| Week ending August 11, 2017 |
The MPI accelerates at its fastest rate all year
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The IHS Materials Price Index (MPI) rose 3.6% last week, its strongest gain of the year. The index has now increased in five of the last six weeks. Iron ore and steel scrap prices jumped last week, sending the ferrous index up a strong 6.2%. Higher oil prices and better prospects for the dry bulk cargo market pushed up the chemicals and freight indexes by 5.0% and 6.4%, respectively.
Record Chinese steel production and growing confidence around Chinese industrial activity are behind the recent rally in iron ore prices. This rise is something of surprise, chiefly because it is hard to see Chinese steel production at its current elevated level persisting for long. The recent rise in oil prices, which has helped lift chemical prices and freight rates, is tied to a decline in US inventories and a dip in the Baker-Hughes rig count for North America.
The change in commodity markets since late June is consistent with the steady stream of good economic reports, the latest being the July US employment report and July IHS Markit Purchasing Manager reports. The July US employment report beat expectations, showing an increase of 209,000 jobs. Meanwhile, the IHS Markit Purchasing Managers’ Index (PMI) for global manufacturing improved slightly in July. Although recent optimism in markets is not unwarranted, we would caution against extrapolating the current rally too far into the future. Oil markets look well supplied in 2018, financial markets are slowly tightening, while Chinese growth will be stable at best (not accelerate)—all factors that will check strong continuing increases in prices.
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| Industrial Materials: Prices |  |
| Key Prices & Demand Drivers |  |
Construction Materials and Equipment Cost Escalation Hit Lowest Level This Year
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Construction costs rose again in June, according to IHS Markit and the Procurement Executives Group (PEG). |
The headline IHS Markit PEG Engineering and Construction Cost Index registered 51.5, down from 54.0 in May, indicating less broad price increases across the industry. Both the material/equipment and labor categories continue to record higher prices. The materials/equipment price index came in at 51.3 in June, its lowest level in seven months. Price increases were uneven with only six of the 12 categories tracked in the materials sub-index showing higher prices, three categories registered flat pricing, and three had falling prices. Although structural steel and steel pipe prices have backed off from this spring’s peaks, anxiety about the pending Section 232 trade case decision continues. “Steel pipe prices have peaked for the time being and prices for certain products have started to fall,” said Amanda Eglinton, senior economist at IHS Markit. “However, there is still tightness in products such as oil country tubular goods (OCTG) and line pipe, where demand remains elevated. There is high potential for further tightening pending the outcome of the Section 232 trade case. If pipe is included in the scope of this case and imports are restricted, prices will spike again and supply will be very tight. If pipe is not included, steel pipe prices will continue to soften with lower steel input costs.”
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