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August 27, 2015 - Weekly Pricing Pulse
Over recent weeks the "sticky summer" theme has evolved into a major commodity rout that mimics the late 2008 severe decline. Hopes of a late summer stabilization have faded, with the IHS Materials Price index (MPI) measure recording a thumping 3.7% fall last week. Downside news is driving sentiment, with most of the negative chatter focusing on China's financial market correction, which in turn is associated with a slowing real economy. Chinese industrial production growth figures came back down to 6.0% in July from 6.8% in June. Second-half 2015 growth is expected to clock in at 6.2% compared with 7.0% in the first half.
Falls across the board contributed to the MPI plunge. Particularly large decreases were seen in freight (down 11.5%), chemicals (down 8.1%), rubber (down 5.5%), oil (down 4.3%), and lumber (down 2.9%). The only positive news is that ferrous prices are finishing marginally positive, but still very close to cost-floor levels. The overall index has fallen below 2.0 for the first time since April 2009, and we may end up testing the low of 1.66 set in December 2008 relatively soon—perhaps even over the next month, given the terrible financial market developments in China. For this week the baseline decline is expected to be 2.2%, though the risk is for a more significant fall given consecutive declines of more than 7.0% seen in Shanghai over recent sessions.
The start of this week also saw West Texas Intermediate (WTI) drop below $40/barrel, and much attention is shifting to how this will affect the US Federal Reserve's September rate decision. The prospect of a rate hike postponement to December (and perhaps beyond) will support prices, in addition to the end-summer period, which is usually associated with an upswing in overall activity. The bottom line, though, is that this year's "oversupply" narrative has changed, as the risk balance shifts to demand. Can China's massive appetite for commodities be maintained, or is the "soft landing" turning "hard?" The weeks and months ahead will prove both volatile and unnerving across the commodity complex.