does the demand for copper.
- Renewable energy — Copper is used in solar panels, wind turbines and energy storage systems. Long-term copper demand will benefit from the move to green energy.
- Electronics and telecommunications — Copper is used in smartphones, computers and data centres. With digitalisation, the demand for copper grows.
China uses about half the world’s copper. Therefore, China’s economic policies and its activity in the construction sector are a determining factor for copper prices.
What Drives LNG Prices?
LNG (liquefied natural gas) is natural gas cooled to -162 degrees to become a liquid. That way, gas can be transported by special tanker ships without the need for pipes. LNG is vital for energy security, especially in Asia and Europe.
LNG Benchmarks and Regional Markets
Prices of LNG vary by region and are based on different indices:
- JKM (Japan-Korea Marker): This is the benchmark indicator for LNG prices in the Asian market. Japan, South Korea, China and Taiwan are following this benchmark.
- TTF (Title Transfer Facility) It is the leading European natural gas index, traded in the Netherlands. In Europe, TTF is normally used as a basis for LNG prices.
- Henry Hub — It is the main index of natural gas prices in the USA. This indicator matters for U.S. exports of LNG.
The differences between these indicators are indicative of the regional supply- demand balance and shipping costs. For example, an increase in winter heating demand in Asia boosts JKM prices and accelerates the flow of LNG from Europe to Asia.
Upstream Energy Costs & Feedstock Price Correlations
LNG prices are highly correlated with natural gas and oil prices. The raw material of the LNG is the natural gas, so the production costs of the natural gas directly affect the LNG prices. Also, some LNG contracts are oil-indexed, so when oil prices increase, LNG prices increase. The LNG price is also affected by the costs of liquefaction, transportation and regasification.
What Determines LPG Prices?
LPG is an abbreviation for Liquefied Petroleum Gas, a fuel produced from oil refining or natural gas processing. This is known as cylinder gas and is used for heating in kitchens and as automotive fuel. LPG is therefore a mixture of two main components, propane and butane.
Propane and Butane Market Fundamentals
LPG is primarily composed of propane and butane, and each is used for different purposes:
- Propane — It vaporises at lower temperatures, which is what makes it suitable for cold weather. It is applied to areas like heating, cooking and agricultural drying.
- Butane — Evaporates at higher temperatures and is typically used in the summer months or in temperate climates. It is used in portable and lighter gas stoves.
Prices of propane and butane vary with availability, refining, import and export volume and seasonal demand. For instance, during the winter months, the demand for propane increases, and its price goes up.
Feedstock, Freight and Seasonal Demand
The factors affecting LPG prices are as under:
- Raw material cost — LPG is a product of oil and natural gas. These resources are directly linked to the price of LPG.
- Transportation costs. LPG is transported in special pressurised tankers. Transportation costs (particularly in international trade) influence prices.
- Seasonal demand — LPG demand is higher in the winter months for heating purposes; in the summer months, agriculture and industrial use are dominant.
- Refinery output — The availability of LPG is linked to the volume of LPG produced at oil refineries. Maintenance periods at refineries could reduce supply.
- Government policies — Some countries include subsidies or taxes in the pricing of LPG.
What Determines Natural Gas Prices?
Natural gas is a common energy source used to heat homes and generate electricity in industry. It is also used as a feedstock for the production of fertilisers and polymers. The price of natural gas is one of the most significant indicators of the global energy market.
Supply, Demand and Storage Levels
Key factors determine the price of natural gas:
- Volume of production. Natural gas is found underground in reservoirs. Production up, prices down; production down, prices up.
- Demand — Homes, factories, and power plants use natural gas. Prices go up when demand for heating increases in the winter months.
- Storage levels — Natural gas is stored in storage facilities underground. Prices go down when the storage facilities are full and go up when they are empty.
- Import/export — Pipeline and LNG terminal trade affects regional prices.
Weather, Infrastructure and Regional Market Conditions
Weather conditions are very important in the determination of natural gas prices. For instance, a cold winter raises heating demand and pushes prices up. Very hot summers, however, increase the use of air conditioning, affecting electricity demand and, in turn, natural gas prices. Another important factor is infrastructure: the more developed the pipelines, storage facilities and LNG terminals are, the more reliable the supply and the more stable prices. Regional market conditions also affect prices.
For instance, disruptions to gas supplies from Russia to Europe have pushed prices much higher.
What Factors Affect Iron Ore Prices?
Steel is made from iron ore, which is the main raw material. Steel, however, is used in many sectors like construction, automotive, machinery manufacturing and white goods. Therefore, iron ore prices are a major indicator of worldwide industrial production.
Chinese Steel Demand and Iron Ore Consumption
China consumes the most iron ore in the world and produces the most steel. China accounts for some two-thirds of global iron ore demand. Therefore, the policies of China in the construction sector, infrastructure investments and steel production have a direct impact on the prices of iron ore. Demand for iron ore and prices are both increased when China’s construction industry improves. The Chinese government is cutting steel production, pushing prices down with less demand. At the same time, China’s steel exports and inventory levels are also sending important signals to the market.
Global Production, Supply and Freight
A few large mining companies dominate iron ore production. Australia, Brazil, South Africa and India are among the largest producers. When there are production disruptions, natural disasters or logistic issues in these countries, it causes shortages and higher prices. A mining accident in Brazil or a cyclone in Australia could threaten the world supply of iron ore. Shipping costs are important as well: iron ore is typically transported by sea, and the freight costs are included in the prices. Furthermore, the grade ratio of iron ore and the type of ore (haematite, magnetite) are additional factors affecting prices.
What Determines Global Steel Prices?
Steel is the most widely produced and consumed metal in the world. It is a major input for the construction, automotive, machinery manufacturing, shipbuilding and white goods industries. Steel prices are a bellwether for the state of the global economy.
Key Drivers of Carbon Steel, Stainless Steel & Scrap Rates
The drivers of steel prices differ by steel type:
- Carbon steel — This is the most widely used type of steel. The price is related to iron ore, coal (coking coal) and energy costs. Also, the demand in construction and infrastructure investments has a direct influence on the carbon steel prices.
- Stainless steel — Has alloying elements such as nickel, chromium and molybdenum. The price of stainless steel is based on the prices of these metals. Nickel prices are a big factor in the price of stainless steel.
- Scrap steel — Electric arc furnaces use recycled steel. Scrap prices are dependent on scrap supply, steel demand and energy costs. As the price of scrap goes up, so do the costs of producing steel.
Apart from these, other important factors affecting the price of steel are trade policies (anti-dumping duties, tariffs), environmental regulations (carbon taxes), energy prices and the global supply-demand balance. China’s steel production and exports are a key driver for global steel prices.
What Determines Polyethylene & Polypropylene Prices?
Polyethylene (PE) and polypropylene (PP) are the most produced and consumed plastics worldwide. They have a very wide spectrum of applications, from packaging to automotive and from construction to textiles. Hence, the prices of PE and PP are of great importance both for the industry and the consumer.
Polymer Resin Price Factors: From Upstream Feedstock to Global Supply
The chain from raw materials to final product shapes the factors that impact polymer resin prices:
- Cost of raw materials — PE is made from ethylene, and PP from propylene. Ethylene and propylene are derived from petroleum refining or natural gas processing. Hence, the oil and natural gas prices directly influence the polymer prices.
- Production capacity — The supply depends on the capacity of polymer production facilities worldwide. When new facilities come online, supply goes up and prices may go down; when there is maintenance or a shutdown at the facilities, supply goes down and prices go up.
- Global demand — Demand in the packaging, automotive, construction and textile sectors impacts polymer prices. The global polymer market is fuelled by growing demands, especially in Asia, particularly China and India.
- Shipping and logistics costs — Polymers are shipped in bags or in bulk bags in granule form. The shipping costs are used to calculate the prices, especially in the case of international trade.
- Currencies — Polymers are traded in dollars. The value of the dollar will affect prices for buyers using other currencies.
- Environmental regulations — Polymer demand and prices can be affected by recycling mandates, plastic usage restrictions and carbon taxes.
- Trade policies — Anti-dumping duties and tariffs affect polymer trade internationally and their prices.
How Oil and Natural Gas Prices Affect Polymer Markets
Polyethylene and polypropylene are derived from raw materials sourced from oil and natural gas. Hence, the price of polymers is directly dependent on the prices of these two energy sources:
- Oil prices — The price of raw materials such as naphtha and propylene goes up when oil prices go up. This raises the production cost of PE and PP and is reflected in the
prices. Oil prices are a big factor, especially in Europe and Asia, where most of the production is based on naphtha.
- Natural gas prices. Polymer production is generally based on natural gas (ethane and propane) in North America and the Middle East. If gas prices go down, producers in these regions will be more competitive, and polymer prices may fall. When natural gas prices go up, costs go up.
The difference in energy cost is: Since energy costs vary from region to region, the costs of producing polymers vary from region to region. This has implications for global trade flows and prices for polymers. For example, polymer production is more competitive in the US, as natural gas is cheap and the US has become a major exporter of polymers.
To summarise, the polymer market is driven by oil and natural gas prices. Changes in these two energy sources cause instant and swift changes in PE and PP prices.