MPI settles to 2008 lows before Christmas

December 24, 2015 - Weekly Pricing Pulse

The buying environment remains extremely favorable; the sharp bounce in steel scrap will not last amid the global supply glut.

The last MPI reading before Christmas produced somewhat of a surprise. Although the index declined again, it remained above its 8 December 2008 low by the thinnest possible margin. The actual decrease of 1.1% was better than the 2.0% decline we had expected, suggesting that even in the current gloom there are occasional echoes of optimism as we look to early 2016 for a recovery.

Nearly all sectors were down, with oil recording another decrease following news that the US crude export ban could be lifted, which added to concerns regarding high inventory levels. Indeed, early this week oil prices broke through their December 2008 lows. Interestingly, ferrous metals provided one of the few bright spots as that sub-index rose 6% because of a large jump in steel scrap prices. It is hard to see this increase holding, however, given how well supplied global steel markets are—as highlighted by the continuing softness in iron ore prices.

It is also interesting that the better-than-expected MPI performance came amid the Federal Reserve hike, hinting that much of the impact was already priced in. In fact, the event actually turned out to be dovish as focus subsequently shifted to the gradual ramp-up of rates expected for 2016. In the longer term, there are indications that higher rates could speed up the supply-side adjustment as capital expenditure financing costs rise.

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