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January 19, 2017 - Weekly Pricing Pulse
The IHS Materials Price Index (MPI) continued to rise again last week, up a sizable 2.8%. The MPI has increased for 10 consecutive weeks and is now at its highest level in two years. Chemical and rubber markets were once more the main drivers, with prices up 6.5% and 7.5%, respectively.
Rubber prices have surged over the past three months, gaining more than 50% since October 2016. The main drivers behind this exceptional performance are the perception of strengthening demand in China and the supply worries that have emerged because of poor weather in key production regions. For chemicals, gains have been driven in part by seasonal gas price gains, as heating season in the United States strains supply. However, several unplanned production outages have also played a part in tightening the market.
Last week there were several data releases that helped reinforce momentum in commodity markets. In the Eurozone industrial production gained 3.2% year on year (y/y) in November, a sharp acceleration from just 0.8% in the prior month, with consumer nondurables gaining 2.9%. Chinese producer price inflation rose to 5.5% y/y in December to hit its highest level since 2011. Rising inflation has helped reassure markets that the improvement in Chinese aggregate demand may be sustainable and not just stimulus-dependent. Finally, the US dollar also retreated slightly last week, which helped support the entire commodity complex. The strong, broad, and continuing commodity price gains since September have been impressive. But the question arises: is too much optimism being priced into markets right now?