By BDC
MONTREAL, Canada – The recession caused by the pandemic and the recovery that’s still underway have brought new economic concerns to the forefront for many entrepreneurs. Among these is a sharp rise in commodity prices.
While these increases are generally good for Canada’s export performance and therefore its economic growth, they are a major issue for many entrepreneurs. Will these price increases continue in 2022?
Surging prices seen for many commodities
Energy prices are rising towards the peak they hit in 2014 before a price collapse dealt a heavy blow to the Canadian oil and gas sector and the economy as a whole. Elsewhere, lumber prices have been on a rollercoaster ride; metal prices continue to move higher; and consumers are struggling with increasing grocery bills.
Unsurprisingly, the main reason for the commodity price spikes is a supply/demand imbalance caused by the pandemic. As these imbalances begin to resolve, commodity price volatility should ease slightly this year. However, we don’t expect a full return to normalcy to occur until 2023.
Energy
With the global economic recovery comes strong demand for energy. Once high energy demand related to the cold season passes and production increases, prices for many energy products are expected to decline to more stable levels, although higher than those experienced before the pandemic.
Since mid-2020, oil consumption has outpaced production. The reopening of economies has boosted energy demand, leading to a crisis in Europe and Asia. To counter a shortage of natural gas, many countries have turned to oil and coal to meet their needs.
Oil and gas production is expected to continue to increase throughout the year but will only be sufficient to replenish inventories by the end of 2022. Energy prices should therefore remain high, or even increase, in the short term. However, they should begin a downward trend later this year.
Metals
The majority of non-precious metals enjoyed an exceptional year of price increases in 2021. Record demand for goods, including such metal-intensive products as cars, appliances and electronic equipment provided support for metal markets. On the supply side, inventories built up in recent years were rapidly depleted.
This year, consumers are expected to move a portion of their spending on goods to services as lockdowns are eased. A slowdown of the Chinese economy, the most important player in the metals market, should also calm the recent demand frenzy.
On the other hand, supply will continue to be limited by high energy prices. Metal production is highly energy-intensive and, at current prices, some plants and foundries have no choice but to close. This is the case for aluminum in China and zinc in Europe. As a result, many metal prices will remain near or slightly above recent levels, but relief is expected to come in early 2023.
Lumber
The lumber market was hit by extreme price swings in 2021. Here, prices appear to be heavily influenced by the evolution of the pandemic. In early May 2021, the price of hardwood planks of various lengths was more than six times higher than in April 2020. Prices eased briefly during the summer season before rebounding in early fall as the Delta variant took hold in the US and flooding in British Columbia made freight transportation difficult.
The rise of telecommuting and recurring lockdowns has created new real estate needs. Housing starts and renovations reached record highs during the pandemic on both sides of the Canada-US border. Much of the momentum in the residential sector has come from increased household disposable income and low interest rates supported by fiscal and monetary policies. Demand will remain strong in 2022 but will slow from last year’s peak.
The era of cheap money is coming to an end with central banks removing stimulus and should be reflected in the housing—and therefore lumber – market in the coming months. It should also be noted that import tariffs on Canadian lumber doubled for Americans, from 9 to 18 percent in November.
Supply will remain tight in the coming years due to insect infestations and the increase in forest fires that deplete the resource a little more each year. The lumber market could once again see significant price swings, but prices should stabilize later this year once endemic levels are reached in Canada and the US and rates have recovered from their lows.
Agri-food products
While food inflation affects consumers more than businesses, food price increases still impact a wide variety of companies. This is because consumers adjust their spending on other items based on their grocery bill. According to many experts, food inflation will continue into 2022.
In addition to supply chain issues, the industry is being hit by labour shortages, production slowdowns caused by pandemic health measures and high energy costs. Additionally, food-producing regions have been plagued by difficult weather conditions, including a drought on the Canadian prairies last summer.
While wages are expected to rise in 2022, this will not be enough to fully offset the impact of food inflation on consumers’ pocketbooks.
The impact on your business
- Energy prices should only correct in the second half of the year. If your business is energy-intensive, try to see how you can improve your operational efficiency to reduce your energy needs. Although prices should fall later this year, reducing your energy dependence will be good for you in the longer term.
- Households will have to revise their budgets to cope with interest rate increases and food inflation. This may hurt demand for certain goods or services.
- Consumption of goods and residential spending should moderate this year but remain high. This will be reflected in lumber and metals markets, which will remain strong but nowhere near the growth rates seen in 2021.
