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Our Materials Price Index (MPI) fell 0.6% last week, its first
retreat this year. Price decreases were narrow, however, with only
three out of ten sub-components in the index falling.
Notwithstanding last week's decline, commodity prices are up 18.8%
since the end of November, a rally that has now carried the MPI
close to its May 2021 peak.
Falling iron ore and coal prices were the main reason for the
MPI's overall decline last week. Our ferrous sub-index was down
3.1% as iron ore prices dipped to $141 per tonne after recently
trading above $150. Prices dropped after the National Development
and Reform Commission (NDRC) and State Administration of Market
Regulation (SAMR) in mainland China requested traders release
excess inventory. Authorities also carried out port checks and
raised trading fees to curb market speculation. Chinese authorities
also held discussions with China Shenhua Energy Co. and China Coal
Energy Co, two of the largest state coal miners, to establish a
price cap for coal. This shook coal markets and caused global coal
prices to decline 4.4%. While these measures had the desired
effect, recent history shows that these types of interventions have
limited success. Similar moves in other markets also initially
reduced prices which then slowly recovered as market fundamentals
reasserted themselves.
While commodity markets took their lead from Chinese government
interventions last week, geopolitical tensions loomed large. Russia
and Ukraine are large exporters of many hard and soft commodities
so any escalation in the current standoff remains the major upside
risk to prices. With inflation in many countries already high, the
danger of higher oil, natural gas, metal, and wheat prices because
of intensifying tensions is clear. Moreover, the crisis in Eastern
Europe comes against a backdrop of tightening monetary policy,
another reason to expect heightened volatility in commodity markets
as spring approaches.
Posted 23 February 2022 by Michael Dall, Associate Director, Pricing and Purchasing, IHS Markit
