In financial markets, the movement in the commodities prices affects the other segments of the market such as equities and bonds. However, it is not influenced by them much. But, that does not mean that it has no influence on the value of equities and bonds. In fact, it also impacts the other sectors such as retail, auto, healthcare, retail, and much more.
It is because commodities are goods that largely consumed by us for different purposes. They also happen to be our necessities. Any fluctuation on commodity prices impact on both consumer and sectoral level. Here, we’re going to discuss how the movement in commodity prices like metals, bullions, and food impact the other sectors as well.
REAL-ESTATE SECTOR
Real-estate is one of the most recognized sectors in the global market which subdivided into – housing, retail, hospitality, and commercial. Recently, the Indian real estate sector has witnessed tremendous growth due to the high demand for office and residential spaces. As of now, real estate also happens to be one of the largest employers in the global market.
A lot of commodities used in this sector as inputs. If we leave the ‘land’ then still there are other commodities such as iron, wood, steel, and other metals that use in the real-estate sector. Any fluctuation in the prices of iron or steel can immediately affect the prices of real estate. If prices of commodities rise, the sales will decline, the employees will start getting low wages eventually, and there will be less demand due to high prices of materials that majorly used as raw materials in this sector, and vice-versa.
AUTO SECTOR
Like real-estate, the auto sector is also the major contributor in the Indian economy. The Indian automotive sector has now become the 7th largest manufacturer of commercial vehicles in the world. It is a heavy automobile manufacturing industry which employs a large no. of people. Many commodities like crude oil and metal are used as inputs here. Therefore, demand and supply play a major role in the auto sector where any fluctuation in crude oil prices can affect the overall sales of automobiles. The rise in crude prices or metal prices could lead to the rise in the automobile prices which make it difficult for consumers to afford which ultimately lead to…
Many thanks Wasim. I found this post really interesting although from the investing standpoint I would disagree that the price of commodities necessarily correlates directly with the cost of the end product because the cost of the commodity is usually only a small part of the cost of the product. For example if the cost of steel doubled, it wouldn't double the cost of a car. So the correlation is at best imprecise. (I know you didn't actually say that, but it's in line with the trend of your argument.)
For me, there are two main reasons for tracking commodity prices. One is that they often have zero correlation with the market (i.e. a beta of zero or nearly zero) which makes them a useful hedge for a balanced portfolio - the best example of this being gold which usually holds its value or increases in value when recession looms and stock markets dip. The other use is in prediction of share prices in companies that produce commodities - for example, sticking to gold as a model, the shares in gold miners tends to rise as the spot price of gold rises.
The other point to consider is that cost isn't the only determinant of consumer behaviour. Consumers often pay more for the brand they want even if there's an equivalent product for a fraction of the price (think Coca Cola, iPhones, Heinz Baked Beans etc.)
Intelligent investors need to be aware of commodity prices, but it can be a mistake always to try and link them directly to share prices or consumer behaviour.
