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April 13, 2017 - Weekly Pricing Pulse
The IHS Materials Price Index (MPI) declined 1.9% last week, its fifth decline in seven weeks, firmly reversing the positive momentum seen earlier in the year. Last week's fall was driven by a slump in the ferrous metals component, which dropped 9.3%, outweighing a 4.2% gain in oil prices and a large 8.6% increase in lumber prices.
Iron ore prices have fallen from a near three-year high as portside stocks in China reached a fresh high, with excessive supply weighing on prices. Coupled with a slip in US steel scrap prices, this pushed our ferrous component significantly lower. Oil markets continued higher last week, building on the prior week's gains as geopolitical uncertainty in Syria and Libya stoked anxieties about potential supply disruptions.
Macroeconomic data for the week were once again mixed. Generally supportive of the commodity complex was the IHS Markit Global Manufacturing Purchasing Managers' Index (PMI), which came in only fractionally lower in March, remaining very close to its six-year February high. The Caixin Chinese PMI, however, finished lower at 51.2, compared with 51.7 in February. This indicates that manufacturing activity in China is still expanding, but that the breadth of the expansion is not necessarily widening. The March US employment report showed a relatively weak 98,000 jobs added, a disappointing performance, but not necessarily worrisome. Monthly employment data are notoriously volatile. Looking at quarterly data tends to pick up underlying trends better, and on this basis, US labor market performance remains healthy.
Looking ahead, the key to direction in the commodity complex remains China's manufacturing sector. Stronger growth this summer will reestablish prices on an upward trajectory. Flat or decelerating growth (which we forecast) will provide support for prices, but not upward pressure.