JAKARTA (TheInsiderStories) - Commodity prices continue to move higher, although late February and early March have seen periods of volatility with prices pulling back in some markets, IHS Markit reported today. As market by the Materials Price Index (MPI), not included measures of ocean-going shipping rates and DRAM prices, the commodity prices are now up 68 percent from a year ago.
“The demand-side factors that have been driving prices higher for the past year such as rebounding manufacturing activity, generous government stimulus, a weaker US Dollar and investor buying, remain in force, though three of the four have begun to signal a change,” said John Mothersole from IHS Markit.
He continued, “To be sure, government support continues to be forthcoming, whether in the form of extremely accommodative monetary policies or, most recently, the huge $1.9 trillion fiscal package just passed in the US.”
But mainland Chinese manufacturing, the engine underlying physical consumption growth for the past year, shows signs of losing some momentum. Data from Purchasing Manager Manufacturing survey shows both new orders and production barely expanding in February. This slowdown in mainland China was expected and is temporary, but it is expected to extend into the second half of the year.
Outside of China, manufacturing continues to rebound, though there remains the question about a possible shift in the composition of demand, away from goods and back toward services as the pandemic recedes. Likewise, the American Dollar and investor buying do not look to be as supportive of commodity markets going forward.
The recent rise in US interest rates has firmed the Greenback, and in doing so, is undercutting the investor narrative for holding riskier asset classes like commodities. The small rise in interest rates has not prompted a wave of selling, but commodity exchange position reports do indicate that investors have generally not added to their long positions during the past six weeks.
Strong investor buying has been a feature of many commodity markets for the past six months. The absence of fresh inflows will rob markets of some of the momentum that has propelled markets higher over the past six months. The supply-side of commodity markets has also been supportive of higher prices, but here, conditions if anything, are deteriorating.
PMI data for backlogs and delivery times continues to rise in a worrisome way. Fully a year into the pandemic supply chains remain fragile with a growing percentage of firms reporting concerns about supplier performance. Semiconductors have emerged as an Achilles heel for a range of industries, with no easy solution in sight.
“Our expectation is that the current tightness for many commodity grade chips, vital in many types of equipment, could last for the rest of 2021. The good news is that in other sectors, conditions are not as troubled,” he adds.
Mothersole rated, whether or not commodity markets show the kind of prolonged strength last seen between 2010 and 2014 and will depend how quickly supply-side bottlenecks are resolved this year. In most industries, available capacity looks sufficient to meet projected demand growth in 2021 and 2022, if operating rates improve.
“We expect the rise in goods price inflation to prove temporary as the market balances, the supply and demand of physical commodities improves and fundamentals reassert themselves,” he noted.
At the same time, a shift in markets may also prompt investor selling, potentially adding downward momentum to prices. He urged, the delivery times and backlogs over the next six months will be a key indicator to watch for a signal of any change.
While, semiconductor prices, which continue to have strong upside potential, could rise by more than 20 percent by year end. IHS Markit expects container rates, especially from Shanghai to Europe, to normalize over the coming year, with container rates from Shanghai to Europe potentially falling by more than 30 percent by early 2022.
Edited by Editorial Staff, Email: theinsiderstories@gmail.com
