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Our Materials Price Index (MPI) fell 1.2% last week, following a
6.4% drop the previous week. This latest move means commodity
prices are back at April 2021 levels, reversing most of their
second quarter rise. Although softening recently, prices
collectively are still at an eight-year high.
Industrial metals were the main contributor to the MPI's decline
last week with steel making raw materials prices continuing to
slide. Our ferrous sub-index was down 4% as both iron ore and scrap
steel prices fell. This is the fourth consecutive weekly decline in
the sub-index with iron ore prices down to $167 a tonne last week,
the lowest level since early April. Scrap prices also dropped,
falling to $456 a tonne, down from a high of $518 in late May.
Recent weakening in iron ore and scrap prices is linked to
uncertainty over future Chinese steel consumption. Authorities in
mainland China have asked steel mills to limit production to help
reduce energy consumption and meet carbon emission targets and are
threatening punishment for noncompliance. This intervention has
reduced demand for iron ore and scrap steel, sending prices lower.
Industrial metal prices are also reacting negatively to weaker
demand signals from mainland China. Copper prices were down 1.5%
with Chinese copper import volumes in the first seven months of
2021 down compared to the same period in 2020. Further downward
pressure on commodity prices was evident in chemical markets last
week as global ethylene prices dipped. An improving supply picture
and lower crude oil costs caused prices to drop 6.4% last week.
Yet another drop in the MPI reinforces our sense that the
year-long rally in commodity markets has run its course. While we
have been expecting a better supply-side performance in markets to
bring about a change in pricing, it has been on the demand-side
that recent softness has emanated. Growth has begun to slow, with
markets now anxious about the spread of the COVID-19 Delta variant
and what this may mean for future growth. Supply-chain disruptions
and bottlenecks continue to plague markets with vendor performance
not only poor but with little sign that conditions are even
stabilizing. More worrisome, service sectors are now experiencing
the same kinds of problems manufacturing encountered last year,
which means top-line inflation pressures may persist until year-end
or even into early 2022. Recent declines in commodity prices are
encouraging in the sense that the acute cost pressures now present
in supply chains will begin to dissipate if this recent trend
continues. This said, the threat of higher inflation will not end
until problems on the supply-side are resolved.
Posted 18 August 2021 by Michael Dall, Associate Director, Pricing and Purchasing, IHS Markit
