Four factors behind the metals price rally

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rebound Global commodities are going through a resurgence in value as the world staggers back to normal following the Covid-19 pandemic. PHOTO: istock
rebound Global commodities are going through a resurgence in value as the world staggers back to normal following the Covid-19 pandemic. PHOTO: istock


As economies reopen in various parts of the world, the price of some commodities has soared, including those of prominent industrial metals. The extent to which the metals price rally may lose steam depends on how multiple factors play out.

Metals prices have increased by 72% relative to their pre-pandemic levels – reaching a nine-year high in May (in inflation-adjusted terms). The increase has been broad-based across industrial metals – copper was up by 89% in May (year-on-year), iron ore was up 116% and nickel by 41%. The prices of most agricultural and energy commodities are also tracking upward, but at a slower rate. Energy commodities (oil, coal and natural gas), in particular, are only a few percentage points above pre-pandemic levels.

Why have metals prices increased much more than other commodities? There are four reasons:

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1. Manufacturing-based recovery

Manufacturing activity did not slump as much at the start of the pandemic and recovered more quickly than services, especially in China, which is the major user of metals. At the same time, sectors in which energy commodities feature prominently, such as the transportation sector, remain depressed. For example, global road fuels consumption is still at 93% of pre-pandemic levels, restraining a further rebound of petroleum prices.

2. Supply-side factors

Many mining operations were temporarily disrupted by Covid-19. What’s more, freight rates for the transportation of bulk materials reached a 10-year high due to congestion in key ports, quarantine restrictions, ongoing problems staffing shipping crews and a rebound in fuel prices from the deep troughs in spring 2020. This all added to the cost of metals.

3. Expectations for faster energy transition and infrastructure spending

Buoyant expectations about the pace of the transition to a greener economy and ambitious infrastructure programmes gave metals prices an additional boost. Both would increase the “metal intensity” of the global economy. A fast energy transition, for example, could require a 40-fold increase in the consumption of lithium for electric cars and renewables, while the consumption of graphite, cobalt and nickel for these purposes may rise around 20 to 25 times, according to the International Energy Agency. Ambitious infrastructure programmes in the EU and the US would drive up the demand for copper, iron ore, and other industrial metals.

4. Storability of metals

Metals are easier to store than crude oil or some agricultural goods, which need special facilities. This makes their pricing more forward looking and, thus, more sensitive to changes in interest rates (lower interest rates reduce the “cost of carry”, which also includes cost of storage, insurance and other expenses, and, thus, tend to support commodity prices) and market expectations, such as the ones about a faster energy transition and infrastructure spending.

READ: Problems in metals sector bad news for SA

Will metals prices keep increasing or retrench? This is a challenging question.

Market participants seem to expect a peak in metals prices relatively soon, as factors 1 and 2 are supposedly temporary in nature. Indeed, futures markets suggest an increase of industrial metals prices by 50% in 2021 (year-on-year), but a decrease by 4% in 2022.

Still, prices are expected to remain high and could rise further, especially if demand from an energy transition accelerates. On the flip side, prices may decrease more than expected if legislative approval and government actions required for the energy transition and infrastructure programmes do not materialise as expected.

At the International Monetary Fund, Stuermer is an economist in the commodities unit of the research department, and Valckx is senior economist in the monetary and capital markets department.


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