Softening iron ore prices drag the MPI down 2.6%

June 10, 2016 - Weekly Pricing Pulse

Volatility in commodity markets will continue over the summer as trading thins.

The IHS Materials Price Index (MPI) declined 2.6% last week, as volatility in commodity markets continued. While a 13.7% plunge in iron ore prices dragged the headline index down, movements among the other components were once again mixed, highlighting the choppiness that has characterized markets since late April. Oil, nonferrous metals, DRAMs, freight, pulp, and fiber increased in price, while chemicals, lumber, pulp, and ferrous metals fell.

The fall in iron ore prices reflects an unwinding in speculative trading linked to what we believe is an unsustainable surge in Chinese steel production. Steel scrap prices have yet to come back down in the manner of iron ore prices, but expect them to follow suit over the coming weeks. Meanwhile, the increase in oil and nonferrous metals pricing was largely exchange-rate–driven. Many commodity-heavy currencies rose against the dollar, which worked to push up exchange-traded commodities. This dollar weakness offset the effect of continuing softness in global manufacturing highlighted in the May round of Purchasing Manager Index reports.

Looking ahead, thin summer trading will lead to further volatility in the months ahead. Because trading volumes will be seasonally low, markets will be vulnerable and may overreact. With May’s US labor report coming in so far below expectations, upcoming data releases will be under additional scrutiny, with the market attempting to decipher whether this was just one bad report or a sign of a wider problem. We believe it is the former. With the expansion continuing, albeit slowly, we expect commodity prices to receive some support as the year closes.

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Industrial Materials: Prices

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