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June 8, 2017 - Weekly Pricing Pulse
Last week the IHS Materials Price Index (MPI) slumped a whopping 3.1%, its largest weekly decline since mid-April. Our commodity price index is now back to levels last seen in November, with fully two-thirds of its big fourth-quarter rally erased. Last week's retreat was also broad-based, with all 10 sub-indexes falling. Driving the fall were oil, down 3.9%, and rubber, which crashed 10.9%.
Brent crude slipped back below $50/barrel last week as concerns about growing US supply dominated energy markets. It is thought that despite the OPEC supply agreement, increasing US shale production will continue to fuel excessive global supply. Last week ferrous markets were also down strongly, with the sub-component slipping 3.7% as iron ore prices continued to react to high inventory levels in China.
Oversupply appears to be re-emerging as the primary concern in commodity markets. Exuberant producers expanded output in the wake of the 2016 price surge but are now finding that demand is not keeping pace in some sectors. Indeed, the MPI's wide-ranging decline last week came despite a weakening US dollar and strong May manufacturing survey data across the Eurozone. What seems to have happened is that markets are focusing on China, where manufacturing appears softer in the latest data. We expect this dynamic to characterize the second half of the year—decelerating Chinese growth contrasting with improvement elsewhere. This suggests an environment in which prices receive support but not strong pressure.