Commodity prices decline again, but signs emerge of a turnaround

January 29, 2016 - Weekly Pricing Pulse

The relatively robust performance of metals over recent weeks indicates that some commodities may have reached bottom. Current prices look like buying opportunities.

The third week of 2016 saw another decline in the IHS Materials Price Index (MPI). Last week’s contraction came to 2%, with the decrease mostly driven by oil and chemicals. Oil, in particular, is experiencing a punishing downward trajectory that has now taken prices below $30/barrel. However, given that OPEC is being more vocal in calling for coordination with other large global oil producers, prices could stabilize soon. Indeed, they have shown more robustness in recent days.

Despite the overall bearishness in commodity and financial markets, some segments are experiencing support. Ferrous metals registered a 1% gain, while the nonferrous index inched up 1.2%. Rubber prices also appear to have stabilized in the past two months. These better-than-expected trends in recent weeks may indicate that some commodities have indeed hit bottom—although the positive effects here continue to be massively outweighed by oil declines.

Looking ahead, there is potential for more weakness. Much attention is now focused on global growth fundamentals, amid speculation that weaker commodity and equity prices are signs of a broader economic downturn. While we don’t believe this to be the case, jittery expectations will cause more near-term price volatility. The key for commodities will remain Chinese manufacturing. Chinese and US PMI figures coming up this week will be critical in setting the tone leading up to Chinese New Year holiday.

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