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Commodity prices, as measured by our Materials Price Index
(MPI), rose 4.4% last week in one of the largest gains in the
24-year history of our index. Massive moves in iron ore and natural
gas led the index higher, although large increases were seen in a
wide range of commodities last week - nine of the MPI's ten major
subcomponents rose. With last week's increase, the MPI is now
essentially flat for the year, having now erased all of the first
quarter's plunge over the last four months.
Ferrous prices lead the MPI higher last week rising 7.3% due to
an 8.1% rise in iron ore prices, which hit $121 per metric ton. For
context, prices were under $83/metric ton in early April with a
post-Vale dam disaster price peak of $125 per metric ton in 2019.
Record Chinese steel production and multi-year-low iron ore
inventories in China have sparked ore prices. The MPI's energy
sub-index rose 4.9% last week, driven by a 22.3% jump in natural
gas prices. Oil and coal also showed sizeable gains, increasing
3.2% and 4.9%, respectively. With LNG prices near historic lows,
volatility should be expected, which explains the 32.6% rise
European natural gas. Demand in Europe and the US is firming, with
buyers continuing to seize upon cheap cargoes on price dips. Rubber
prices jumped 6.2%, a large move on a 4% dip in Shanghai rubber
inventories. Lumber also continued to climb strongly, increasing
another 8.1%. Even though sawmills are lifting production,
rebounding new home construction and a booming home improvement
market in the US are keeping supplies tight.
Commodity prices are reacting to more signs of rebounding
demand, last week bringing the July Purchasing Manager Index
reports, which recorded a widespread improvement in manufacturing
activity. Our caution is that the recent rebound does not foretell
a full recovery in 2020, the damage to labor markets worldwide has
been too great. Most worrisome, however, is the continuing
deterioration in US-China relations and the re-imposition of
tariffs by the US on Canadian aluminium imports, even though the
new USMCA trade agreement recently came into force. With a global
pandemic still raging, a ratcheting up in trade tensions does not
need to be added to the challenges facing the global economy.
Posted 12 August 2020 by Mr. William May, Senior Economist Pricing and Purchasing, IHS Markit
