Following the sharp drop at the start of February, the IHS Markit Materials Price Index (MPI) bounced slightly last week, rising 0.4%. Six of the MPI’s ten sub-categories rose. Although coronavirus cases continue to rise, markets calmed on the aggressive actions of the Chinese government both to contain the outbreak and support the economy. Buyers seemed to take heart, stepping back into the market to take advantage of lower prices. Market participants seem to be buying into a more positive outlook with the return of workers to factories in some regions of China and the announcement that Beijing will enact "targeted and phased" stimulus measures such as lower corporate taxes and releasing more funds for provincial authorities.
A strong 4.1% rebound in iron ore prices carried the MPI higher last week, which stemmed from news of weak shipments from Brazil and the prospect of stimulus from Beijing. Rubber and pulp also benefited from this reversal in mood in China, rising 2.8% and 2.6%, respectively. Energy prices rose 0.8% mainly due to the 5.3% rise in coal prices, but was also helped by the 0.6% increase in oil prices, which collectively offset the 9.2% fall in LNG prices. Lumber prices managed to shrug-off negative sentiment, rising by 5.6% on unseasonably strong new home starts in December and January. December starts hit an annualised rate of 1.6 million homes, the highest rate since 2006. Reduced Canadian exports to the US have also helped boost prices, which are already up 14.7% so far in 2020. Not all commodities rebounded last week. As expected, chemicals fell last week, dropping 4.4% in a lagged effect to softer oil prices reducing chemical feedstock costs. Ocean going freight rates also continue to suffer because of reduced Chinese production and quarantine measures being imposed on ships and crews. Bulk freight rates fell another 7.9% last week, their eighth consecutive weekly decline. Charter rates are down a cumulative 38.2% since the mid-December peak.
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 commodity prices recapture their recent losses.