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New Year Optimism Carries Commodity Prices Higher - Iron Ore And Steel Scrap Led Commodities Higher On Restocking And Firming Manufacturing Data - William May, Senior Economist, IHS Markit

Date 15/01/2020

Commodity prices, as measured by the IHS Markit Materials Price Index (MPI), rose 1.4% last week resuming the rally that began in late November; eight of the index’s ten subcomponents rose in a broad-based move. Increased activity in Asia ahead of the Lunar New Year holiday and optimism surrounding the pending Phase One US-China trade agreement appears to be behind last week’s lift.

Ferrous prices rose 2.4% for the week on increases in both iron ore and steel scrap prices. Chinese steel makers boosted ore buying to restock inventories ahead of the Lunar New Year holiday at the end of the month. Steel scrap has jumped 37.5% from October lows as finished steel prices have rebounded. Fiber prices rose for a fifth consecutive week, increasing 4.4% on a 5.9% jump in polyester prices that stems from positivity surrounding a US-China trade deal. DRAM prices, which increased 3.1% last week, have been on the rise recently because of tightness in production, which has led buyers to proactively increase orders. Energy prices rose 0.1% last week, a small move in spite of tensions in the Middle East. Following its brief rally to $70 /bbl, Brent crude prices have fallen back to around $64 /bbl, lower than before Major General Soleimani’s assassination.

Although sentiment has certainly improved with the stabilization in global manufacturing activity and the deceleration in trade tensions, we wont have a true read on the health of commodity markets until late February when buyers return from the New Year holiday. The following challenges will make the rally in commodities prices difficult to sustain throughout 2020: Brexit continues to cloud the outlook in Europe, the full effect of the Boeing’s problems will weigh on US growth in the first quarter, imbalances in the Chinese economy have yet to be fully dealt with.