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Commodity prices as measured by our Materials Price Index (MPI)
rose 0.7% last week in a broad-based move. Like equity and bond
markets, commodities are drawing on the positive momentum created
from a US-China phase-one trade agreement, buying in Asia ahead of
the Lunar New Year holiday and the US Senate's ratification of the
USMCA, the replacement for NAFTA.
Chemicals rose 3.8%, due to propylene and ethylene are rising
6.4% and 3.7%, respectively. US ethylene however rose 15.2%
following an 18.4% rise last week making up for losses sustained in
December. Despite the two-week, 36.3% rise, US ethylene prices are
bouncing along close a 20-year low. Ethylene also remains tight in
Asia due to high demand and two major crackers being offline.
Lumber, after a poor start to 2019 is one of the best performing
commodities over the past six months. Lumber prices rose again last
week, increasing 4.8% on the back of continuing firm housing demand
and mill closures that represent around 18% of British Colombia's
capacity. DRAMs also popped 5.3% on the announcement of the release
of new gaming consoles at the end of 2020 and growing cloud
investments. Energy prices fell 3.1% for the week, with oil falling
4.7% as the US hit a record 13 Mbbl/d of crude production and
tensions in the Middle East eased. Gas prices also tumbled again,
falling 7.5% mainly due to a 13.5% drop in Asian gas prices. Asian
gas prices could soon drop below the $3/MMBtu level, as rising
supply outpaces weak winter demand.
The mood in commodity markets has clearly improved since October
given some clarity on trade and signs that global manufacturing
activity is at least stabilizing. Challenges remain to be sure.
Regionally, Europe's manufacturing sector continues to look
fragile, while imbalances in the Chinese economy have yet to be
fully addressed. Most important perhaps, are the contentious trade
issues that were avoided in the phase-one US-China trade agreement
have yet to be resolved. Still, for the moment, commodities markets
have a decidedly glass half full view of the near-future that is
lifting prices and imparting a degree of optimism for the new
year.
Posted 22 January 2020 by William May, Senior Economist Pricing and Purchasing IHS Markit
