Commodities Material Price Index2018-09-18T09:12:23+00:00

June and July have been especially volatile for commodities. The IHS Markit Materials Price Index (MPI) in mid-July is down slightly since early June, but still substantially higher (23%) than a year ago.

Weakness in non-petroleum commodity prices can be linked to concerns about an escalating trade war, on top of lackluster data from China. Commodity prices are likely to remain range-bound for the rest of 2018. Slower growth in China and the European Union, tighter financial markets, and the added threat of trade actions will most likely lead to continued volatility. Global commodities prices have declined since the end of 2017. The IHS Markit Materials Price Index (MPI) dropped 7.9% to 3.105 since January 2018. The quarterly trend diverges from the annual trend, the MPI increased 4.3% in Q2. The commodity complex was driven upward by rallying oil prices, leading to a narrow rise in the MPI; only four sub-indexes increased last week, while five fell and another stayed flat. Oil prices increased 1.7%, supporting freight and chemical markets. Macroeconomic data released last week continued to point to peaking global growth. The Eurozone PMI Manufacturing Index showed its weakest activity in 18 months as export activity declined and business optimism sank. The Chinese General Services PMI report indicated a pickup in the service sector; however, IHS Global Insight continues to see a slowdown in industrial activity. In the United States, the Bureau of Labor Statistics reported another month of brisk job growth, further bolstering the case for tighter monetary policy from the Federal Reserve. As global growth conditions peak, the commodity complex has limited growth potential. Once the rally in oil markets loses its steam, be on the lookout for a retreat in commodity prices. The big story currently is the Section 232 tariffs approved by the Trump Administration last week, putting 25% imported steel and 10% on imported aluminum (except Canada and Mexico). The impacts were immediate and severe. Domestic steel prices spiked immediately $250/ton across the board for all shapes and types. There will be spot market shortages and shipment delays as domestic capacity takes three to nine months to come on line. Ultimately, post-tariff steel prices should settle to $150/ton over steady market prices by Q1 or Q2 of 2019. Aluminum prices have already captured anticipated Section 232 price increases since December 2017. 10% to 20% increases in finished product materials (aluminum siding, panels, ductwork, conduit, wire, tubing and fittings) have hit the market. While the overarching intent was to get steel production up from 73% to 80% capacity, sheet metal producers were already nearing 100% capacity. So there may be dire impacts to sheet metal product availability as well as pricing (ductwork, metal studs, etc.) as much of the market may be put on allocation due to short supply. Cumming has included an initial memo analysis of the impacts of the Section 232 tariffs as Exhibit E. Although the countries and tariff levy percentages have been modified, the impacts to downstream material prices remain the same.

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