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Commodity prices continue to move higher, although late February
and early March have seen periods of volatility with prices pulling
back in some markets. This recent choppiness cannot be described as
a correction and, indeed, our Materials Price Index (MPI) has
continued to record a collective price increase in the commodity
complex across the four weeks to March 5. As marked by the MPI,
(which does include measures of ocean-going shipping rates and DRAM
prices), commodity prices are now up 68% from a year ago.
The demand-side factors that have been driving prices higher for
the past year - rebounding manufacturing activity, generous
government stimulus, a weaker US dollar and investor buying -
remain in force, though three of the four have begun to signal a
change. To be sure, government support continues to be forthcoming,
whether in the form of extremely accommodative monetary policies
or, most recently, the huge $1.9 trillion fiscal package just
passed in the US.
But mainland Chinese manufacturing, the engine underlying
physical consumption growth for the past year, shows signs of
losing some momentum. Data from IHS Markit's Purchasing Manager
(PMI) Manufacturing survey shows both new orders and production
barely expanding in February. This slowdown in mainland China was
expected and is temporary, but it is expected to extend into the
second half of the year. Outside of China, manufacturing continues
to rebound, though there remains the question about a possible
shift in the composition of demand - away from goods and back
toward services - as the pandemic recedes.
Likewise, the US dollar and investor buying do not look to be as
supportive of commodity markets going forward. The recent rise in
US interest rates has firmed the US dollar, and in doing so, is
undercutting the investor narrative for holding riskier asset
classes like commodities. The small rise in interest rates has not
prompted a wave of selling, but commodity exchange position reports
do indicate that investors have generally not added to their long
positions during the past six weeks. Strong investor buying has
been a feature of many commodity markets for the past six months.
The absence of fresh inflows will rob markets of some of the
momentum that has propelled markets higher over the past six
months.
The supply-side of commodity markets has also been supportive of
higher prices, but here, conditions if anything, are deteriorating.
PMI data for backlogs and delivery times continues to rise in a
worrisome way. Fully a year into the pandemic supply chains remain
fragile with a growing percentage of firms reporting concerns about
supplier performance. Semiconductors have emerged as an Achilles
heel for a range of industries, with no easy solution in sight. Our
expectation is that the current tightness for many commodity grade
chips, vital in many types of equipment, could last for the rest of
2021. The good news is that in other sectors, conditions are not as
troubled.
The surge in commodity prices over the past year guarantees a
burst in goods price inflation this summer. Whether or not
commodity markets show the kind of prolonged strength last seen
between 2010 and 2014 will depend how quickly supply-side
bottlenecks are resolved this year. In most industries, available
capacity looks sufficient to meet projected demand growth in 2021
and 2022 -- if operating rates improve.
We expect the rise in goods price inflation to prove temporary
as the market balances, the supply and demand of physical
commodities improves, and fundamentals reassert themselves. At the
same time, a shift in markets may also prompt investor selling,
potentially adding downward momentum to prices. Delivery times and
backlogs over the next six months will be a key indicator to watch
for a signal of any change
Commodity price outlook
Semiconductor prices, which continue to have strong upside
potential, could rise by more than 20% by year end. IHS Markit
expects container rates, especially from Shanghai to Europe, to
normalize over the coming year, with container rates from Shanghai
to Europe potentially falling by more than 30% by early 2022.
Our Materials Price Index (MPI) measures a weighted average of
weekly spot prices for a key collection of globally traded
manufacturing inputs. The components are crude oil, chemicals,
nonferrous metals, ferrous metals, paper pulp, lumber, rubber,
fibers, tech components, and ocean-going freight rates. It seeks to
capture the commodity input costs for a diversified global
manufacturer.
Posted 15 March 2021 by John Mothersole, Director of Research, Pricing and Purchasing, S&P Global Market Intelligence
