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Our Materials Price Index (MPI) climbed 3.5% last week, building
on its 3% gain the previous week. It was another week when prices
collectively recorded a significant weekly gain sending the MPI to
a seven-year high. The MPI now stands 57% higher than in late
February 2020.
All but one of the MPI's ten sub-components posted increases
last week with energy, metals and chemicals the notable movers. Our
energy index was up 6.8% as cold weather in Texas froze pipelines
and forced 20% of US natural gas supply offline. This sent the
Henry Hub spot price to $10.33/MMBtu from $4.63/MMbtu in the
preceding week, an unprecedented 123% increase. The severe winter
weather also impacted chemical markets with over 60% of US ethylene
production offline. The result was a 3.7% climb in our chemical
sub-index last week. Metal exchanges remained extremely active with
our steelmaking raw materials index increasing 2.5% and the
nonferrous index up 3.4%. Iron ore prices soared because Chinese
economic activity was higher than usual since many workers did not
travel home for Lunar New Year. Copper prices reached $8,930 a
tonne last week, the highest level since 2011 amid expectations of
a future rise in green infrastructure projects where copper will be
an important raw material. The price of tin also soared as high
demand from the electronics industry sent stockpiles to near record
lows. Spot prices reached $29,349 per tonne, a ten-year high, and a
global tin shortage means upward pressure is likely to persist.
It was a muted week for equity markets as investors swung
between vaccine rollout positivity and fears over a spike in
inflation. Yields on 10-year US Treasury bonds climbed and the
sell-off pushed investors towards commodities. The return of Asian
buyers to the market after the Lunar New Year also provided a
further boost to commodity markets. The broad-based gains in
industrial metals have led to further speculation that a commodity
supercycle is beginning. Evidence of a sustained increase in goods
price inflation remains limited thus far. However, the sharp
increase in the MPI over the past eight months guarantees a rise in
goods price inflation through at least the second quarter. Once
this becomes apparent in official data the question is whether
equity investors will accept the risk or, as happened last week,
pour into commodity markets. The answer to this will determine
level of commodity price inflation in the near term.
Posted 23 February 2021 by Michael Dall, Associate Director, Pricing and Purchasing, IHS Markit
