## Metals and Oil: A Tale of Two Commodities

_IMF Blog, September 14, 2015_

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## Bibliographic details
- Authors: Rabah Arezki, Akito Matsumoto
- Published: September 14, 2015

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### Overview
- 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.

### Metals matter
- 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.

### Appetite for production (demand-side concentration)
- 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.

### Oil supply glut
- 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.

### Hooked on metals (supply-side and exposure)
- 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.

### Financial market conditions
- 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.

### The next chapter (prospects and drivers)
- 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.

### Bottom line (scenario and risks)
- 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.*

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## References

- [World Economic Outlook](http://www.imf.org/weo)
- [blog from last December](http://blogs.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/%20http:/blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/)

_Source: https://www.imf.org/en/blogs/articles/2015/09/14/metals-and-oil-a-tale-of-two-commodities_