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May 6, 2016 - Weekly Pricing Pulse
Positive sentiment appears ahead of fundamentals.
The IHS Materials Price Index (MPI) saw its third consecutive increase last week, recording a 1.7% gain. The MPI is now up 28% since mid-January, which we believe marked a trough in the current price cycle. Increases were broad-based, with metals, energy, rubber, lumber and ocean-going shipping prices all rising fairly strongly. Pulp and DRAM prices did fall.
The oil subindex continued to rally for a fourth consecutive week (up 5.9%) as benchmarks started eyeing $50/barrel ahead of an expected midyear rebalancing of the global market. Moreover, the ferrous subindex gained another 1.3%, which now takes us to levels not seen since the summer of 2015. Similarly, nonferrous metals are also near one-year highs. Both metal indexes tracked higher on frenzied buying in China, which abated only when authorities there moved to clamp down on what they described as speculative excesses. Apart from broadly positive sentiment, which was reinforced by a weakening dollar and hope of supply-side consolidation, markets may also have been looking at the recent flash PMI reports for signs of improving fundamentals. However, actual PMI reports released early this week do not confirm this apparent optimism, with Chinese and US manufacturing figures generally coming out weak.
It should also be noted that during the first half of 2015, the MPI experienced a similar rally, followed by strong declines starting in late summer. Many commodity prices are being influenced by short-term derivative contracts now set for delivery in June. Once this seasonality passes, downside risk may come back onto the radar screen. We expect volatility ahead in the second quarter, and would not be surprised by a partial rollback in late spring.