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October 14, 2016 - Weekly Pricing Pulse
OPEC's change of stance will improve the MPI's short-term prospects, and promises additional volatility ahead of the cartel’s November meeting.
The IHS Materials Price Index (MPI) continued to sink last week, despite some optimism still reverberating through oil markets and the improvement in global manufacturing activity highlighted in the latest purchasing managers' indexes. All in all, the index fell for a third week in a row, with a 0.9% pullback.
Much of the drop again came down to chemicals, which declined as natural gas prices dipped and product supplies improved. The chemicals subindex came through with a sharp 4.7% drop, also its third consecutive weekly retreat. The other notable decline was in the ferrous subindex, which lost 3.3% due to declines in both iron ore and steel scrap prices. Steel markets are resetting after prices had risen too strongly this summer. Oil prices also showed strength. Since OPEC’s announced "in principle" production agreement last month, prices have shown considerable resilience, staying above $50/barrel. The oil subindex recorded a strong 8.7% spike for the week, its second consecutive gain.
Broader indicators for commodity markets were mixed last week. On the positive side, global manufacturing showed a slight improvement in the September purchasing managers' indexes. All major manufacturing economies except South Korea and Brazil show expansion, although the pace of the expansion can still best be described as only lackluster. The negative news for commodities came from currency markets, with sterling weakening sharply following the prime minister's announcement that Britain's EU exit process would formally start by the end of March 2017. Policy signals are heavily hinting towards a "hard Brexit,” despite signs at the start of this week that opponents of a "hard out" are starting to ramp up their efforts. Therefore, sterling is being dragged lower, helping to lift the US dollar, which was already receiving support because of an anticipated US interest rate hike this December.