Industrial Prices a cyclical rebound, a muted recovery, or no recovery at all?

Transcription

1 Pricing & Purchasing Summit Industrial Prices a cyclical rebound, a muted recovery, or no recovery at all? 26 September 2016 ihsmarkit.com John Mothersole, Director, , john.mothersole@ihsmarkit.com

2 Overview and takeaways The plunge in commodity markets is over prices bottomed in January This rise in raw material prices is already filtering downstream; suppliers will soon be recording cost increases and will use this to try to lift prices But the modest pace of the expansion coupled with ample capacity suggests support for prices rather than building pressure in supply chains Markets are in transition -- leverage between buyers and sellers is becoming more balanced 2

3 Global Environment John Mothersole, Director, , 3

4 Global growth looking better but still unexciting Percent change World United States Canada Eurozone United Kingdom China Japan India Brazil Russia

5 Global manufacturing activity is not showing much momentum Global Manufacturing PMI, diffusion index, 50> = expansion, <50 contraction Source: IHS Markit 5

6 Softness in global manufacturing is also seen in stagnate merchandise trade Merchandise World Trade, index, 2005= Source: Netherlands Bureau of Economic Policy Analysis 6

7 China: industry faces tepid demand and policy headwinds as economy transitions toward services Chinese fixed asset investment and industrial production growth Nominal Fixed Assets Investment, left scale Industrial Production, right scale 7

8 Excess capacity in China will weigh on prices for some time Chinese industry, capacity utilization rates, rates percent Source: EU Chamber of Commerce in China, IHS Markit *2012 8

9 Excess capacity can be seen outside China too US capacity utilization, manufacturing, percent

10 Differential interest rate moves will help strengthen the US dollar and may roil commodity markets 10

11 The view in supply chains John Mothersole, Director, , 11

12 The long plunge in commodity prices is over -- they have seen a broad based rebound since January IHS Materials Price Index, 2002w1=

13 Downstream prices are also starting to move; year over year suppliers will soon be recording cost increases Producer prices in local currencies, year over year change US Eurozone China 13

14 Other broad measures of cost escalation chronicle the same shift Global PMI, manufacturing input prices, diffusion index, 6 month moving average Source: IHS Markit 14

15 A transition in supply chains: leverage begins to shift away from buyers Global PMI diffusion indexes Seller advantage Buyer advantage Source: IHS Markit Backlogs, 6 month moving average, left scale Delivery times, 6 month moving average, inverted, right scale IHS 15

16 Chinese manufacturing is likely to slow further, suggesting support for prices rather than building pressure Chinese Industrial Production, percent change year ago, left IHS Materials Price index, level, 2002w1=1.0, right

17 Exchange rates and their influence on commodity prices Commodity prices and the US dollar exchange rate Source: IHS Markit IHS Materials Price Index, 2002w1=1.0, left scale US Dollar Trade Weighted Exchange Rate, inverted, 2009=1.00, right scale

18 Leverage gauge A more balanced position in markets is less favorable to buyers A year ago Today Buyers Neutral Sellers 18

19 Global crude oil market A modest deficit will support a shallow, rising price trend in World liquids production is expected to lag demand, implying modest inventory draws. Brent is projected to average $47/bbl in 2H 2016, $52/bbl in 2017, and $57/bbl in After falling this year, world production will begin rising in Upward revisions to the outlooks for Russia, Kazakhstan, the North Sea and Gulf-5 support this trend. The US industry is adapting to lower prices. Despite trimming the price outlook, US production is only slightly lower in World refined product demand growth is sluggish, but it will exceed production growth next year. We project world liquids demand will rise by 1.3 MMb/d-1.5 MMb/d in

20 Snapshot of global oil fundamentals and price outlook FUNDAMENTALS World economic growth 2.7% 2.6% 2.3% 2.7% 3.0% (from previous year) World oil (liquids) demand growth (from previous year in MMb/d) World oil (liquids) production growth (from previous year in MMb/d) US crude oil production growth (annual average in MMb/d) Gulf-5 crude oil production growth (annual average in MMb/d) PRICES Implied change in global liquids inventories (annual average in MMb/d) Dated Brent $99 $52 $43 $52 $57 (annual average per barrel) WTI - Cushing $93 $49 $43 $50 $54 (annual average per barrel) Notes: Gulf-5 includes: Saudi Arabia, Kuwait, United Arab Emirates, Iraq, and Iran. Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liquids demand includes all refined products, blended biofuels, synthetic fuels, as well as liquefied petroleum gases (LPGs) and ethane. A positive number for implied change in global liquids inventories indicates an implied stock build. A negative number indicates an implied stock draw. Figures are rounded. MMb/d = Million barrels per day. Source: IHS, Argus Media Limited 2016 IHS 20

21 Global chemicals outlook The surge in N. American natural gas prices has lifted feedstock costs. Unplanned maintenance is are also effecting supply, providing upside risk Demand is subdued in Europe with markets relatively balanced, although near-term price risk is on upside for Propylene and PP After production disruptions early this summer, Asian prices have stabilized because of rising imports and weakening demand Buying environment will improve by year end, as global capacity remains well above demand. In the US, moderating feedstock costs in Q4 help improve outlook Ethylene, cents/lb North America Europe China Source: IHS Markit 21

22 Global steel outlook Ample capacity, especially Chinese capacity, weighs on the outlook Any lift in prices is likely to bring added production as is happening now Anti-dumping tariffs are a game of whacka-mole. They do help protect US and Europe markets from Chinese production but open the door for other suppliers Carbon steel prices bottom late in 2016 or early 2017 Stainless prices will rise from this point through 2017, maybe 2018 Hot rolled carbon sheet, US dollars per metric ton United States Europe P.R. China Source: History MEPS, Forecast IHS Markit 22

23 Nonferrous metals outlook We see a muted price recovery Consumption growth looks restrained. It averaged 4.3% per year between 1995 and 2015; it will not grow faster than 2.5% over the near-term Production growth for some metals still looks strong relative to consumption (aluminum), while inventory in some cases remains high (aluminum, nickel) Zinc has the best prospects. Nickel improves but high inventory restrains prices. Aluminum suffers from high inventory and strong production. We are growing more bearish on copper Composite LME Price Index, Mar 2003= Source: IHS Markit 23

24 Summary and takeaways The buyers market of the past 2 years is ending. Conditions in supply chains are becoming more balanced Commodity prices bottomed in January This rise in raw material prices is filtering downstream; suppliers will soon be recording cost increases and will use this to try to lift prices But the modest pace of the expansion coupled with ample capacity suggests support for prices rather than building pressure in supply chains 24

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