Industrial metal prices have surged 70 percent relative to their pre-pandemic levels to hit a 9-year high in May, outperforming agricultural and energy commodities.
A decade of reduced capital spending by producers had decreased the industrial metal prices to two-decade lows in the last few years (see graph below). Now, the crunch is reversing, with industrial metals outperforming other commodities and trading at supercharge prices.
According to an IMF report, the surge has been broad-based across industrial metals. Copper has surged 90 percent in May, Iron ore has scaled over 115 percent, and Nickel has surged 40 percent (year-on-year). The rate of increase of prices of other commodities is lesser as compared to metals.
—deflated by US Consumer Price Index, 2014=100 (Source: IMF)
Why have metals prices increased much more than other commodities? A report by International Monetary Fund reveals reasons:
Manufacturing activity did not slump as much as the services industry at the onset of the outbreak. And when the activity did slump, it recovered quicker. This was especially true for China — the world's largest user of metals.
But, sectors that use energy commodities, like the transportation sector, remain depressed. For example, global road fuel consumption is 93 percent of the pre-pandemic levels.
Mining operations were disrupted for a short time by COVID-19. On top of that, freight rates due to container shortage reached a ten-year high.
Container shortage is an imbalance in the availability of containers to shipping freight. The coronavirus outbreak affected trade, both imports and exports. The fall in imports led to a supply-demand container imbalance, hitting exports. Wherever containers were circulated, they remained stationary as the trade fell. This shortage combined with quarantine restrictions increased congestion at the ports and pushed freight rates higher.
The rebound in fuel prices from low levels of 2020 added to the factors that resulted in the metal price surge.
Faster energy transition and infrastructure spending
Expectations of economies transiting to green energy sources are fuelling the metal rally.
A faster transition to a green economy requires a 40-times increase in lithium consumption. Lithium is used for manufacturing renewable products and electric cars. Plus, the International Energy Agency projects a 20-25 times increase in demand for graphite, cobalt, and nickel. Clearly, green economies need metals. This expected demand is adding to the price rise.
The infrastructure programs launched in European Union and the United States is another factor driving the demand for industrial metals.
Energy commodities have no such added responsibilities.
Metals, unlike other commodities, are easier to store. This makes their prices sensitive to
— economic factors
— market expectations .
Future outlook: Rise or retrench?
IMF research suggests market participants are expecting to see a peak in metal prices. JPMorgan Chase said it sees a continued rally in commodities as the global economies reopen.
Further, if the demand for metals from energy transition accelerates, the prices could rise further.
Indeed, the futures market suggest a year-on-year increase in industrial metal prices by 50 percent in 2021. But they also show a decrease of 4 percent in 2022.
According to the report, experts believe the first and second factor fueling the surge are temporary. And that 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."
(Edited by : Abhishek Jha)