Willy Wonka would not have been happy. Cocoa prices touched a 33-year high in April thanks to a combination of robust demand for chocolate and a poor crop in West Africa.
The eccentric owner of the chocolate factory in Roald Dahl’s wonderful tale of childhood fantasy would have cringed at the prices of his main raw material. Car companies in the real world are currently having similar emotions as they see the price of their chief input climb. ArcelorMittal chief Lakshmi Mittal told the Financial Times last week that steel prices are likely to go up by around one-third owing to higher iron ore prices, and that he has already informally sounded out steel buyers that prices are northbound.
There are similar tales from other parts of the global economy because of soaring commodity prices. The blame games have already begun, with each section of the value chain blaming suppliers down the line. So car companies are blaming steel companies which are pointing fingers at iron ore miners. The net result continues to be inflationary pressure.
Illustration: Jayachandran / Mint
All this usually leads to lobbying. We inevitably see this in India as well. Companies that consume steel lobby the government to cut steel import duties so that domestic prices can be brought down. The steel companies lobby for a ban on iron ore exports to China. The Indian government is not above some independent tinkering as well, with discreet phone calls to companies to hold their price line.
All this excited action does not take away from the main fact that we are perhaps in the midst of a secular bull run in the prices of agricultural and industrial commodities. China continues to drive global commodity prices thanks to the appetite of its manufacturing and infrastructure sectors. The Indian government too aims to catalyse $1 trillion of infrastructure spending in the next five years—that will mean demand for a lot of steel, cement, aluminium, coal, etc.
The upswing in commodity prices need not be smooth. Tighter monetary policies in the Western economies or a double-dip recession will undoubtedly take some air out of inflated commodity prices, but the price trend in the medium term seems set to be inflationary.
The government will be sorely tempted to force companies to hold the price line, but that is not the correct policy response. India needs to deal with the problem from the supply side by making it attractive for companies to invest in mining and manufacturing capacity. The fact that much of the country’s ore wealth is in Naxalite-controlled territory is a significant problem.
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