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Our Materials Price Index (MPI) fell 1% last week, its third
consecutive weekly decrease. Notwithstanding last week's retreat,
the MPI is still at its highest point since January 2014. Commodity
markets are markedly different from this time last year, with
prices as measured by the MPI 87% higher than late March 2020.
Six of the MPI's ten sub-components posted decreases last week
with chemicals seeing the biggest downward move. The index dipped
4.2% with lower crude oil prices and improving supply driving
prices lower. Brent crude dropped to a low of $60.50 having broken
$70 at the start of March and this decline fed through to lower
feedstock costs for chemicals. In addition, Asian supply levels
have improved with several plants restarting production, which
resolved existing shortages. North American production continues to
make good progress after last month's cold snap in Texas creating
further downward pricing pressure. There is also less pricing
pressure in base metals with our steelmaking raw materials index
decreasing 0.7% last week. The index has now declined for three
weeks in a row although prices are retreating from historic highs.
One of the reasons for the drop is an expectation that the Chinese
government will soon impose new policy measures to crackdown on
pollution. This will likely include measures to restrict blast
furnace operations in mainland China, which has reduced buyer
interest in iron ore. Lumber markets are still experiencing price
inflation however with our sub-index increasing 10% last week. Low
interest rates and a desire for single family homes, because of the
pandemic, have boosted homebuilding rates and lumber demand is
vastly outstripping supply.
The US treasuries sell-off continued last week as investors
continue to focus on strong future growth prospects and the
associated inflation risks. The past year of rising commodity
prices already ensures higher goods price inflation this summer.
Whether this burst of inflation is prolonged or only temporary will
depend on how quickly problems in production and logistics services
are resolved. Commodity prices were generally unaffected by the
container ship blockage in the Suez Canal last week, but they are
likely to be impacted in the coming weeks. Shipping costs were
already soaring before the Ever Given ran aground (our shipping
sub-index increased 21.6% in the last four week). This latest
incident only highlights the fragility of supply chains in early
2021 and increases the upside price risk. The hope is that
disruptions and bottlenecks fade as the pandemic recedes in the
second half of the year. If they do, markets look to be in a better
balance with cost pressures becoming manageable even as a broader
recovery gains traction. Delivery times, currently extended, will
be a clear sign that conditions in supply chains are returning to
normal. If they do not begin retreating by late summer or decline
only slowly in the third and fourth quarter, the rise in goods
price inflation may become uncomfortably long.
Posted 30 March 2021 by Michael Dall, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence