IHS Markit Expects Commodity Prices to Bottom Out in 2Q 2020 & Recover Slowly

After falling -32% from a year earlier, commodity prices will reach bottom in second quarter, according to the IHS Markit May Commodity Price Watch published by John Mothersole, IHS Markit’s pricing and purchasing research director, and one of the leading experts on commodity pricing in the nation. Following is his report.

Commodity prices are not expected to regain their late-2019 levels until well into 2022. The COVID-19 pandemic has reshaped the outlook by triggering the largest peacetime contraction in the global economy since the Great Depression. Uniquely in the postwar period, the pandemic is a shock to both demand and supply. This said, the reaction in commodity markets indicates that the loss in aggregate demand is more significant and offsets any disruptions to supply.

As measured by our IHS Markit Materials Price Index (MPI), commodity prices are now projected to fall by more than -32% year-over-year (YOY) in the second quarter. The Materials Price Index measures a weighted average of weekly spot prices for a key collection of globally traded manufacturing inputs. The components are crude oil, chemicals, nonferrous metals, ferrous metals, paper pulp, lumber, rubber, fibers, tech components and ocean-going freight rates. It seeks to capture the commodity input costs for a diversified global manufacturer.

We see a bottom in commodity prices in the second quarter. Daily volatility in markets is still high but has been moving lower since mid-March, and since April we have seen signs that markets are stabilizing. Spreads in financial markets between high and lower quality debt have narrowed slightly, as have discounts in scrap metal markets. Long-term bond yields have also been inching higher. Most importantly, production cuts are

increasing, with these supply-side cuts pulling markets back toward balance.

For category managers, supply-side cuts create an added twist. While pricing looks weaker in 2020 and even in 2021, availability and supply assurance are likely to be as important as price during the next six quarters.

Looking to the near-term, the scale of the downturn and the likely start-stop nature of the recovery means a rebound will be “U”, not “V” shaped. Globally, real GDP moves back to its 2019 level only in 2022.

 This prolonged recovery has implications for commodities. Slower growth and the lower trajectories for physical consumption mean prices in 2022 will still be lower than in late 2019 — for commodity prices as measured by the IHS Markit Materials Price Index , some -10% lower.

One commodity to watch carefully is iron ore. Iron ore prices remain strong and have pushed back above $90 per metric ton on concern over Brazilian supply and data showing Chinese steel production increased in April. Notwithstanding their recent strength, IHS Markit now projects iron ore prices will fall below $70 per metric ton in 2021. Iron mine capacity remains ample, and on the demand side, we expect global steel production to be cut in response to COVID-19-related softness in both global construction and light vehicle production. - John Mothersole, pricing and purchasing research director, IHS Markit