When the war in the Middle East started, most traders immediately thought of oil, because around 20% of the global supply of petroleum goes through the Strait of Hormuz. But, there are other products that are even more highly concentrated in the region. Some of these products are vital for specific industries, and could have long-reaching consequences if the war persists for some time.
Many products are either immediately manufactured in the vecinity of oil production, or are byproducts of the processing of crude. This is often the result of cost reductions, which means certain products are concentrated in the Persian Gulf. Compared to the 20% of crude, 30% of global fertilizers are produced in the region. 45% of sulphur exports used to transit the Strait of Hormuz. One third of helium exports come from Qatar. And almost half of all global urea production comes from the Gulf.
Why It Matters Beyond Crude
Energy prices often fluctuate and are frequently discounted from inflation concerns because of that. “Core” inflation readings are more stable, and used to guide policy decisions. The main concern about higher crude prices is that, eventually, it will increase inflation has higher production costs seep into the economy. But, the concern is not immediate, since it takes time for that to happen.
Brent has more-or-less stablized at a little over $100 per barrel this week, as companies manage inventories and find alternatives to Gulf production. Suppliers are running down inventories in the Atlantic basin, taking advantage of higher prices due to the war. Those inventories can potentially be sustained for around another month, which could keep the price of crude somewhat under control, as long as the war doesn’t last too long.
Inflation Is the Main Driver of Forex Now
But managing those inventories is not as easy for the other products mentioned. Urea in particular, since around 40% of the Northern Hemisphere’s consumption occurs in spring. Prices are already rising, and those will be reflected in the core CPI measurements that come out in early April. The higher cost to fertilize crops while planting will translate into higher food prices come harvest season in the fall, meaning that inflation could be sustained.
Petroleum is also the key precursor to most plastics, so higher crude prices will soon mean higher, well, everthing. Sulphur is a key element used in manufacturing a wide range of vital chemicals and also fertilizer. Helium could be of particular importance given that it’s used in medical devices such as MRIs. All of those things rising in costs would likely immediately be felt in CPI measures as well. That might mean that certain central banks could come under pressure to raise rates very soon.
Not All Currencies Will See An Equal Impact
China is the world’s largest producer of urea, and is already restricting export since it is having trouble sourcing (cheap) natural gas. This will likely exacerbate prices as consumers have to find alternative producers, namely in the US. Countries with their own domestic supply of many petroleum byproducts and derivatives could see their exports increase, which would support their currency. Those include Canada and the US.
Meanwhile, countries that are reliant on imports, such as the European Union, Japan and New Zealand could see their currencies undermined as they have to pay more to import. Additionally, their consumer prices might rise faster as their supplies are at higher risk. While this would force the central bank to raise rates, it probably will actually weaken the currency as investors worry the economy will underperform.