What drives metal prices?

Metal prices have been declining since 2011 after a long upward trend that began in the early 2000s (Figure 5.1). Some analysts consider this to be a signal that we are nearing the end of the so-called commodities supercycle. Although that is difficult to ascertain with confidence, the prolonged fall in metal prices is consistent with a more typical commodity boom-and-bust cycle. Indeed, after a period of high metal prices during the 2000s, investment and capacity in the sector increased substantially. At the same time, high prices led to downward adjustments in demand. Those adjustments contributed to a gradual decline in metal prices after 2011, which in turn lowered profit expectations and reduced investment in the sector, especially in high-cost mines. The decline in investment will eventually reduce capacity, and lower production should eventually lead to a rebound in metal prices and, in turn, an upturn in investment. In fact, prices did rebound to some degree in 2016.

Understanding the evolution of metal markets is important for at least two reasons. First, metals are at the heart of the world economy because they are key intermediate inputs to industrial production and construction. Metal markets are thus shaped by shifts in the volume and composition of global demand and supply, and transformations in metal markets also signal important changes in the world economy. Second, for some countries, metal exports are a large portion of total exports, and fluctuations in metal prices can have important macroeconomic consequences. This chapter addresses the following questions:

• What are metals?

• Where are the primary centers of metal production and consumption?

• How have metal markets evolved?

• What lies ahead?

What are Metals?

Metals are mineral bodies that come in a variety of forms. “Base metals” are those that oxidize or corrode relatively easily. Among the base metals, a distinction is made between ferrous and nonferrous metals. Ferrous metals, typically iron, tend to be heavy and relatively abundant. Nonferrous metals, which are generally more expensive than ferrous metals, do not contain iron in significant amounts and have desirable properties such as low weight (for example, aluminum), higher conductivity (for example, copper), or nonmagnetic properties or resistance to corrosion (for example, zinc and nickel). In contrast to base metals, “noble metals” are resistant to corrosion or oxidation. These include the precious metals—so called because of their perceived scarcity—such as gold, platinum, silver, rhodium, iridium, and palladium. Chemically, precious metals are less reactive than most elements and have high luster and high electrical conductivity.

Unless otherwise indicated, this chapter focuses on four main base metals: iron ore,1 copper, aluminum, and nickel. All four experienced price declines since 2011, although to varying degrees (Figure 5.1). These metals are used for many purposes but especially for construction and machinery because of their ductility and malleability.

What’s Ahead?

The slower pace of investment in Chinese manufacturing and the ample global supply of metals have both exerted downward pressure on metal prices in recent years. However, the decline in metal prices started much earlier, and it therefore makes sense to explore what may lie ahead. It is helpful in this regard to go beyond the price outlooks generated by the behavior of futures markets and instead to review the forces that underpin the demand and supply of metals.

On the demand side, Chinese economic growth is projected to slow further, albeit gradually, but with considerable uncertainty around the timing and the nature of the shift. In broad terms, however, the effect of slower growth in China will be to lower metal prices (Figure 5.9).8 In addition, a slower pace of growth in China’s industrial production could produce further metal price declines.

Growth Rates of Metal Price Index

(Index, 2005 = 100)

Sources: IMF, Primary Commodity Price System and Global Data Source; and IMF staff calculations.

Note: The figure shows the actual and fitted annual growth rate of the metal price index. The fitted growth rate is based on a regression of the annual growth rate of the metal price index on the annual growth rate of China’s industrial production.

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Growth Rates of Metal Price Index

(Index, 2005 = 100)

Sources: IMF, Primary Commodity Price System and Global Data Source; and IMF staff calculations.

Note: The figure shows the actual and fitted annual growth rate of the metal price index. The fitted growth rate is based on a regression of the annual growth rate of the metal price index on the annual growth rate of China’s industrial production.

• Download Figure
• Download figure as PowerPoint slide

Growth Rates of Metal Price Index

(Index, 2005 = 100)

Sources: IMF, Primary Commodity Price System and Global Data Source; and IMF staff calculations.

Note: The figure shows the actual and fitted annual growth rate of the metal price index. The fitted growth rate is based on a regression of the annual growth rate of the metal price index on the annual growth rate of China’s industrial production.

• Download Figure
• Download figure as PowerPoint slide

Outside China, a number of advanced economies have prioritized infrastructure spending, including the United States, and such spending is sometimes associated with stronger metal demand. However, overall metal consumption by advanced economies is lower than in emerging markets, and advanced economies also rely more heavily on recycled metals, both of which would limit the increased metal demand likely to result from increased infrastructure spending.

On the supply side, declining investment in the metal sector is unlikely to lead to a substantial price rebound in the near future, although temporary outages or the closure or exiting of large mines would help prices recover. Low energy prices have in fact helped keep down or reduce mining and refining costs, including for copper, steel, and aluminum. High-cost or high-pollutant mines would certainly close first, considering that current metal prices may be close to the breakeven point for these high-cost mines. However, SNL Metals & Mining research suggests that metal prices will have to fall much further to trigger significant reduction in capacity due to plant closures. that prices would need to fall further before substantial capacity becomes vulnerable to closure (SNL Metals & Mining 2015). Moreover, the expansion of metal extraction in Latin America and Africa as a result of an improved investment climate is unlikely to be reversed to any great extent; to the contrary, the investment climate in those regions can be expected to steadily improve. As a result, ample global supply will likely continue to push down metal prices.

The interplay between weaker demand and a steadily increasing supply, given the existing cost structure in global metal markets, points to a continued glut, leading to a low-for-long price scenario. In turn, the risk associated with such a scenario is that investment will continue to falter and lead to a sharp increase in prices down the road.

The metals industry is no stranger to volatility, particularly this year with the rise in prices mainly due to the impact of Coronavirus. The manufacturers that produce materials were not immune to coronavirus and felt the impact. They were down employees, lead times were pushed out as countries shut down, and getting resources became incredibly difficult. The COVID-19 vaccine may have resulted in some sectors rebounding to pre-pandemic levels, but in our industry, supply remains tight causing prices to rise. Simply put, metal producers are facing a lack of resources to both manufacture and deliver the metals.

The increase in metals prices, like fuel prices, may indicate that we are emerging into a time of economic recovery. The greater the demand, the more metals that are being put back into the economy in the form of buildings, tech, infrastructure, etc., resulting in more manufacturing (and sales) in the future. “Prices for copper have risen to their highest level in almost eight years,” The Wall Street Journal reports. “Other raw materials, such as aluminum and zinc, have added roughly 15 percent since the end of September and 40 percent or more since mid-May.” 

One other key factor of metal prices rising is increased interest from investors. Throughout the pandemic, investors kept their money in safer markets. Now, with pandemic closer to being in the rear-view mirror, they are looking to invest in industrial metals. Metal is the key to making everything, from electric cars to homes to the device you are using to view this blog. As The Wall Street Journal Reports, “Investors are piling into wagers on industrial metals like copper and nickel, betting that the coronavirus vaccines and stimulus programs will drive a boom in manufacturing activity as part of a global economic resurgence.” Here at Admiral, many industries we serve took a hit in 2020. Now, we are seeing our customers gaining jobs and placing orders equal to the pre-pandemic level, if not higher. We remain optimistic about the prospects for the coming year.