Metals and Oil: A Tale of Two Commodities

IMF Blog, September 14, 2015

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Title: "Metals and Oil: A Tale of Two Commodities"
Authors: Rabah Arezki, Akito Matsumoto
Date: September 14, 2015
Core thesis: Both metals and oil have seen large price declines, but metals are driven more by demand (notably China) while oil is driven more by supply.

Base metals highlighted: iron ore, copper, aluminum, nickel.
Recent price dynamics:
- Metals prices have been gradually declining since 2011.
- Oil prices peaked in 2014 and declined more abruptly thereafter.
Shared cause: downward pressure on prices from abundant production following an era of high prices combined with lower demand from emerging markets and advanced economies.

China’s role:
- China accounts for 50 percent of global base metal consumption.
- China accounts for 14% of the world’s oil consumption, which is almost exclusively used for transportation.
Other countries:
- India, Russia, and South Korea have increased metal consumption but remain far behind China.
Recent demand weakening:
- Slower pace of investment in China in recent years.
- Sharp Chinese stock market decline and currency devaluation in the referenced summer have exerted downward pressure on metal prices.
Implication: Metals prices are heavily influenced by demand conditions in China.

Supply drivers for oil:
- OPEC’s decision to maintain production levels.
- Strong shale oil production in the United States.
- Large production capacity from earlier investment.
- Prospect of Iran increasing oil production following the nuclear deal.
- Potential lifting by Congress of the US ban on crude oil exports.
- Libya and Iraq exceeding many analysts’ expectations for production despite geopolitical challenges.
Demand context: Slowing demand from emerging markets and advanced economies reinforces the supply-driven price decline.
Outlook: Greater likelihood of an era of much lower oil prices than in recent years.

Supply increases:
- Global production has increased across the board for most metals due to rapid investment in capacity in the 2000s.
- Discovery and development of major mines outside advanced economies (expansion to Latin America and Africa) continue to add to global supply.
Cost factors:
- Low energy prices have reduced costs for mining and refining, including for copper, steel, and aluminum.
Export dependence:
- Metals account for more than half of the total exports of Mauritania, Chile, and Niger.
Implication: Resource wealth can be beneficial but also creates macroeconomic vulnerabilities for countries highly dependent on metals exports.

Third short-term influence on commodity prices: investor “risk off” behavior.
Example: The sell-off on August 24 affected both oil and metals; oil initially recovered, and metals subsequently rebounded significantly.
Role: Sudden shifts in investor sentiment can put downward pressure on both oil and metals prices in the short run.

Futures markets signal continued low prices for metals.
Demand-side outlook:
- Chinese economic slowdown projected to be gradual but uncertain.
- A simple analysis finds that 60 percent of the variance in metal prices can be explained by fluctuations in China’s industrial production.
- Recent further falls in Chinese industrial production could justify further metal price declines.
- China’s intended rebalancing away from investment toward consumption may disproportionately reduce metals demand (decline in construction; rising transportation demand affects oil more).
Supply-side outlook:
- Investment in the metals sector has dropped but is unlikely to prompt a significant price rebound in the near term.
- Continued discovery and development of mines in Latin America and Africa, and likely improvements in investment climates, suggest ample supply will persist.
Net implication: Continued supply abundance is likely to push metal prices further down.

Conclusion: Both oil and metals are currently relatively low, but underlying drivers differ:
- Metals: weaker demand (China) combined with steady supply increases → likely continued glut and a “low for long” price scenario.
- Oil: largely driven by supply gluts.
Risk: If investment in metals falters for an extended period, it could eventually lead to a sharp price increase later on.

Source: IMF blog post "Metals and Oil: A Tale of Two Commodities" by Rabah Arezki and Akito Matsumoto, September 14, 2015.