Investors jittery as input prices soar

At a time when businesses in Bangladesh are putting all their efforts to recover from Covid shocks, new crises are emerging one after another as prices of all inputs--from energy to cotton to base metals – are skyrocketing.

As soaring raw material prices are raising production costs, exorbitant freight charges are eating into whatever small profit margin they still have.

This same scenario is emerging all across the globe as businesses and factories try to return to normalcy with signs that the virus is apparently within control.

The situation is even worse for Bangladesh's industries that depend on imports for almost all raw materials.

Earlier this year, the World Bank had forecast global commodity prices, which were already above pre-pandemic levels because of an upsurge in economic activities, would gain further and stabilise in the rest of the year.

In its semi-annual Commodity Markets Outlook, the global lender projected that energy prices would be higher by a third than in 2020, with oil averaging $56 a barrel while metal prices would climb 30% and agricultural 14%.

The outlook was published before new variants rattled the confidence gained from vaccine rollout, slowing the recovery and prolonging the pandemic worldwide. Supply chains were disrupted further and the price rally defied most of the past forecasts.

Now, industrial raw materials, and primary energy sources like oil and gas are among the most volatile of most traded commodities that matter for industrial growth around the world.

The Dow Jones Commodity Index rose by about 70% in June. Since then, some materials have continued to climb, some have gone down.

Oil crossed $80 a barrel in September – for the first time in three years.

The price of copper was pushed up as demand recovered, while lithium, used in electric-vehicle batteries, rose by 21% in September alone.

All these created sudden surges in demand for raw materials at a time when both producers and the shipping infrastructure, still disrupted by local bouts of Covid-19, are already under strain, The Economist said in an analysis last week.

For commodity market "super-mayhem", the magazine identifies uneven nature of economic rebound as a key reason. China led the world's pandemic recovery, but the rebound in the world's second largest economy seems faltering. While the USA is going at full throttle, Europe is facing a slowdown due to Delta variant and supply bottlenecks. Most of the small economies are yet to gain pace.

The commodity market chaos has come as a fresh blow for all, irrespective of big and small. No matter how strong it is to sustain any shocks, a more than 80% hike in gas spot price is a great concern for Europe.

And any such shock is definitely much harder for countries like Bangladesh. A 22% surge in Brazilian coffee may be ignored, but a steep surge in oil and gas prices is enough to frustrate both industries and consumers in Bangladesh.

High oil prices mean a bigger burden of subsidy, which the state-owned petroleum monopoly is trying to pass on to consumers. Furnace oil price hike will enhance cost of electricity generation as the government is gradually switching over to cleaner fuel to avoid coal-based power generation.

Prices of LNG and components of LPG, two important energy sources for Bangladesh, have been rising.

Petroleum products accounted for 7% of Bangladesh's total imports in the pandemic-hit fiscal year 2019-20, while the share of iron, steel and base metals was more than 5%, according to data of Bangladesh Bureau of Statistics. The demand for raw materials and capital goods is surging with the enhanced activities in factories.

Import of iron, steel and base metals surged 69% in July-August this year compared with the same period last year, when demand fell drastically due to pandemic-induced disruption. The growth was over 6% for petroleum products and 57% for plastic and rubber articles that shared 3% of the import basket.

So, any volatility in the global market is certainly a concern for Bangladesh's industries which rely mostly on imports to cater both for local and export markets.

Shahriar Jahan Rahat, deputy managing director of KSRM and also director of Chittagong Chamber of Commerce and Industry (CCCI) told The Business Standard, "Prices of all raw materials have surged abruptly which leads us into uncertainty. We panic while buying any raw materials in advance as we cannot predict anything."

Giving an example, he said in 2007, the prices of scraps, raw materials of steel products, increased up to $700 per tonne which had fallen to $150.

"If the instability continues for a long period, it ultimately will create pressure on consumers then they will reduce consumption – the impacts will be on industries. So the industrialists and investors are in tension. We want sustainability," added Rahat.   

The drop in iron ore price is welcome news for the steel industry, which is reeling from the pandemic shocks on the back of a surge in construction works, mostly in the public sector.

When contacted, HM Steel and Golden Ispat Director Mohammad Sarwar Alam said, "Bangladesh steel industries will not be benefited from the price drop of the Iron ore; the steel industries are dependent on scrap materials. Moreover, the price of coal has doubled compared to last year – which impacts the products related to coal such as the price of silicon manganese, Ferro manganese and sponge iron. In the span of one week, the price of these raw materials increased by $80 per tonne."

But lithium price hike may frustrate Bangladesh's ambition for battery-driven automobile journey. Encouraged by favourable policy support and tax break promises, some private sector entrepreneurs are planning to assemble electric vehicles and set up battery plants. Lithium price hike is not encouraging for them at this initial stage of their plan.

Bangladesh Auto Industries Limited (BAIL), a local automobile company which is set to produce electric vehicles (EV) which uses chemical energy stored in rechargeable lithium-ion battery packs at Chattogram's Mirsarai economic zone, is also cautiously observing the price of lithium.

Masud Kabir, managing director of BAIL told The Business Standard, "We are observing the price in the global market and trying to locate the root causes of price ups and downs to set up a better price for our customers."

Similarly, copper going costlier is a shock to Bangladesh's cable industry. For a range of products made from copper like- electric transformers, copper wires, copper strip, copper rod, copper pipes, copper bus bar, and copper tubes, the prices are becoming unstable, said industry insiders.

When contacted, SK Miraj Ali, company secretary of Coppertech Industries Limited, a leading company that makes copper-related products, said, "As the price is increasing at the global market it has impacts in the local market as well. The prices of copper items are increasing as a response to the rise in the global market."

Gazi Mukarram Ali Chowdhury, Chairman of Marine Safety System, award-winning copper-related products exporters said, "The price of copper has been very unstable. Around a year ago it was $6,000 and now it is $10,000 per tonne. On Friday, the price of copper was $8,300 and on Monday it became $9,200 per tonne. China is one of the largest suppliers of the metal.  As China has affected the supply, the prices of copper rose."

Bangladesh is willing to enhance its share of clean fuel in its future energy mix. As the natural gas reserve is dwindling for want of new discoveries and explorations, the government in recent years promoted the import of clean fuels including LNG and LPG.

While mayhem in the raw material and metal market may shake investors' confidence in Bangladesh as anywhere else in the world, the soaring price of clean fuels and battery ingredients will jeopardize the nascent initiatives to choose between green and dirty fuels especially for energy-hungry countries like Bangladesh.