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Commodity prices, as measured by our Materials Price Index
(MPI), rose 1.1% last week, as Chinese buyers returned to the
markets after the Golden Week holiday. A strong third quarter for
Chinese industrial activity, aided by effective COVID-19
containment measures, means that mainland China will continue to
set the tone for commodity prices in the fourth quarter.
In a busy week, it was a rise in energy and nonferrous metals
prices that sent the MPI higher. Natural gas and oil both rose,
with gas standing out, rising 18%, due to huge jumps in both US and
European prices. Gas prices reacted positively to the prospect of
colder weather on the horizon. Initial fears of widespread
Hurricane Delta damage added to upward pressure in the US market.
Nonferrous metals, particularly nickel and aluminum, provided
further support to the headline MPI number this week. Nickel rose
4.3%, with aluminum up 4.1% to an 18-month high. Both metals are
benefiting from good data from mainland China's auto sector, where
new vehicle sales rose 17% in September. Nickel is being given an
added boost by the start-up of a large new battery plant designed
to produce BYD's new blade battery, which the company claims is
resistant to thermal runaway and increases energy density by as
much as 30%. The new factory is one of four planned and focused
attention on the promise that EV demand holds for nickel
consumption. Chinese auto sales were also behind a 9.7% jump in
rubber prices, the biggest mover in the MPI last week.
Mainland China continues to underpin the rise in commodity
prices. Third quarter Chinese GDP increased by 4.9% year on year,
an increase from 3.2% in the second quarter, confirming the
turnaround after the sharp first quarter contraction. Industrial
production is back at pre COVID-19 levels and retail sales have
also turned positive after two consecutive quarterly declines. This
quick rebound is fueling hope that mainland China will be able to
lift global commodity markets by itself, much like it did in the
aftermath of the Great Recession. Given the softness still present
outside mainland China, and given Chinese policymakers desire to
rein in debt, especially in the highly leverage real estate sector,
this seems a bit too optimistic. With COVID-19 case counts rising
rapidly in Europe and North America, the fourth quarter will
provide an answer.
Posted 21 October 2020 by Michael Dall, Associate Director, Pricing and Purchasing, IHS Markit