| Week ending December 22, 2017 |
Freight rates and pulp lead another rise in commodity prices
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Price increases in a number of sectors are a result of disrupted supply chains.
The IHS Markit Materials Price Index (MPI) increased by 0.4% last week, its sixth consecutive gain. The rise was broadly based, with 7 of the 10 subcomponents rising. Freight rates and pulp prices were the biggest movers, increasing by 2.2% and 1.9%, respectively.
Chinese cuts in mining output are continuing to push up iron ore prices and lifting demand for ore imports, which is having a knock-on effect on seaborne freight rates. Meanwhile, ferrous metals prices rose by 0.5% last week in part because of the added cost pressures. In pulp markets, robust demand from China drove up prices. Buyers in China cannot get recycled fiber because of the ban on waste imports, causing them to purchase more virgin-grade fiber. A similar shift from scrap to primary material is also being seen in plastic and base metal markets. Finally, a disruption in the Forties Pipeline last week put upward pressure on crude oil prices.
In spite of the year-end rally in markets, we still expect commodity prices to remain relatively range-bound in 2018. While more widespread last week, price increases across the commodity complex have been choppier compared to earlier in the year. Demand growth has been good to be sure; however, price increases in a number of sectors recently have come about because of attempts to control supply or special temporary factors that have disrupted supply chains. Such factors include OPEC’s extended production agreement, China’s effort to improve air quality or limit waste material imports, and the International Tripartite Rubber Council’s repeated efforts to limit exports. With capacity in many sectors still adequate and demand growth not expected to accelerate—in large part because of tightening credit conditions—commodity prices are expected to lose momentum once these temporary restrictions to supply are resolved. |
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Construction Labor Costs Reach Highest Level in Almost Three Years, IHS Markit Says
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Construction costs rose again in November, according to IHS Markit and the Procurement Executives Group (PEG). |
The current headline IHS Markit PEG Engineering and Construction Cost Index registered 60.2, supported by strong figures in both the materials/equipment and labor sub-indexes. The materials/equipment price index was 60.9 in November, moving up from the October figure of 58.9. Price increases were widespread. Current subcontractor labor prices rose at a fast pace in November: the index figure came in at 58.5, the highest reading since December 2014. “Subcontractor rates continued to accelerate over November and expectations for future increases reached a five-year high,” said Emily Crowley, principal economist - pricing and purchasing, IHS Markit. “Tightening labor market conditions combined with an uptick in activity are driving expectations of future rate increases. Currently the U.S. South and West are having the most trouble finding workers leading to stronger wage escalation, whereas the end of major projects in Eastern Canada are keeping pressure off of wages in that region.”
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