Prices of industrial metals may fall by half
September 15, 2006
 By Quentin Wray
Singapore - Prices of industrial metals were expected to fall by nearly half in real terms over the next five years to bring them closer to the costs of production, the International Monetary Fund (IMF) said in a report released yesterday.
The fund said China's breakneck industrialisation had been a key driver of the 180 percent increase in the inflation-adjusted prices of metals such as aluminium, copper, lead, nickel, steel, tin and zinc since 2002.
Prices had also been supported by the fact that there had been very little investment in the metals sector in the late 1990s and the early 2000s following a period of price declines.
But the IMF said in its World Economic Outlook 2006 report that, while metal prices could rise to multiples of production costs during booms, such as commodity producers are now enjoying, they returned to "a little above costs" within a few years.
The fund backed up its prediction of lower prices with movements on commodities futures markets, which point to the inflation-adjusted price of metals being on average about 45 percent lower today than in five years' time.
In contrast, it said, oil prices, which have risen 157 percent in real terms since 2002, would remain near current prices over this period.
The IMF said for steel, aluminium and copper, which are the world's most traded base metals, China had contributed half of the world's consumption growth.
It had contributed almost all of the increase in the world consumption of nickel and tin and that, in the cases of lead and zinc, China's uptake had exceeded the total world consumption growth, meaning that other countries were now consuming less of the metals than before.
These increases were much higher than China's 29 percent contribution to world growth and by far exceeded the Asian nation's 15 percent contribution to total world output.
The IMF said physical demand for the commodities would continue to be sustained by China and, to a lesser extent, other emerging markets.
It said historical patterns suggested that consumption of metals typically grew together with income levels until this reached $15 000 (R110 400) to $20 000 per person a year.
At higher income levels, growth tended to become more driven by services and the use of metals stagnated.
China's per capita annual income was $6 400 and the country had so far tracked Japan and Korea during their initial development phases.
For some metals usage was higher due to the strong competitiveness of its economy and the relocation of manufacturing from advanced economies and other emerging markets.
India, which is the other major, rapidly growing emerging market, would have less of an impact on the metals markets because its industrial sector had a considerably lower share of the economy than China's, the IMF said.
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