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September 23, 2016 - Weekly Pricing Pulse
The recent MPI rally still looks somewhat vulnerable in light of chemical feedstock headwinds expected over coming months.
The IHS Materials Price Index (MPI) posted a 0.8% increase last week, breaking the previous two-week losing streak. Much of the rise came from chemicals, which recorded a robust 5.2% increase because of a strong rebound in ethylene prices. While we have drawn parallels between chemicals and natural gas over recent weeks, chemical prices may hold up a bit longer due to capacity outages in the United States, even as North American temperatures cool.
Other components on the MPI showed uneven moves. The oil subindex pulled back nearly 3%, not altogether surprising given that some of its recent gains have been associated with market expectations ahead of an OPEC meeting in late September. Shipping rates, however, rose, marking their fourth consecutive increase and taking the subindex some 13% higher since late August. This freight rally is occurring for a number of reasons. The Hanjin bankruptcy has disrupted scheduled sailings and created a scramble for available capacity on selected routes. The dry bulk market has also seen some consolidation in recent months that has helped firm charter rates.
Fundamental data is also providing a mixed picture. Chinese industrial production (IP) grew at a faster pace in August than in July, though this uptick came because the contraction in the mining sector slowed, not because of any inherent strength in manufacturing. Eurozone July IP, however, recorded a 0.5% year-on-year contraction, compared with 0.4% growth posted in June. The "mixed bag" was capped off with US IP posting a 0.4% month-on-month decline in August compared with July’s uptick of 0.6%. With aggregate demand showing no clear momentum coming into the fourth quarter, commodity markets can expect a period of choppiness, which will only intensify ahead of the Federal Reserve's (IHS-forecast) December rate hike.