The coronavirus 2019 (COVID-19) pandemic has reshaped the outlook by triggering the largest peacetime contraction in the global economy since the Great Depression. Uniquely in the postwar period, the pandemic is a shock to both demand and supply. This said, the reaction in commodity markets indicates that the loss in aggregate demand is more significant and offsets any disruptions to supply. As measured by our IHS Markit Materials Price Index (MPI), commodity prices are now projected to fall by more than 32% year over year (y/y) in the second quarter.
“We see a bottom in commodity prices in the second quarter. Daily volatility in markets is still high but has been moving lower since mid-March and since April we have seen signs that markets are stabilizing. Spreads in financial markets between high and lower quality debt have narrowed slightly, as have discounts in scrap metal markets. Long-term bond yields have also been inching higher. Most importantly, production cuts are increasing, with these supply-side cuts pulling markets back toward balance.” – John Mothersole, pricing and purchasing research director, IHS Markit
For category managers supply-side cuts create an added twist. While pricing looks weaker in 2020 and even in 2021, availability and supply assurance are likely to be as important as price during the next six quarters.
Looking to the near-term, the scale of the downturn and the likely start-stop nature of the recovery means that a rebound will be “U”, not “V” shaped. Globally, real GDP moves back to its 2019 level only in 2022.
“This prolonged recovery has implications for commodities, which are not expected to see physical use regain their late-2019 levels until well into 2022. Slower growth and the lower trajectories for physical consumption mean prices in 2022 will still be lower than in late 2019—for commodity prices as measured by the MPI, some 10% lower.” – John Mothersole, pricing and purchasing research director, IHS Markit
Iron ore prices remain strong and have pushed back above $90 per metric ton on concern over Brazilian supply and data showing Chinese steel production increased in April. Notwithstanding their recent strength, IHS Markit projects iron ore prices will fall below $70 per metric ton in 2021. Iron mine capacity remains ample, and on the demand side, we expect global steel production to be cut in response to COVID-19 related softness in both global construction and light vehicle production.
The Materials Price Index (MPI) measures a weighted average of weekly spot prices for a key collection of globally traded manufacturing inputs. The components are crude oil, chemicals, nonferrous metals, ferrous metals, paper pulp, lumber, rubber, fibers, tech components, and ocean-going freight rates. It seeks to capture the commodity input costs for a diversified global manufacturer.
