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May 13, 2016 - Weekly Pricing Pulse
Commodity prices are still bouncing back off a low base, although the fundamental basis for the recent rally is weakening.
The IHS Materials Price Index (MPI) increased yet again last week, marking its fourth consecutive expansion. The index is now up almost 29% since its mid-January low. However, in contrast to the broad-based nature of the recent rally, last week's increase was narrowly confined to ferrous metals, freight, lumber, and pulp. Increasing ferrous prices stood out (up 2.3%), with gains being seen across scrap and iron ore markets.
Steel prices are being affected by events in China, where a seasonal uptick in activity is being reinforced by government stimulus and a wave of speculative buying. Our research suggests that iron ore prices have responded to higher levels of demand from steel production, but we doubt whether these upward drivers are themselves sustainable.
Furthermore, April's Chinese Caixin/Markit general manufacturing purchasing managers' index (PMI) points to softer fundamentals; it fell to 49.4, its 14th consecutive month below 50. The US manufacturing PMI also dropped in April, although it remained slightly above 50. Surprisingly, the Eurozone is emerging as a support, with the 51.7 manufacturing PMI reading generally coming out ahead of expectations. Last week's global financial market declines do, however, suggest that lackluster economic fundamentals are being priced into asset markets, placing another constraint on the MPI's recent surge. That said, this week the MPI may get an oil-price boost from Canadian wildfires, which are disrupting crude production at a time when the global market is already tightening.