It's deja vu on commodities :: Business Line,

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Over the last one year, prices of crude have rallied 42 per cent in dollar terms, copper moved up 40 per cent and the price of the agri-commodity, urea, has more than doubled. The key commodity categories of energy, metals and agriculture have been making waves in tandem, yet again globally, stoking inflation and threatening to upset the growth engine, especially in the developing countries. This is reminiscent of the commodity movement prior to the 2008 peak. It is deja vu all over again.

For Corporate India, the hike in the prices on the raw materials front and inability to pass the hikes fully has meant weaker profit margins. With commodity movements, barring perhaps agriculture (in the case of India) mostly influenced by a bevy of global factors, we take a look at events driving energy and metals, with the World Bank's pink sheet (commodity prices and indices) as a base.

ENERGY

The Energy Index of the World Bank (with crude, coal and natural gas as constituents) increased at a compounded annual rate of 9 per cent per annum over the last five years, far higher than the core inflation in most countries. It is currently 23 per cent below its highs in 2008.

Even as crude, the major constituent in the Energy Index, averaged at $77 a barrel until September 2010, declining inventory and political turmoil in West Asia and North Africa stoked prices to as high as $116 a barrel in April 2011. The loss of 1.3 million barrel a day of Libyan light sweet and distillate-rich crude was not made up by the OPEC countries, despite spare capacities, on account of lower demand for medium-sour crude that OEPC supplies. Note that the dollar's depreciation against major currencies is also one reason for the oil rise. In all, according to a World Bank report, estimates have it that oil was costlier by $15 a barrel as a result of the Libyan supply loss. The report also estimates crude to average at $107 a barrel for 2011, assuming no further supply disruptions. In the case of coal, stringent mining policies in countries such as Indonesia or Australia, could keep prices elevated.

METALS

Chinese demand for metals is widely reported to be the key driver of metal prices. China is known to be the world's largest consumer of metals — eating into 40 per cent of global supplies in 2009. While sluggish demand in 2010 kept metal prices (represented by World Bank's Metal index) well under their 2008 highs, the index crossed the earlier peak in February 2011 with metals such as tin and copper shooting past their pre-crisis levels to move to new highs. At its peak in April 2011, tin prices were twice their year ago rates.

Others such as aluminium (of which China is a net exporter) though remain well below their 2008 highs, owing to higher supplies. While most metals have shown weakness since February 2011, the World Bank estimates prices of metals to close 17 per cent higher in 2011, before higher supplies curb price rallies in 2012. Energy costs too, will be a key determinant of metal prices