Since IHS Markit questioned last month whether commodities could continue moving higher, they have done just that. As measured by IHS Markit’s Material Price Index (MPI), commodity prices advanced another 5.5% between mid-June and mid-July. From the beginning of the current rally in late April, prices have risen for 11 straight weeks, recording a cumulative gain of 30.4%. Moreover, the rise in prices has been consistently broad-based with, on average, 70% of the MPI’s components increasing each week. The MPI is still down 6.1% in the year to date, but given the optimism in markets, it is conceivable that prices will erase their first quarter plunge before the end of September.
“For the moment, markets are brushing aside any concerns about rising COVID-19 case counts and any possible second wave effects. Instead they are focusing on a heady combination of good Chinese data, continuing supply disruptions, a softer US dollar, the promise of yet more stimulus and hopeful news on a possible vaccine.
"Still, our caution remains. The pandemic’s effect on labor markets is not temporary, nor will consumer spending return to normal soon, fundamentals that commodity markets cannot ignore forever.” – John Mothersole, pricing and purchasing research director, IHS Markit
IHS Markit’s consumption and production forecasts across several industries highlight what continues to look like challenging end markets over the near-term. Notwithstanding recent signs of recovering demand, global oil consumption is not projected to exceed its late 2019 level until 2022. Likewise, global aluminum and copper consumption are forecast to still be lower in late 2021 than at the end of 2019. Finally, global light vehicle production is not expected to break its 2019 level until 2024.
Given that most industrial markets were not tight at the end of last year, as evidenced by the general decline in materials prices across the second half of 2019, a relatively soft demand outlook signals an equally soft pricing environment. Momentum and sentiment may carry commodity prices higher for a while longer, but not indefinitely.
Commodity to watch: Tin
Tin is seeing the same kind of supply-side disruptions plaguing other metals like copper at the moment, while demand has proven to be resilient during the pandemic. Large tin producers such as Myanmar, Malaysia and Bolivia have all seen mine production disrupted in 2020. Even China, a large exporter of refined tin, has flipped to an importer. Demand from tin’s biggest end-market, solder used in manufacturing components, has hardly been dented by COVID-19. Packaging demand has also held up well as household consume more food at home. The net effect of good demand on top of strained supply has been a draw down in inventory and rising prices. Expect to see price relief later this year. But for now, tin is enjoying a bullish mix.
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.
