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January 15, 2016 - Weekly Pricing Pulse
Current pricing weakness reinforces a wait-and-see buying strategy.
The IHS Materials Price Index (MPI) kicked off 2016 by falling 0.9%, erasing all of the previous week’s gains. This latest decline brought the index below its December 2008 trough, pushing prices collectively to their lowest level since December 2003. With the exception of the chemicals and steel-making materials, all commodities in the index declined. Steel scrap prices increased, with the ferrous metals index moving up 2.6%, marking the subindex’s fourth consecutive weekly gain.
More broadly, commodity prices fell as part of the collateral damage from the sharp sell-off in the Chinese stock market and subsequent strengthening in the US dollar. Oil prices fell 5.3% for the week, while rubber and base metal prices dropped 4.5% and 3.6%, respectively. The largest decline for the week, however, was seen in dry bulk freight rates, which plunged 7.7%. Even though daily charter rates are currently below operating costs, weaker oil prices and the prospect for even fewer cargoes heading to China were enough to push rates even lower.
This week began with both Brent and West Texas Intermediate (WTI) testing the $30/barrel mark, as Chinese equity markets and the yuan continued to fall, though both showed signs of stabilization on Tuesday. The continued weakening of the yuan hints at even more softness in aggregate demand and suggests prices may fall further. We expect markets to remain volatile until after the Chinese New Year holiday in early February.