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Our Materials Price Index (MPI) fell 2.8% last week, its third
consecutive weekly drop. Despite the successive declines, the MPI
remains at its highest point since May 2014 and still stands 48%
higher than early February 2020.
A large downward move in our steel making raw materials index
was the principal cause of last week's price drop. Indeed, more
components of the index rose than fell. Our steel index was down
8.4% after a significant iron ore sell off in the first half of the
week drove prices down to $148/metric ton, the lowest point since
mid-December. Lower demand from mainland China due to the upcoming
Lunar New Year holiday was the main reason for the decline. An
improving supply picture added to iron ore's weakness as major
producer Vale is expected to increase production in the near term.
Our energy sub-index continued its recent downward move, falling
1.7%, as natural gas prices retreated from historic highs. Coal
prices also fell as Asian demand dropped due to the Lunar New Year
effect. In contrast, oil prices increased last week as the supply
reductions implemented by the OPEC+ producers in January began to
have an impact on the overall market balance. Our DRAMS index
increased 3.2% as ongoing microchip shortages pushed prices higher.
The index has increased for the past ten weeks and, with General
Motors announcing the temporary closure of three global production
sites because of the shortage, price pressure will persist in the
near term.
Equity markets, in contrast to commodities, had their best week
since November. Despite weaker than expected US non-farm payroll
data, markets focused on strong earnings reports and the brighter
prospects for global economies from the COVID-19 vaccine rollouts.
The weakness in commodity markets is tied to the run up to the
Lunar New Year holiday in mainland China. Buyers were largely
absent in Asia, with much of mainland China's manufacturing sector
on holiday. Whether this softness continues beyond the Lunar New
Year holiday will depend on the supply-side of markets and
specifically on clear signs that vendor performance is improving,
something that is not yet apparent in the data for backlogs or
delivery times. Prospects for a third large stimulus package in the
US also now loom in front of markets. Increases in the MPI over the
past eight months guarantee a rise in goods price inflation through
the second quarter. The question for markets is what impact will
the fresh stimulus have on spending? If added spending is directed
toward goods with bottlenecks in supply-chains still unresolved,
pricing pressures will worsen. On the other hand, should
consumption shift back toward services as the pandemic recedes at
the same time that supply disruptions are tackled, markets may be
able to accommodate the stimulus induced increase in demand without
experiencing a worrisome increase in goods price inflation.
Posted 10 February 2021 by Michael Dall, Associate Director, Pricing and Purchasing, IHS Markit