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The prices of many basic commodities and raw materials have witnessed remarkable increases in recent months and weeks, including iron, copper, fodder, aluminum, petroleum, oils, and wheat, which portends a large global inflationary wave that has begun to emerge and is expected to be reflected more and clearer during the coming period. Especially on final product prices and inflation rates.
In Egypt, some commodity prices have already begun to rise due to this increase, such as iron, some electrical appliances, fodder, flour, coffee, and other commodities, but the biggest impact it seems from analysts’ and experts’ expectations has not yet been reflected on inflation in Egypt, which is expected to be Slightly different compared to other economies, especially developed ones.
In this report, Masrawy tries to understand the reasons for the rise of these commodities and raw materials globally during the recent period, and how the impact of this rise could be reflected on price inflation and consumption in Egypt.
Why are prices of commodities and raw materials rising globally?
Ayman Abu Hind, investment expert, founder and investment manager at Adviseball Holding, sees that it comes at the top of the reasons behind the rise in the prices of raw materials and commodities globally, the reopening of many economies after a great distance in vaccinating citizens in these countries, which raised the demand for materials Crude with the return of economic activity.
Abu Hind told Masrawy that this coincided with the inability of the producers of raw materials to quickly absorb these requests because they did not expect the demand for them to return so quickly, as their estimates were that this would happen at the end of this year.
He stated that this resulted in a large difference between demand and supply, which resulted in a rise in many prices of raw materials and basic commodities. Despite that, demand does not decline due to the increase in prices, in order for manufacturers to cover the demands for their products. In the end, the increase in raw materials prices will be passed on to the final consumer. .
Muhammad Abu Basha, deputy head of the research department at Hermes Investment Bank, told Masrawy that the rise in commodity and raw materials prices is due to the beginnings of recovery in part of the most important economies in the world, such as China, the United States and Britain, which is due to the expansion of the spread of vaccines against the Corona virus.
He added that this means that these countries will complete the opening of their economies soon after they began to partially open, and this is reflected in the rise in economic activity and demand.
Abu Basha stated that by doing so, he will benefit from the stimulus packages that were injected during the last period, especially in the advanced economies, part of which was cash directed to individuals, and with the opening of the economies, these funds will be spent in the markets, thus raising the demand for goods and products.
Abu Hind explained that part of the current demand for raw materials and basic commodities is due to the producers’ desire to obtain more than their needs for the purpose of storage, for fear of a greater shortage of these raw materials, and thus the inability of these producers to meet the demands they have for the products.
He pointed out that the recent global increase in demand for raw materials is mainly due to the increase in demand in China, Southeast Asia and some other countries such as India – before the recent setback in the face of the spread of the Corona virus – and not only the opening and resumption of activity in the European and American economies.
Muhammad Abu Basha believes that coinciding with the high demand in some countries, there were problems related to the accumulation of demands on companies and the difficulty of meeting them through the speed of supply, which generates pressure on these companies because there are already problems related to supply since the period of closing economies, which coincides with the already high demand In the current period, which was evident in the shortage of electronic chips for the auto industry.
The inability of companies to supply at the same speed of orders results in gaps that represent pressure on companies, which leads to higher prices, in addition to the impact of other factors such as transportation bottlenecks, the issue is like a “domino” game, and imbalances in the elements of the production and consumer process began to appear with the start of the return The request, according to Abu Basha.
Abu Basha said that inflation figures have already begun to rise in some countries in recent months, including the United States last month, especially with the fear of the inflationary wave that has already begun.
He added that there is also a surge in demand from some producers for some raw materials in order to want to store them due to fears of the shortage in them, which puts pressure on their prices. At the same time, these producers cannot get what they want from the raw materials, and eventually these increases will move to prices final goods to the consumer.
Abu Basha stated that there are a number of primary commodities whose prices have increased significantly during the last period, such as iron, aluminum, copper, as well as petroleum, and contributed to the rise of some of these commodities, as China’s attempts to store quantities of them in order to meet the requests related to them, especially with the recovery that it began to witness in the last period in a way earlier than other large economies.
How long will this wave last?
Ayman Abu Hind said that there are two scenarios for the period of the inflationary wave that hits the prices of basic commodities and raw materials globally, one of which is expected to be temporary, and the other believes that it may continue.
He added that it is likely that the first scenario will occur, that this inflation will be temporary, and with the increase in supply and coverage of high demand in the coming period, prices will be controlled.
Abu Hind stated that the second scenario is that prices will continue to rise for a while in order for producers to compensate for the losses they suffered in 2020, coinciding with the beginning of the repercussions of the Corona crisis, and then prices will decrease with time.
This scenario may include an increase in the prices of all products globally, which leads to a large inflation wave that results in a decline in demand and thus a decrease in prices after that, according to Abu Hind.
Muhammad Abu Basha expects this inflationary wave to continue globally until next year, with a maximum ending in late 2022.
He pointed out that the continuation of this wave is related to the speed of vaccination with Corona vaccines around the world, especially in emerging countries, which are currently witnessing a slowdown in this process, and thus, with time, the gap between supply and demand will be healed, with the opening of economies in all countries.
How will this inflationary wave affect prices in Egypt and when?
Abu Hind believes that the impact of the external inflation wave will start to appear and reflect on consumer prices in Egypt by the end of next June and that it will be temporary, but Abu Basha expects that the peak of the high inflation rates in Egypt will be affected by this imported wave at the end of this year and the beginning of the new year.
The two experts agreed that Egypt’s impact on this wave will not be significant, as the average inflation rates, according to their expectations, will range between 6 and 8%, which is consistent with the Central Bank’s inflation targets at 7%, with an increase or decrease of 2% during the last quarter of 2022, and also lower. From the general average of inflation rates in the past two decades between 9 and 11%.
Abu Hind said that it is expected that the increase in the international prices of raw materials will be reflected in the raw materials entering the industry in some sectors in Egypt, but not all, including the increase in prices in a number of commodities that have already occurred, such as iron, cement, bricks and fodder.
He completely ruled out that Egypt will go through the same inflationary wave that it was exposed to after the flotation or even close to it, and it is likely that the annual inflation rates in Egypt under this wave will not exceed the 8% level and that it will be temporary and will not exceed 8%, because the external inflationary wave will not transfer with its full effect to the Egyptian market.
While Abu Basha believes that this wave will be reflected in the prices of commodities in Egypt and emerging countries gradually, especially with the continued impact of the repercussions of the Corona crisis and the slowdown in recovery in light of the slow movement of vaccination and the absence of strong stimulus packages, and thus consumption was affected in the recent period.
He said, “The increases have affected almost all basic commodities, and it is expected that its impact will take time in emerging countries, including Egypt, which will cause delays in passing the increases to the prices of final products, and also that this happens gradually and does not represent a pressure on the consumer.”
Abu Basha expected that the peak of this effect would be with the start of a recovery in consumption, which is expected not to occur before the end of this year and the beginning of next year, and its strength will be related to the strength of this recovery, but the average inflation rate in general will not exceed 6% at this peak and the rises will be gradual.
Other factors that help prevent Egypt from being affected by the force of this wave
Muhammad Abu Basha said that there are other factors that will help prevent inflation rates in Egypt from making a big jump at the height of being affected by this inflationary wave, including the low inflation rates that Egypt has witnessed during the past and current years, which range between 4 and 7%, especially since it did not exceed this 5% level. year so far.
He added that among these factors is also the presence of a stock of raw materials in some companies, and thus the ability to pass the increase in raw materials prices gradually to the final goods in a way that does not lead to large price hikes at once, with the purchase of new materials gradually in the coming period with the end of the stock Present.
Companies may also resort, coinciding with passing the price increase gradually, to other financial measures related to reducing costs in order to be able to bear part of this increase without passing it on to the consumer, who may not bear large increases in prices once, especially after the price hikes during the years that witnessed the implementation of the program Economic reform, according to Abu Pasha.
He pointed out that one of these factors is also the provision of quantities of food commodities whose prices have risen globally in a subsidized manner for the owners of ration cards in Egypt, which contributes to the fact that the increases in their prices do not fully affect the Egyptian consumer.
The fact that the prices of gasoline and diesel did not drop significantly during the significant drop in oil prices last year contributed to the fact that they were not raised significantly locally last month and thus did not have a noticeable impact on inflation, according to Abu Basha.
Also, the prices of other non-food commodities that may rise in the coming months as a result of this wave, such as cars or electrical appliances, will not affect the inflation rate significantly due to the lower relative weight of these commodities in the index, according to a macroeconomic analyst.
Does the expected rise in inflation rates in Egypt affect consumption and interest?
Ayman Abu Hind expects that the expected rise in inflation rates will not have a significant impact on consumption in Egypt, because it is already affected by the measures and crises that it has been exposed to during the last stage, the latest of which is the repercussions of the Corona pandemic, and therefore it has almost reached the peak of its impact, and no new inflationary wave will have a noticeable impact on it. .
He ruled out that the economy would be affected by the expected inflationary wave significantly, given that the effect of any wave of this type is focused on the consumption side, which is already affected in the case of Egypt, and therefore there is no room to absorb more repercussions, but the effect that may occur is to prolong the period that may take Consumption for recovery.
Abu Hind also ruled out the significant impact on the consumption of basic food commodities and the impact of this wave on low-income earners, due to the fact that the prices of these commodities did not rise as strongly as some other raw materials and commodities, in addition to the fact that part of these commodities that reach low-income people is subsidized.
He explained that even if some food commodities are affected in some way, this effect will be reflected on the way of consumption in general and not on their consumption because they are necessary commodities, and therefore some families may be forced to dispense with other commodities for some time in exchange for maintaining the same level of consumption of these commodities.
He pointed out that the biggest impact may be on some sectors, including electronics, iron and steel, cement, as well as pharmaceuticals, among others, in light of the fact that the non-oil private sector is already suffering from a relative stagnation, which is what the PMI shows.
Muhammad Abu Basha expects that the expected rise in inflation rates in Egypt during the coming period will not necessitate raising interest rates in the Central Bank.
He said that even after inflation reaches its peak, Egypt will provide a positive real return in the range of 3% or a little less (compared to about 4% or more currently), which will be higher than the general average, which is supposed to range between 1 and 2%.
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