The economics of world metals markets

The world prices of primary commodities are notoriously volatile. For instance, on 20 July 2007 oil prices hit what was then a record high at $US80 per barrel on 20 July 2007, before accelerating to an all-time high of $US144 on 3 July 2008, and then plunging sharply to less than $US35 a barrel by 26 December 2008. Such substantial changes in prices are the norm rather than the exception for commodities. As much of this volatility is unanticipated by forward markets, it is likely to inflict substantial costs on producers, consumers and governments of commodity-exporting and importing countries. The basic objective of this thesis is to improve understanding of the economic forces driving world metals prices. The thesis consists of six chapters that are distinct but closely related. These chapters can be divided into three major building blocks: Price volatility. Based on a new methodology we present a detailed analysis in examining the underlying forces behind high metals price volatility. Using an index-number approach to the cross-sectional volatility of prices, the results show that risk factors unique to each individual metal continue to be important. Relatedly, we introduce a Monte Carlo simulation approach to identify the fundamental ‘drivers’ of prices from the supply and demand sides of the market. Pricing behaviour. A well-known empirical relationship is that a 10% increase in the consumption of a metal is associated with a 7% fall in its price, which is called “Nutting’s law”. This relationship holds for a wide variety of metals and through time. We provide a rigorous microeconomic justification for Nutting’s Law, which has remained a mystery until now.