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May 4, 2021

The worst is yet to come

Business

May 4, 2021

LAHORE: Pakistanis must brace for further increase in prices of almost everything this time, not because of government’s incompetence, but due to increase in global rates of all raw materials needed for production of commodities.

Covid-19 first devastated the most advanced economies, including China, Europe and the United States. That killed the demand for numerous raw materials and commodities.

Only food and healthcare sectors saw rising demands. The deadly virus is still playing havoc in the United States, but its economy has been given a huge fiscal stimulus to roar back.

Chinese and European economies are rebounding. The rebound is accompanied with surge in demand be it steel, copper or lumber. China is one of the largest users of raw materials and also largest supplier of some. There is stiff competition for most raw materials among these economies taking the prices to new heights.

The cost for almost everything is on the rise whether it is construction, vehicles or food. In fact, food prices have been rising for the last eleven months, according to the Food and Agriculture Organization.

There is a risk of higher inflation in most of the developed economies due to the fiscal stimulus provided by them, but their central banks are staying put and not bothered about the inflationary impact letting the economic resurgence continue without brakes.

That means the demand for commodities would further grow. This trend would have grave implications for Pakistan’s economy that is experiencing the third and the gravest wave of Covid-19.

Consumers in Pakistan are surprised that the prices of all products have not declined even after revaluation of the rupee by about 8 percent in the past two months. Car prices remain high, steel prices are increasing, edible oil is dearer, and copper and aluminium-based products are more expensive.

This is all due to very high prices of these commodities. Surge in the prices has not stopped; Bloomberg quoting an expert predicts commodity rates to further increase by 10 percent next year.

It would be unrealistic to expect prices of anything to come down anytime soon.

Commodities rates are a boon for commodity exporting countries, but Pakistan unfortunately is a net importer of all commodities used in the industrial processes.

Car manufacturers have made the people know that they use copper, aluminium and steel in their products and an increase in their rates would impact car prices. But people in Pakistan are not aware of other uses of these metals in our country.

Copper prices almost doubled from $5,100 in May 2020 to around $10,000 per ton by April 30, 2021. Besides its use in renewable energy technology (solar panels) and electric vehicles, copper is widely used in power grids, winding of motors and electric cables used in laying cable networks in residences, commercial buildings and industries.

The rates of fans, cables, all types of motors would continue to go up if copper prices continue with an upward trend. Fallout of this increase in Pakistan is the emergence of substandard products, where manufacturers use less percentage of copper where 100 percent copper is required.

Steel prices are increasing like never before. Two years back the global steel industry was in gloom. Numerous steel plants were closed in Europe. But with the surge in demand in China and Europe the price of hot rolled steel has increased from euro 402/ton last year to euro 965/ton now.

There is a construction boom in Pakistan where there is considerable use of steel in residential projects and massive use in commercial buildings and infrastructure projects. The impact of high steel costs would be less on residential construction, but the cost of commercial buildings and infrastructure projects would be much above estimates made one year back. We do not have iron ore reserves in Pakistan and import it, or import steel scrap for our steel re-rolling mills.

The increase in global rates of grains has increased the cost of rearing poultry birds and cattle. Cost of corn used to feed livestock has increased from $148/ton a year back to $245/ton.

Global meat rates are rising and Pakistan stands a chance to enhance its meat exports as world demand rises above supplies. We fortunately still have surplus meat available.

Our grain prices are rising at a higher pace than the percentage increase in the global markets. Wheat, sugar and edible oil have seen their historic peaks in the past two years with sugar prices more than doubling.

Worst is still to come when local vested interests would factor in the impact of global prices on their locally produced products.