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Commodity markets remain buoyant. Notwithstanding a retreat in
late January, prices as measured by our Materials Price Index have
advanced nearly 8% since mid-December and by almost 36% since early
November. A solid rebound in manufacturing, a weaker US dollar,
generous government stimulus, and investor buying are all providing
demand-side support.
Persistent disruptions in supply chains are also creating
supply-side bottlenecks and roiling markets. Markets are replete
with examples of industries roiled by the pandemic: steel sheet is
on allocation in the US, semiconductor shortages are hampering auto
production, drops in South American mine production have sent
copper inventories to their lowest level in 10-years, a lack of
containers has reduced ocean going shipping capacity while high
absenteeism remains a problem throughout manufacturing.
These supply-side problems are highlighted most prominently in
the IHS Markit Purchasing Manager
Indexes (PMI) for backlogs and delivery times. December data
showed delivery times rising alarmingly again after spiking in
early 2020. This is a testament to continuing problems in meeting
orders. Rising backlogs are another manifestation of the same
problem. Together, backlogs and delivery times indicate how
stretched and even fragile supply chains have become.
To date, the surge in commodity prices has been largely absorbed
in company profit margins. This said, there are clear signs that
building cost pressures are beginning to push downstream, with a
burst of goods price inflation over the next six months now
unavoidable.
Whether or not commodity markets show the kind of prolonged
strength last seen between 2010 and 2014 will depend on two
factors: how quickly supply-side bottlenecks are resolved this year
and the character of demand once the pandemic begins to subside. In
most industries, available capacity looks sufficient to meet
anticipated demand growth through 2021 or even 2022.
The question remains, will capacity utilization rates improve or
will supply chain problems persist?
Our sense is that, just as demand will slowly build during the
year, so too will problems on the supply-side be slowly
resolved.
Pent-up demand may also prove to be weaker than expected, at
least for goods. It is true that personal savings are well above
historical averages in the advanced economies and even in important
emerging markets, such as mainland China. But goods demand has been
pulled forward, supported by stimulus and the fact that service
consumption - travel, entertainment, dining out - has been
suppressed because of COVID-19 mandated restrictions. It is
possible that a return to more 'normal' consumption patterns once
the pandemic recedes will not be accompanied by a burst of growth
in goods markets. It is also possible the scarring in labor
markets, with a rise in the number of long-term unemployed, means
that saving rates fall back to historic levels only slowly.
Where does this leave commodity markets? It is true that the
run-up in commodity prices has been stronger and lasted longer than
we expected six months ago. This upstream pressure in supply chains
is now guaranteed to push into intermediate materials and even
final goods prices in early 2021.
Still, we believe this burst of goods price inflation will prove
temporary with stresses beginning to ease after mid-year on the
assumption that problems on the supply-side are slowly sorted out.
A better balance in markets may also prompt some investor selling
as positive momentum ebbs. Commodity prices may not only stop
rising, but they may see modest corrections by spring or summer.
Our expectation is that our Material Price Index, after increasing
almost 50% between the July of 2020 and March of 2021, will then
retreat by as much as 10% by year end.
Commodity Price Outlook
For individual commodities, the declines will be even more
dramatic. US lumber prices, currently near $850 per thousand board
feet are project to drop under $500 by year-end. Hot rolled steel
sheet in Europe is projected to fall from an average price of over
800 euros per metric ton in the first quarter to 600 euros by the
fourth quarter. North Asian ethylene prices, currently above $920
per metric ton are project to fall below $850 per metric ton late
this year.
Watch delivery times and backlogs over the next six months. They
will provide a clear signal of any shift as vendor performance
improves. Even a hint that conditions are returning to normal in
supply chains is likely to trigger price corrections in several
markets given how exposed prices appear to be now.
Posted 03 February 2021 by John Mothersole, Director – Research, Pricing and Purchasing