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August 12, 2016 - Weekly Pricing Pulse
The commodity recovery is once again gathering pace despite headwinds.
The IHS Materials Price Index (MPI) more than recovered prior losses last week, seeing a 2.6% overall gain despite ongoing oil price weakness. The oversupply narrative in refined products continued to weigh on crude benchmarks, with prices generally staying below $45/barrel. The oil subindex is now back to April 2016 levels and down some 15% compared to early June. Chemical prices, however, surged, with the chemical subindex jumping 7.4% on the back of continuing strength in US natural gas prices—Henry Hub spot prices now look to test $3/MMBtu because of a prolonged heat wave.
Metals also showed some momentum, with iron ore prices pushing the ferrous subindex 4% higher on increasing Chinese steel production (which we believe to be unsustainable). Other notable increases also came through in fiber (up 1.5%), pulp (up 1.1%) and nonferrous metals (up 0.7%).
The MPI is now hovering near a one-year high, having broken out of a narrow trading range that persisted from March to July. While supply/demand headwinds have weighed down individual commodities in recent weeks, the index has been supported by diverse trends that have offset losses. Markets have certainly calmed in the wake of the Brexit vote. Indeed last week's European PMI figures suggested that, outside of the United Kingdom, the fallout from Brexit may be limited. Moreover, the strong August US employment report highlighted a solid US economy, allaying any fears that the weak second-quarter GDP number pointed to a worrisome softening in growth. This recent data, along with additional monetary policy stimulus in the United Kingdom and Japan, has shifted investors back into "risk-on" mode, and helped propel commodity prices higher