Energy prices have of late hit multi-year highs. Crude oil, natural gas and coal market rates are at elevated levels. While Brent crude is seen testing $85 a barrel, WTI is trailing at $80 a barrel. Newcastle coal trades at a new high of $235 a tonne. The US natural gas is above $5.50 per mBtu.

High energy prices are seen propelling the price of other commodities higher. Often, energy commodity prices and non-energy commodity prices move in tandem. While high energy prices are themselves a trigger for inflation, their impact on the cost of production of other commodities including metals and agricultural goods further exacerbates the overall price situation and accelerates inflationary tendencies.

Also read: Asian shares fall as global energy crunch fuels inflation worries

With high energy prices, the energy intensity of non-energy commodities comes into play. Industrial metals are a good example of high energy intensity of commodities. They require large energy inputs for production and so, energy costs have a bearing on the overall commodity production cost.

Aluminium, tin and nickel, for instance, consume a lot of energy. This week aluminium prices have escalated to a new high and breached the $3,000 a tonne mark because of rising energy prices as well as electricity crunch in China. Steel is another energy guzzler. With production of about 1,800 million tonnes a year, steel consumes a notable percentage of total global energy usage.

Precious metals too are energy intensive. Energy represents a sizeable part of the production cost of platinum and gold including mining and refining.

Impact on agriculture

Relatively less-appreciated is the relationship between energy prices and agricultural cost of production. For instance, high crude oil prices impact agricultural commodity markets in more ways than one. High crude oil and natural gas rates translate to higher cost of chemical pesticides and synthetic fertilizers.

Higher input cost raises the overall cost of production of crops. What’s more, processing of crops and transportation of agricultural goods also becomes more expensive with high energy costs.

There’s another angle. Elevated levels of crude oil encourage greater diversion of agricultural crops for making biofuels. For instance, sugarcane, corn and wheat are used to make ethanol for blending with gasoline while vegetable oils (palm, soy, rapeseed oils) are used for making biodiesel, by a process called transesterification, to be mixed with mineral oil diesel. Some countries have imposed mandatory blending while discretionary blending is practised elsewhere.

Interestingly, there is a positive correlation between economic growth and consumption of energy products and industrial metals. No wonder, often, energy products and industrial metal markets move in tandem. Demand for both energy products and industrial metals moves with the level of industrial activity.

Of course it is necessary to clarify that high energy prices are not the sole driver of commodity markets. Fundamental factors such as supply and non-fundamental factors like financial investment, monetary policy and currency play a part in exaggerating the price impact.

(The author is a policy commentator and commodities market specialist. Views are personal)

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