JAKARTA (TheInsiderStories) Commodity prices, as measured by the IHS Markit Materials Price Index (MPI), fell 1.0 percent last week in a broad-based move that saw eight of the index’s ten sub-components decline. Weak buying caused by the Lunar New Year holiday is now being matched against active selling tied to growing fears around the impact of the coronavirus on Chinese demand.

Freight rates and rubber saw the largest declines last week, dropping 4.9 percent and 3.8 percent, respectively.  Rubber prices have been rising almost without pause since early October on concerns that tightening supplies related to fungal blight, so some profit-taking might be expected.

Bulk freight rates have dropped by more than 20 percent since late December on weaker iron ore shipments from Brazil and Australia as a result of wet weather, especially in Southern Brazil. Although Hubei province (Wuhan is the capital) is a modest steel-making center by Chinese standards, prospects of extended holiday idling – and the possibility that other areas will soon face similar actions – are undercutting charter rates.

Other commodities with exposure to China have shown weakness as well.  Pulp, metals, natural and synthetic fibers, and chemicals all saw modest declines last week after showing upward momentum since early December.

In particular, copper prices, often regarded as a bellwether for the global economy, have fallen almost 9 percent in two weeks, giving up almost all of their fourth-quarter advance. Lumber and DRAM prices were the only sub-categories in the MPI to buck the downward trend last week, rising 2.8 percent and 0.9 percent, respectively.

Lumber prices have been reacting to very good seasonal housing activity in the United States (US) linked to low mortgage rates, while DRAM prices are rebounding because of improving semiconductor orders and shipments.

While reports of the spreading coronavirus in China dominated commodity markets last week, other news was more encouraging. The IHS Markit flash January Purchasing Manager reports for Japan, the Eurozone and the US all showed conditions either stable or improving, giving hope that the upward momentum in markets evident during the past two months might be restored once the flu epidemic in China is contained.

Meanwhile, the Official NBS Manufacturing PMI in China edged down to 50.0 in January from 50.2 in the previous month. This was the weakest reading since a contraction in October, amid Beijing’s efforts to contain an ongoing Wuhan coronavirus outbreak that has claimed over 200 lives in the country so far, with World Health Organization declaring a global health emergency.

Output rose the least in three months (51.3 vs 53.2 in December) while export orders shrank again (48.7 vs 50.3) and employment continued to fall (47.5 vs 47.3). Meantime, new orders expanded for the third month in a row and at the fastest rate since April 2019. Also, buying levels advanced steeper (51.6 vs 51.3), the third consecutive month of increase.

On the price front, input cost inflation accelerated noticeably (53.8 vs 51.8), while selling prices dropped for the ninth straight month and at a stronger rate. Finally, sentiment strengthened sharply (57.9 vs 54.4).

By William May, senior economist, IHS Markit, Edited by Staff Editor, Email: theinsiderstories@gmail.com