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March 18, 2016 - Weekly Pricing Pulse
A recovery now appears to be under way; the only question is whether it might turn into something more robust. Although we believe prices are headed higher in the second half of the year, the lack of improving fundamentals underpinning this rally suggests spot purchasing in the weeks immediately ahead to catch dips.
Last week the IHS Materials Price Index (MPI) continued its recent good form with a very strong 6.8% rise. This followed a 6.0% gain for the week ending 5 March. The broad index is now well above its December 2008 lows and roughly on a par with levels recorded back in October 2015.
Looking across sectors, we had an astounding 20% jump in iron ore prices at the start of last week. Ore prices briefly broke above $60/metric ton, well above the $40 trading range seen only a few weeks ago. Chinese inventory restocking was behind the surge. Given ample supplies and the need to close huge amounts of steelmaking capacity in China, ore prices above $55/metric ton are not sustainable, as demonstrated by the market's partial pullback late last week. Added to the rise in iron ore was a 10.5% increase in crude prices, although here again prices have been pulling back as Iran suggested it will not be freezing output until production reaches 4 million barrels per day. Finally, DRAM prices were notable once again, last week posting a 10% decline. Recent volatility has been partially attributable to shortages of lower density DRAMs, which has begun to dissipate.
Taking a broad look at the coming week, even with steel and crude oil cooling down, there is potential for some lagged effects to carry through momentum, particularly in the chemicals segment, which is already showing energy price-related momentum. Looking slightly further ahead, we caution that this rally may be partially driven by a combination of short covering, promises of production cuts, and additional stimulus. Time will tell whether fundamentals are actually adjusting quickly enough to sustain these recent trends.