The primary reason behind the prices of commodities is the economic principle of supply and demand. Unlike stock prices that can be affected by earnings of a given company or an investor’s perception. The interplay of supply and demand leads to price fluctuations, movement in the market, and prospects for investment. In the UK and other countries around the world, commodity traders, investors, and companies need to know how the global market operates so they can make sound investments and business strategies.
Understanding Supply and Demand in Commodity Markets
Every single economic activity is based on supply and demand. When looking at the commodity markets, supply and demand are what affect the price of crude oil, metals, agricultural products, and natural gas.
Supply
Supply refers to the total amount of a commodity which producers are willing to sell at a particular price. The factors that will affect supply would be production, level of political stability, technological innovation, and government policies.
Demand
Demand refers to how much of a commodity the consumers are willing to buy at a given price. Demand is affected by how powerful the economy is, the needs of the industry, demographic change, and general spending trends.
Why Commodity Prices Rise and Fall
When the amount of a product supplied into the market exceeds its demand, prices usually drop. On the other hand, if the demand for a product increases while the supply remains the same, the price goes up. These price changes allow traders and investors to buy or sell based on predictions made regarding the price changes of the commodities.
Things that Affect Supply in Commodity Markets
The supply of commodities is susceptible to various factors, which often leads to price changes. Here are some of the more important factors:
Geopolitical and Economic Events
Political instability as well as matters like trade restrictions and even conflict in key regions tend to cause a shift in the supply chain. Sanctions placed on oil exporting countries like Russia or Iran tend to increase crude oil prices due to the limited supply globally.
Natural Catastrophes and Climatic Changes
Particular attention must be paid to weather patterns in agricultural commodities. Droughts, floods, hurricanes, or other natural disasters can greatly hinder crop output leading to higher prices.
Production Costs and Technological Advancements
Extraction, labour and capital investment in technological advancements all influence the production of commodities. For example, the global supply of oil increased due to improvements in oil “fracking” technology, which then led to a lower global price of oil. At the same time, the greater costs of mining oil have the opposite effect on metals such as copper and aluminium.
Government Policies and Regulations
The supply of commodities is highly influenced by a country’s subsidy, set tariffs, and trade policies. Agricultural subsidy policies adopted in the UK, for instance, affect the output and price of farming products in the country.
Factors Affecting Demand in Commodity Markets
There are a number of things that affect the demand in commodity markets, such as economic or seasonal aspects. Here we outline some factors affecting the demand of commodities:
Economic Growth and Industrial Demand
Coal, Iron ore, crude oil, copper, and natural gas are the main types of commodities that industrial production depends on. Economic growth of the UK manufacturing industry and the energy industry concomitantly increases in the demand for these resources.
New Technology
The demand for conventional fossil fuels can be lessened due to innovations in technologies and movements towards renewable energy. The increasing use of solar and wind power, for example, has an impact on the demand for coal and oil.
Consumer Trends and Population Growth
The rising global population requires more and more basic products like food, energy, and metals. Modern consumer trends, like the increased adoption of electric cars will increase the demand for lithium and cobalt, which are crucial for making batteries.
Fluctuations in Demand on Seasonal and Cyclical Basis
Certain commodities have seasonal variations in demand. In the United Kingdom, demand for natural gas increases in winter when the need for heating is high. On the other side, there are cyclical variations such as an increase in gasoline demand during summer when more travel is done.