A Commodities Crunch Caused by Stingy Capital Spending Has No Quick Fix

HONG KONG—A yearlong steep climb in commodity prices is testing an economics maxim: High prices cure themselves by spurring supply and quenching demand.

Languishing commodity prices led producers to slash capital spending on major resources by nearly half over the last decade, shrinking stocks of industrial metals to two-decade lows and reducing supplies across commodities. The crunch now is converging with a buying spree in key markets to supercharge prices—and there is no quick fix.

Since 2011, investments to develop the energy and mining sectors have fallen 40%, according to asset manager Schroders, leaving many producers unprepared for a recent boom in manufacturing and spending in the world’s two largest economies. Prices of resources from corn to lumber to battery metals have risen sharply over the past year, in many cases to twice or more from pre-pandemic levels, aided by low interest rates, a weaker dollar and infrastructure building in the U.S. and China.

The consequences of underdeveloped global resources now stoke worries among regulators and companies that producer price inflation—buoyed by demand projections that in key materials stretch decades ahead—is becoming sufficiently broad and prolonged that it spills onto consumer prices. Raw-material shortages sometimes morph into broader market dysfunction that force companies to cut or shut production, as some car makers have done in recent months because of limited semiconductor supply.

“It’s not how much it will cost, it’s whether or not you can get it,” said

Tai Wong,

analyst at BMO Capital Markets. “It’s like chips—without it, you can’t sell cars.”

Copper, a widely used metal that economists view as a proxy for macroeconomic health, illustrates the long trail of the supply crunch.

From 2011 to mid-2016, there were an average of 3½ months of global copper surpluses and 8½ months of shortages annually, International Copper Study Group data show. From September 2016 onward, the deficits became more frequent, increasing to an annual average of 10 months with two months of surpluses.

A copper refinery in Verkhnyaya Pyshma, Russia.


Andrey Rudakov/Bloomberg News

Supplies won’t stay uniformly short. Agricultural harvests turn on the weather. Established markets such as crude oil have infrastructure that can readily raise supply. But the lag in capital investments in key new sectors slows their responsiveness to fast-changing demand that requires doubling—or, for some battery metals, tripling—production in coming years, analysts say.

“A lot of ore comes from very remote locations, some in the middle of a desert,” said Peter Gray, director at Perth-based consulting firm Moore Australia. Often, “the cost of building a processing plant where the mine is means it will never get off the ground.”

Justifying the cost and securing funding mean adding time. Three years ago, few investors were interested in

Element 25 Ltd.

’s pitch to develop battery-grade manganese, said managing director Justin Brown. The Australian miner is in prime position as the metal has emerged in recent months as an efficient ingredient in rechargeable batteries—but its project still needs at least a year to put new financing, processing and offtake agreements in place.

A battery pack is installed in an electric sport-utility vehicle. Prices of battery metals have risen sharply over the past year.


Milan Jaros/Bloomberg News

American lumber mills, which can take two years to build, added about 10% to their capacity in the last five years. They haven’t kept up with home-building demand that has roughly doubled lumber prices year-over-year. Global supplies of commodities from platinum to coal fell or flatlined last year from 2019.

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In West Africa, Rio Tinto Ltd.’s Simandou iron mine—a rare case of a single project with enough scale to substantially increase global supply—needs a 400-mile railway to move its metal to port. Production hasn’t begun after more than a decade in development.

Innovations blunt price surges, but not for long. New Chinese smelting techniques slowed nickel price advances early this year, but prices have continued to push upward since. Electric-vehicle makers chasing battery ingredients have pushed nickel and cobalt and other battery-metal prices at least 40% higher year-over-year.

The surges are spurring inflation concerns. Individual commodities are a small part of the final price tag of consumer goods, and aren’t likely on their own to move the price significantly. After soaring 40% year-over-year, cobalt prices still are just 1% of an electric vehicle’s cost. But the broad rallies stoke producer price inflation, a harbinger—though inconsistently so—of consumer inflation. PPI is rising in both the U.S. and China.

“We need to keep prices basically stable, and pay particular attention to commodity price trends,” China’s Vice Premier Liu He said in April when Chinese PPI rose 6.8% year-over-year, the highest in nearly four years.

In the short to medium term, higher commodity prices, instead of triggering the market’s self-regulating mechanism, can beget higher prices as concern about securing tight supplies amplifies purchasing momentum, BMO’s Mr. Wong said.

A shoe factory in Chongqing, China. Chinese exporters this year raised prices on products such as furniture and boots.


Wang Quanchao/Xinhua/Zuma Press

China’s consumer inflation remained at a relatively low 0.9% in April, but its commodity buying has roiled markets elsewhere. A run on natural gas last winter, caused by huge Chinese purchases, put parts of Japan on the verge of blackouts. Chinese exporters this year raised prices on products such as furniture and boots. U.S. data show prices of imports from China rose 2.1% year-over-year in April, the most since March 2012—due in part to yuan strength against the dollar.

Consumer inflation hinges more on factors including wages and food, economists say. But the persistently high producer prices are coming at a critical juncture: U.S. consumer inflation rose 4.2% in April, the most since 2008. U.S. regulators have played down the increase as due to “transitory” price increases, but analysts say the recent factory-level price shocks underline longer-term risks.

“Although China is not obviously exporting inflation, from a U.S. perspective, rising prices of imports from China may start to feature in the debates about inflation there,” Oxford Economics economist

Louis Kuijs

said. “If global commodity prices were to continue to rise significantly in the coming six months, inflation will become a significantly larger problem—globally and in China.”

Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com

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