Four factors behind the rally in metals prices
As economies reopen in various parts of the world, the prices of some commodities have skyrocketed, including the prices of leading industrial metals. The extent to which the rally in metals prices can run out of steam depends on how several factors play out.
As our last chart of the week shows, metal prices rose 72% from their pre-pandemic levels, hitting a nine-year high in May (in inflation-adjusted terms). The increase was generalized to all industrial metals: copper is up 89% in May (year over year), iron ore is up 116%, and nickel is up 41%. The prices of most agricultural and energy commodities are also on the rise, but at a slower pace. Energy commodities (oil, coal and natural gas), in particular, are only a few percentage points above pre-pandemic levels.
Why have the prices of metals increased so much more than other commodities? There are four reasons:
- A manufacturing recovery: Manufacturing activity collapsed less at the start of the pandemic and recovered faster than services, especially in China, which is the main user of metals. At the same time, sectors in which energy raw materials dominate, such as the transport sector, remain depressed. For example, global consumption of road fuels is still at 93% of pre-pandemic levels, slowing a further rebound in oil prices.
- Supply factors: Many mining operations have been temporarily disrupted by COVID-19. Additionally, freight rates for transporting bulk materials have hit a decade-high due to congestion at key ports, quarantine restrictions, persistent shipping staff issues and a rebound in shipping. fuel prices compared to deep lows in spring 2020. All of this added to the price of metals.
- Expectations for a faster energy transition and infrastructure spending: High expectations about the pace of the transition to a greener economy and ambitious infrastructure programs have given metal prices an additional boost. Both would increase the “metal intensity” of the world economy. A rapid energy transition, for example, could require a 40-fold increase in lithium consumption for electric cars and renewables, while the consumption of graphite, cobalt and nickel for these purposes could be increased by 20 to 25 times, according to the report. The report. International Energy Agency. Ambitious infrastructure programs in the European Union and the United States would increase demand for copper, iron ore and other industrial metals.
- Metal storage: Metals are easier to store than crude oil or certain agricultural products, which require special installations. This makes their pricing more forward-looking and, therefore, more sensitive to changes in interest rates (lower interest rates reduce the “cost of transportation”, which also includes the cost of storage, insurance and insurance. other expenses, and, therefore, tends to support commodity prices) and market expectations, such as those regarding a faster energy transition and infrastructure spending.
Will metal prices continue to rise or fall? This is a difficult question.
Market participants seem to expect metal prices to spike fairly quickly, as factors (1) and (2) are believed to be temporary in nature. Indeed, the futures markets suggest an increase in industrial metal prices of 50% in 2021 (year-on-year), but a decrease of 4% in 2022.
Nevertheless, prices are expected to remain high and could rise further, especially if demand from an energy transition accelerates. On the other hand, prices could fall more than expected if legislative approval and government actions required for energy transition and infrastructure programs do not materialize as expected.
Martin stuermer is an economist in the Commodities Unit of the IMF’s Research Department.
Nico Valckx is a Senior Economist in the Commodities Unit of the IMF’s Research Department.
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