Four Factors Behind the Metals Price Rally

IMF Blog, June 8, 2021

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Metals prices have increased by 72 percent relative to their pre-pandemic levels—reaching a nine-year high in May (in inflation adjusted terms).
Increase is broad-based across industrial metals:
- Copper is up 89 percent in May (year-over-year).
- Iron ore is up 116 percent.
- Nickel is up 41 percent.
Most agricultural and energy commodities are also tracking upward, but at a slower rate.
Energy commodities (oil, coal, and natural gas) sit only a few percentage points above pre-pandemic levels.
Global road fuels consumption is still at 93 percent of pre-pandemic levels, restraining a further rebound of petroleum prices.

A 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, the major user of metals.
- Sectors in which energy commodities feature prominently, like the transportation sector, remain depressed, limiting energy commodity rebounds.

Supply-side factors
- Many mining operations were temporarily disrupted by COVID-19.
- Freight rates for the transportation of bulk materials reached a ten-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.
- These factors added to the cost of metals.

Expectations for faster energy transition and infrastructure spending
- Buoyant expectations about the pace of the transition to a greener economy and ambitious infrastructure programs increased expected “metal intensity.”
- A fast energy transition could require a 40-fold increase in the consumption of lithium for electric cars and renewables.
- Consumption of graphite, cobalt, and nickel for these purposes may rise around 20 to 25 times.
- Ambitious infrastructure programs in the European Union and the United States would drive up demand for copper, iron ore, and other industrial metals.

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 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 amplify sensitivity to expectations about energy transition and infrastructure spending.

Market participants seem to expect a peak in metals prices relatively soon, as factors (1) and (2) are supposedly temporary.
Futures markets suggest:
- An increase of industrial metal prices by 50 percent in 2021 (year-over-year).
- A decrease by 4 percent in 2022.
Risks to the outlook:
- Upside: Prices could rise further, especially if demand from an energy transition accelerates.
- Downside: Prices may decrease more than expected if legislative approval and government actions required for the energy transition and infrastructure programs do not materialize as expected.

IMF Blog: Four Factors Behind the Metals Price Rally (June 8, 2021) — Martin Stuermer, Nico Valckx