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Our Materials Price Index (MPI) fell 0.2% last week, its sixth
consecutive decline. Declines were not universal with six out of
the MPI's ten subcomponents down. Notwithstanding their recent
consolidation, commodity prices as measured by the MPI are still up
20% since the beginning of 2021.
Industrial metals led the decline last week with both the
ferrous and nonferrous metal sub-indexes down. Steel making raw
material prices fell 0.3% as the price of iron ore dropped to $173
per tonne having been as high as $230 last month. The decrease came
after the National Development and Reform Commission vowed to
intervene to curb speculation in the iron ore market. Promising to
"severely punish" any wrongdoing, it is a further signal that the
Chinese authorities are prepared to take action to curb recent
price rises. The nonferrous sub-index declined 2.5% with sizable
drops in copper, aluminum, and zinc. The declines followed the
announcement of the first metals auction by the Chinese National
Food and Strategic Reserves Administration. It confirmed it would
auction 20,000 tonnes of copper, 30,000 tonnes of zinc, and 50,000
tonnes of aluminum on July 5-6. Although a small fraction of the
amount used each month in mainland China, it still had the impact
of reducing prices. Lumber prices continued to fall with the
sub-index down 7.1% last week. This latest move means lumber prices
have fallen 35% in the last month with additional declines expected
as buyers resist current elevated price levels.
Equity markets recovered from the volatility of the previous
week as President Biden reached a tentative agreement for US
infrastructure spending. Although the deal was worth less than
initially proposed, it boosted investor confidence in the growth
prospects of the US economy. And although the latest core personal
consumption expenditure data showed the largest increase since 1992
the bond market seems to accept that inflation is likely to be
transitory, in line with the US Federal Reserve's stance. Commodity
price movements are starting to reinforce this view with a
combination of factors -- improved supply conditions, buyer
resistance, and less bullish investor sentiment - increasingly
pointing to a rally that has run its course. Expect prices to
collectively record a modest decline over the rest of the year.
Semiconductors are likely an exception while cracks in finished
steel prices or the inability of oil prices to push above $80/bbl
will be an affirmation that the year-long rebound in commodities is
indeed over.
Posted 30 June 2021 by Michael Dall, Associate Director, Pricing and Purchasing, IHS Markit
