(Bloomberg) — In the face of surging copper prices, Carrier Global Corp. has a plan to contain costs: It’s hedging raw materials costs and then charging customers more for its heating, ventilation and air conditioning systems.
The Florida-based company’s strategy symbolizes the conundrum facing manufacturers as prices for commodities spike. With a path out of the pandemic in sight, corporate executives, economists and investors betting on a strong recovery face an acid test as producers try to shift the higher costs to consumers.
As copper prices reach a nine-year high above $9,000, moves like Carrier’s offer an early sign of success. Even after boosting prices earlier this year, the company still forecasts sales growth of between 6% and 8%. China’s Gree Electric Appliances Inc. — the world’s top residential air-conditioning manufacturer — also is boosting inventories in a roaring market for appliances and consumer electronics.
“They are stocking up, and they’re using it to make consumer products that the whole world has been demanding hand over fist on the back of the pandemic,” Michael Cuoco, head of hedge-fund sales for metals and bulk materials at StoneX Group, said by phone.
But with money managers piling into commodities more broadly in the expectation that the rising costs of goods will eat into fixed-income returns, some observers see an inflationary feedback loop developing that could hit the real-world recovery much harder.
Brent crude started the year with its fastest rally on record, creating price pressures that could put a much more immediate strain on consumers. U.S. lumber futures also shot to a record, prompting fears of inflation in the housing market.
As investors react to fast-moving inflation dynamics across financial markets, copper is getting caught in the crosswinds. Prices reached a fresh nine-year high Thursday as Federal Reserve officials offered reassurance they don’t view the rising costs of goods as a threat to growth.
But on Friday, copper suffered the biggest one-day drop in more than four months, with a selloff in global equity and bond markets signaling that investors believe the effects may be less benign and a policy response may come sooner.
It’s all setting up a dangerous game of chicken between investors and central bankers led by the Fed. U.S. officials are adamant about pumping more stimulus to support a recovery, with a $1.9 trillion package up for congressional debate and a willingness even to run the economy a little hot to maximize employment.
“The rise in oil, agriculture commodity prices and others are all sending a signal that the market is getting more optimistic about the global recovery this year,” Khoon Goh, Singapore-based head of Asia research for Australia & New Zealand Banking Group, said in an email. “Given that inflation is starting from a very low point, there is space to absorb the commodity-related price increase.”
Markets, meanwhile, are seeing a faster recovery and a greater risk of overheating, and they’re on guard for any sign that Fed chief Jerome Powell loses his patience with soaring inflation expectations and brings forward now-distant plans to make monetary policy less accommodative.
Manufacturers used to being caught between markets and policy makers, including with the U.S.-China tariff wars, already are making adjustments.
Carrier raised prices while also hedging more than 75% of its copper, aluminum and steel inputs after 2021, Senior Vice President Patrick Goris said during a Feb. 23 sustainability conference.
Home-improvement retailer Home Depot Inc. counts on being able to absorb the latest run-up in raw materials costs, President and Chief Operating Officer Ted Decker said on a Feb. 23 earnings call.
“We don’t have a lot of anxiety around managing the commodity flows,” Decker said. “We run this as a portfolio. We work closely with our supplier partners to be the advocate for value for the customer.”
Euro region manufacturers in February witnessed the sharpest monthly rise in input prices in nearly 10 years, according to IHS Markit. But after a yearslong spell of stagnant inflation and growth in the region, order books are filling fast and inventories of finished goods are tumbling.
The prospects for metals manufacturers look particularly bright as the European Union prepares to unleash a $1 trillion-plus stimulus program targeting copper-intensive renewable-energy systems and electric-vehicle infrastructure.
Nexans SA, one of the world’s leading electric cable-makers, announced a restructuring that will involve divesting units servicing mainstay customers in the industrial sector to focus purely on growth in the global electrification drive.
Anticipating that surging demand will leave copper in tight supply, the French company also is bulking up its processing of recycled copper materials.
Even if copper prices run further during the demand boom, bullish investors say manufacturers will be well-positioned to pass on costs, given the metal’s array of uses in everything from cars, washing machines, wind turbines and grid infrastructure.
Additionally, it’s often used in small quantities in smartphones, fridges and TVs, making it a relatively minor component in the final cost paid by consumers.
“You probably don’t have a headwind to growth with this type of inflation — in the short term,” James Tatum, portfolio manager at New York-based Valent Asset Management, said by phone.
Rising prices for fuels and food could prove much more pernicious, given their significant weight in household spending. Energy and agricultural commodities are jumping, but central bankers aren’t worrying yet with nominal inflation rates still at low levels.
Still, with money managers pulling cash out of bond markets and parking it in commodities as a hedge, they may end up contributing to making more-aggressive inflation a reality.
“It becomes a problem when reflation turns into inflation, and people simply stop doing stuff because it costs too much,” Colin Hamilton, managing director for commodities research at BMO Capital Markets Ltd., said from London. “I would argue that we’re getting toward that point.”
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