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Our Materials Price Index (MPI) climbed 5.2% last week,
following a 4.5% increase the previous week. This is the sixth
consecutive weekly price increase and puts the index at its highest
point since May 2011. Prices, as measured by the MPI, have
increased 131% since mid-May 2020.
Six of the MPI's ten sub-components posted increases last week
with ferrous metals and energy the largest reasons for the upward
move. The steel-making raw materials index jumped 9.6% as iron ore
spot prices touched $230 per metric ton on metal exchanges. There
were signs of weakening sentiment towards the end of the week after
the local government in Tangshan, mainland China's main city of
production, announced its intention to intervene should any mills
be found to be hoarding stock in order to push up prices. However,
the key factor behind the recent price rally is strong Chinese
demand so it is unclear how effective this government intervention
will be in lowering prices in the near-term. The energy index was
up 5% as natural gas and coal prices increased considerably. Coal
prices saw broad-based gains as trade tensions between China and
Australia curbed Australian imports into China. This sent thermal
coal prices up to RMB900 per tonne with the MPI's global coal
sub-index jumping 7.5% as a result. In contrast, lumber prices
decreased after seven consecutive weeks of growth. The decline was
only 1.4% but considering the lumber, sub-index has gained 90%
since March, which provides a welcome change for buyers.
In contrast to commodities, equity markets pulled back last week
with the FTSE All-World index down 1.5%, its biggest weekly drop in
over three months. Markets were roiled by US inflation data, which
showed the consumer price index was 4.2% higher in April 2021 than
April 2020. This was above market expectations and was the largest
monthly year-over-year increase in US inflation since 2008. As
expected, the surge in commodity prices over the past year is now
filtering downstream. This normal lagged transmission of upstream
cost increases is being amplified to a degree by base effects, with
the strong price declines of early 2020 now dropping out of the
year over year calculations. Still, the overlying reason for the
rise in commodity prices and now top-line inflation are the
continuing disruptions in supply chains. What prices are signaling
is a global economy struggling to adjust to the severe jolt of the
pandemic. The only solace in looking forward is that absent some
new shock, IHS Markit believes supply-chain conditions during the
second quarter are as bad as they will get. Assuming some
improvement this summer, inventories will begin to recover with
delivery times starting to improve. Most importantly, this change
should also be accompanied by some price relief in the second half
of the year.
Posted 20 May 2021 by Michael Dall, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence
