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Our Materials Price Index (MPI) fell 8.4% last week, the second
biggest one week drop in the index's 25-year history. Price
declines were widespread with all ten MPI sub-components dropping.
Last week's drop takes commodity prices to the lowest level since
February 2021, although they are still 41% higher than one year
ago.
Large declines in energy and metal prices were the biggest
contributor to last week's commodity market correction. Global coal
prices plunged, dropping 22.1%, the largest drop ever recorded in
the history of the MPI, as Chinese authorities announced miners
would sell coal at a discount. This intervention by Chinese
authorities was an effort to resolve the energy crisis in mainland
China, which has been raging since September. Coal production fell
because of campaigns to improve mine safety and address pollution
levels in the country. This created a shortage, pushed up prices,
leading to cuts in electricity production because of the inability
of power companies to pass along cost increases. Power rationing
and mandated cuts in production for many heavy industries as part
of China's 'Dual Control' policy have also created problems in
other sectors. Steel production has dropped by more than 20% in
recent months, triggering a plunge in iron ore prices. Prices fell
to $94 a tonne last week, an 18-month low, having been as high as
$220 a tonne in May. Pulp prices have also fallen dramatically as
demand for packaging has slumped with the decline in industrial
activity. It has been the turmoil unleashed in many markets by
conflicting policy directives that prompted the National
Development and Reform Commission to intervene in its most direct
manner so far, first in the coal market, but also in other sectors
to relax production restrictions.
Last week's plunge in the MPI coincides with other encouraging
signs for markets. US nonfarm payroll employment rose 531,000 in
October, beating expectations, and the unemployment rate declined
0.2 percentage points to 4.6%. Combined with upward revisions to
payroll gains for prior months, these developments reveal a labor
market on a better footing heading into the fourth quarter. The
JPMorgan Global PMI™ (compiled by IHS Markit) also rose from 53.3
in September to 54.5 in October, its highest since July. To be
sure, price risk remains on the upside given Chinese policy
interventions. The upcoming Olympics in Beijing, a major steel
producing region, is likely to mean further production cuts as the
government wants to reduce pollution during the games. Last week's
commodity price correction, however, makes May's peak in the MPI
look increasingly like the high-water mark in the current commodity
price cycle. Given the real and growing anxiety about rising
inflation rates, lower commodity prices portend a slow unwinding in
the cost pressures impacting goods markets and therefore goods
prices inflation as early as the first half of 2022.
Posted 10 November 2021 by Michael Dall, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence
