2. Features of mineral commodity price cycles
Industrial and precious metals
While these patterns can be seen across most commodities, there are some variations, which mainly arise from variations in the demand drivers for certain commodities and from their conditions of supply.
Industrial metals, for example steel, aluminium, copper, nickel and zinc, are similar in their cyclical behaviour as they are used in the same few industrial sectors, notably construction, machinery production, transportation and consumer durables. A further attribute these metals have in common is that their cyclical upswings and downswings are often accompanied by substantial stock drawdowns and stock-building, which can stretch cycles out and make price fluctuations more extreme.
Common industrial metals are traded on commodity exchanges, such as the London Metal Exchange (LME) or the New York Mercantile Exchange (Nymex), and a material part of any imbalances in global supply and demand will reflect as changes in the warehouse stocks of these exchanges.
Precious metals such as such as gold, silver and platinum share some of the same demand drivers as industrial metals because these metals have some industrial uses. Platinum, for example, is used in automobile catalysts.
However, unlike industrial metals, they are also readily storable and surplus stocks can therefore be brought quickly on to the market in times of high demand. Some precious metals, primarily gold, are used for the purposes of investment. Gold, for example, tends to increase in value in times of high interest rates, currency uncertainty and high inflation.
Minor metals and bulk commodities
Minor metals such as cobalt, molybdenum and tantalum often show the most extreme price volatility of all commodities. This is largely because of their supply inflexibility. Many minor metals are, for geological reasons, produced from a small number of mines or are recovered as by-products of other, more economically important metals. Their rate of production tends to be dictated by demand for the primary metal being produced.
Bulk commodities (like coal and iron ore) and industrial minerals (such as titanium minerals and phosphates) differ from the industrial and precious metals in some important ways. These commodities tend to be more differentiated, meaning that they are produced in a wide variety of forms with different physical and chemical characteristics. They are therefore unsuited to being traded on commodity exchanges and are more commonly traded directly between producers and consumers. Historically, this has led to these commodities showing less price volatility than the industrial and precious metals. In the absence of the ability to deliver surplus production to an exchange, producers of these products are forced to adjust more quickly to supply imbalances.
There are also some differences on the demand side which set these commodities apart and point to the likelihood of lower price volatility. For example, demand for coal, which is used for electrical power generation, tends to fluctuate less year-on-year than does demand for the industrial metals, while demand for many industrial minerals is more heavily concentrated on less volatile consumer products rather than on volatile investment products.