The two biggest news stories in the headlines at the minute relate to the inflationary pressures present across the world and the conflict between Russia and Ukraine. And whilst one of these is not strictly the direct cause of the other, they nevertheless, have a close relationship.
For the countries that have strong exposure to the commodities markets, such as Canada, this has very much proved to be a mixed bag. And whilst the rising prices of commodities, such as oil and gas, have brought bumper profits for businesses operating in this sector, increases in commodity prices have hit Canadian consumers hard. According to the latest figures, inflation in Canada has reached a 39-year high of 8.1%, this figure has been directly impacted by rising energy and food prices.
For Canadian traders and investors who pay close attention to the markets, the rise and fall of commodity prices have also been of great interest—although perhaps for very different reasons. Volatility in the commodities markets has presented trading opportunities for traders, although this has had an impact on other sectors of the economy and other financial markets.
With that said, if you are one of the many novice traders who are looking for direction with how to trade commodities in Canada amidst all this economic uncertainty, keep reading this short article for a brief primer on the market forces at play. And who knows, armed with this knowledge, you might even be able to spot some new trading opportunities in the near future!
What are commodities?
In the global economy, commodities are basic economic goods that are highly fungible—meaning that they are interchangeable with other goods of the same type. Commodities are typically used as inputs in the production of other goods or services. In this way, commodities as a raw material are distinguished from a product, as a finished good that is sold to consumers.
Examples of commodities include crude oil, gold, coal, gas, and metals, as well as agricultural products such as wheat, corn, soy, coffee,and cotton. There is a distinction between hard commodities—which are mined or extracted—and soft commodities—which are grown.
Canada and commodities
Canada has historically had a close relationship with commodities, which have formed a major part of the Canadian economy. And whilst Canada has grown into a global economic superpower, thanks to the growth of manufacturing and information technology services, commodities still form a major part of the country’s economic output.
For example, in 2019, Canada exported $114 billion worth of energy products alone, in addition to significant volumes of food, wood products, and minerals. Therefore, the health of the Canadian economy has generally been tied to the state of the global commodity markets, given that this is where much of its economic output is sold. Canada’s top commodity exports are Canadian crude oil and petroleum, gold, wheat, aluminium, and rapeseed.
What impacts commodity prices?
The prices of commodities are ultimately determined by supply and demand. What the “supply” and “demand” is at any particular point in time will be impacted by a wide variety of factors, such as natural disasters, the demand from investors, famines, production levels, adverse weather events, and general investor appetite. It might also be impacted by agreements between states regarding production levels, as is the case with OPEC (or the Organisation of Petroleum Exporting Countries).
How is the Russia-Ukraine conflict impacting commodity markets?
The conflict between Russia and Ukraine has dealt a major shock to the commodity markets, which has had repercussions across the world.
This has disrupted the production and trade of a number of important commodities which Russia and Ukraine are important exporters of. This includes energy such as oil and gas, fertilizers, and grains.
Russia is the world’s largest exporter of wheat, pig iron, natural gas, and nickel. They also capture a large share of coal, crude oil, and refined aluminium. Russia and Belarus are important exporters of fertilizers for the agricultural sector too. Similarly, Ukraine is an important supplier of wheat and sunflower seeds, as well as fertilizers.
The supply of these important exports has been impacted not only by the physical blockades caused by the conflict but also by the disruption to their production.
These supply disruptions have led to greater demand across the world, which has, in turn, increased prices. Increased commodity prices come on top of an already tight commodity market, which has experienced increased price pressure due to supply issues during the pandemic. This has had a compounding and spiralling effect and has created inflationary pressure across the world.