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April 29, 2016 - Weekly Pricing Pulse
The MPI looks to be choppy in the second quarter; substantive negotiations may have to wait until later this summer.
Despite the collapse of talks among oil producers in Doha, the IHS Materials Price Index (MPI) managed to advance (up 1.1%) for a second week in a row. The bulk of last week’s rise came from crude oil (up 1.4%) and metals, with strong increases in both our ferrous (up 2.7%) and nonferrous (up 3.7%) indexes. Freight also reinforced its impressive rally (up 9.9%), seen alongside a Chinese industrial restocking cycle.
The week started with markets cautiously eyeing the post-Doha oil fallout, after the collapse of talks on an output freeze by large producers. Nonetheless, the retreat in oil prices was temporary, as focus shifted to the oil worker’s strike in Kuwait, which briefly took 2 MMb/d of supply offline.
Apart from oil, steel has also made a remarkable recovery this year, with our ferrous metals subindex up some 36%. Iron ore prices themselves are up more than 50% since the start of the year. Part of this is due to springtime restocking, while some reflects mill restarts. Chinese investors also appear to be piling into markets, as evidenced by surging open interest and volume on the Dalian Commodity and Shanghai Futures Exchanges. Such volatility is almost always driven by expected changes to fundamentals, rather than the fundamentals themselves. For steel specifically, excess supplies and large amounts of idle capacity make the recent jump in prices look unjustified. For commodities more broadly, the sustainability of this recovery will be driven by the accuracy of these bullish expectations. At the moment, however, the rally is looking a bit exposed, especially when contrasted to the soft "flash" manufacturing PMI figures that came through for the United States, Europe, and Japan last week.