Commodity prices, as measured by our Materials Price Index (MPI), powered higher for a tenth-straight week, rising 2.7% in another broad-based move. Markets are shrugging off higher COVID-19 case counts and are instead focusing on production cuts, supply disruptions and improving demand to push prices higher. While the global economy has clearly turned a corner, our caution remains that the reaction in commodity markets seems "enthusiastic" given our near-term forecasts for physical consumption and the amount of capacity available.

Ferrous prices led the MPI higher last week, rising 2.7%. Iron ore CFR China rose 3.2% to $105/mt by week's end and continued in Monday trading to $111/mt due to an uptick in Chinese rebar demand and in spite of record iron ore exports from Australia. The MPI's energy index rose strong 2.6%, mainly due to a 4.5% rise in crude oil prices driven by a 6.3% rise in OPEC crude prices which have been playing catch-up with Brent, the spread between the two markers having reached as wide as $5 /bbl in May. The non-ferrous sub-index increased 2.5% and is now up 17.9% from its first quarter low. Copper again showed strength rising 3.1% on the threat of strikes in Chile. Nickel rose 3.9%, benefiting from Chinese buying, a factor supporting the entire base metals complex. Lumber rose 12.3% as exceptionally strong demand in Canada outpaced supply, cleaning suppliers out in some cases. Lumber prices are now up 24.3% year-to-date, which, along with freight, are the only prices in the index up from the start of the year. Finally, bulk freight rose another 11.0%. The rally in ocean going bulk charter rates has run out of steam as volumes from Brazil cooled slightly.

With materials demand still well down from pre-COVID-19 levels, notable upward weekly price moves are coming from commodity groups impacted by production cuts and disruptions related capacity restrictions e.g. crude oil, base metals, freight and lumber. Some producers not constrained by COVID-19 safety restrictions do seem to have been caught out by the strength of the current rally. With capacity utilization in many sectors low, however, this raises the risk that supply will start to creep back in production, incentivised by higher prices. Given the underlying softness in demand, this could expose markets to a correction. The "V" shaped recovery now being priced-in to many markets seems increasingly at odds with this underlying fundamental.

Posted 15 July 2020 by Mr. William May, Senior Economist Pricing and Purchasing