Commodity prices strengthened for a second consecutive week, however, recent gains have not come close to offsetting recent losses. The IHS Markit Materials Price Index (MPI) rose 1.1% last week with seven of the MPI’s ten subcomponents recording increases. A slowing rate of new coronavirus cases reported in China last week provided support to markets, which seemed to calm as the week progressed. However, the mood changed dramatically over the weekend with the reported jump in confirmed coronavirus cases in South Korea, Italy and Iran.
Energy prices jumped 3.5% last week but remained below late January levels. Natural gas prices, which have been particularly volatile lately, posted an 8.8% increase this past week after an 8.2% decline the week before. Oil also enjoyed a good week last week, with crude prices increasing almost 5%. Like energy prices, ferrous metals prices rebounded, rising 2.4%. Both iron ore and steel scrap prices showed solid gains, though both remain below late January levels. In spite of some positive news in most commodity markets last week, freight rates have continued to weaken, with the MPI’s subcomponent index declining another 5%, its ninth consecutive slide since late December. Falling export volume from China is outstripping carrier measures to withdraw capacity, with dry bulk and container rates tumbling on Asia-Europe and trans-Pacific routes as a result.
Commodity markets appeared to find some footing in mid-February as factory production in China slowly restarted. Transportation bottlenecks in China and, in particular, a lack of trucking services in central China seemed to be the big obstacle preventing normal flows in supply chains. Now, however, the possibility of the epidemic spreading outside of China threatens disruptions on a global scale. The new question facing markets is how well will countries like Italy and South Korea, not just China, contain outbreaks of the virus.
With stimulus being deployed in China, workers returning to work and some commodities rallying, markets appear to be mending or at least indicating that we may be seeing the worst now. How quickly Chinese factory production returns to normal will determine how quickly, or not, commodity prices recapture their recent losses.
