Journal Issue

After the Metals Market Boom

International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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Senior Economist, International Economics Department, World Bank

The last few years have witnessed remarkable changes in the markets for base, nonferrous, metals. A long period of extremely low prices and pervasive demand pessimism has been followed by sharply higher prices and growth of demand. The causes of these changes and what they portend for the future are critically important for many developing countries that depend heavily on exports of these commodities.

Price boom of 1987–89

The World Bank’s dollar price index for the base metals increased steadily between 1986 and 1989, reaching a peak during the first quarter of 1989 at a level more than 80 percent higher than in 1986 (see chart). Since then the index steadily declined, by more than 16 percent through the last quarter of 1989, except for the brief period of recovery during the third quarter, mainly spurred by increases in copper, tin, zinc, and lead prices.

The general causes of the price boom of the late 1980s are gradually becoming clearer. Growth rates of metal consumption during 1986–89 significantly exceeded GNP growth rates, and the metals intensity of GDP started to increase even in the mature industrial economies. An analysis of US data for 1950–85 suggests that the post-1974 decline of consumption can be explained mostly by the changes in the level of output and in the prices of energy, labor, and capital inputs. High energy prices reduced capital investments and metals consumption. The subsequent vigorous expansion of investment and production of metals-intensive capital goods spurred the growth in demand for metals after 1987, which in turn was stimulated by reduced energy prices and a large pent-up demand for investment.

This article is based on a longer paper, “Structural Change in Metals Consumption,” by Bourn-Jong Choe, PPR Working Papers, WPS 180, April 1989, available from the The World Bank, Washington, DC 20433, USA.

Events on the supply side also made a significant contribution to the price rise in two important ways—through the reluctance of producers to reactivate idled capacities and supply disruptions. Recent data indicate that production increased quite substantially in 1987 and 1988, but fell short of the potential production. In the last several years, the metals-mining industry has been beset by unusually frequent and large supply disruptions of various kinds, mostly in developing countries. Many developing countries were therefore unable to take full advantage of the high metals prices because of labor disputes, political and social unrest, natural and manmade disasters, and lack of efficient management. Copper, lead, and zinc mining were the hardest hit.

Higher prices initially stimulate additional production through increased capacity utilization. However, because of the restructuring that took place before the price boom, the capacity utilization rates for most metals were already at high levels in early 1987. When the prices increased, most of the idled capacity was not reactivated because of high start-up costs and the widespread expectation that prices would soon fall. An exception may be the case of tin, where sharp production increases took place in 1988 when prices started to rise. As a result, the price increase for tin was far more moderate. In general, most of the production increases originated from new additions to capacity that had been in the pipeline for some time.


The consumption of metals per unit of output in industrial economies probably will not decline as fast as previously anticipated, if expectations of relatively low energy prices are sustained in the 1990s and investment activities in manufacturing remain vigorous. Further, the mining industries have not responded to the latest price boom with their characteristic expansion of capacity. Finally, prospects for economic growth for the market economies in the 1990s as a whole look more promising than anticipated a few years ago. This is largely because investments that have been realized, or will be made in the near term, are expected to contribute to significant productivity improvements, and the greater integration of economies in Europe are expected to foster increased investment and restructuring in the manufacturing sector.

As seen in the discussion below of the prospects for each of the major metals, demand is expected to grow at significantly higher rates during the 1990s than those contemplated during the early 1980s, even though this will still only be at a moderate level. Supply responses are also likely to be tempered by the hardships experienced in the 1980s. As a result, the metals price trend in the 1990s should be maintained at reasonably remunerative levels.

Copper. A tally of known copper projects indicates that the market economies’ effective mine capacity will rise substantially over the medium term to slightly more than eight million tons by 1995. This increase will be the result of several large-scale projects that have been already in the pipeline, including Chile’s Escondida project. Other countries where significant increases are anticipated are Australia, Papua New Guinea, Portugal, Mexico, Brazil, and Zaire. Production in the United States, Canada, and Zambia, however, is expected to decline during much of the 1990s.

From 1990 to about the mid-1990s, the world copper market is likely to be characterized by a sizable surplus of production over consumption, putting downward pressure on prices and keeping investment low. This may improve the market balance and help raise prices in the second half of the 1990s. Lately, new large-scale mining ventures have become a rarity. In today’s highly competitive market conditions, the mining companies have tended to favor safe, low-cost projects—such as expansion of existing mines and the “solvent-extraction/electro-winning” process. The bulk of incremental demand to the year 2000 will be met from these sources.

Aluminum. Given the anticipated slowdown in industrial activity in 1990–91, aluminum prices are expected to decline further as stocks increase. The downward pressure on prices, however, will be moderated by the relatively small amount of new capacity expected to come on stream during the early 1990s and by idling of marginal capacities, as well as from lower operating rates.

Metal price indices, 1980-20001

Source: World Bank. International Commodity Markets Division.

1 1989-2000 are projections.

The outlook to 1995 and beyond hinges on the extent of new investment projects. There are a number of projects at various stages of planning and implementation that could come into production by the mid-1990s. These new investments, predicated on the availability of inexpensive electrical power, include the smelters in Brazil, Canada, and Venezuela that utilize hydroelectric power, and those in Australia and countries in the Middle East that rely, respectively, on coal and hydrocarbon fuels. Australia, Brazil, and Venezuela also have large resources of bauxite—the source of aluminum. If most of these projects materialize, at a time when demand growth is expected to slow down, a glut of aluminum will result. Thus, investments in this sector are likely to proceed more cautiously.

Tin. Recent increases in tin production and the declines in tin prices have shown the degree to which tin production can respond to higher prices in the short term in the absence of strong production controls. Although major increases in production also took place in Bolivia, Indonesia, and Malaysia, where idled facilities were reactivated, Brazil and China accounted for a large part of the increase through additions of new capacity. The future of the tin market will be dominated by what happens in Brazil and China. The large quantities of low-cost tin available from these countries could result in substantial oversupply throughout the 1990s, despite an improved outlook for demand growth.

Nickel. Up to 1992, additional nickel sources, mainly in Cuba, Indonesia, and Yugoslavia, soon to begin production, will add about 45,000 tons to supply. These additional supplies, coming on top of very large increases in 1989 and at a time of economic slowdown, may be sufficient to generate a surplus and result in sharp declines in prices. During the rest of the 1990s, the capital goods sector is expected to take the lead in economic growth during the rest of the 1990s. The demand for nickel is, therefore, expected to increase at a moderately high rate. Recent high prices, however, have stimulated interest in investment projects in a number of places, including Canada, China, Cuba, Indonesia, the Philippines, South Africa, and the Soviet Union. Although the potential for increased supplies is large, its realization will be moderated by the prospect of lower prices that may result from large capacity expansion.

Zinc. It seems likely that zinc consumption will decline over 1990–91. Over the longer term, continued expansion of the galvanizing and diecasting markets will be offset by reductions stemming from thinner zinc coating and lighter diecasting. In the near future, a number of large and small projects that had been in the pipeline for some time are expected to begin production, at a time when demand is expected to soften. The largest among them is the Red Dog mine in Alaska. After allowing for the capacities that will be retired, the expected production increase will be sufficient to cause sharp declines in prices. Investments in new zinc mining projects should be considerably moderated by the early 1990s to create a more balanced market during the second half of the 1990s.

Lead. With most of the adverse impact on lead consumption having been worked off—as a result of environmental and health concerns, downsizing of batteries, and lengthening of battery life—the long-term demand for lead in industrial economies is likely to resume growing, very much in line with changes in the production and stocks of automobiles. As environmental and health concerns rise in the developing countries, their demand growth will be moderated considerably to below historical rates.

Supplies of primary and secondary lead over the long term should be large enough to meet the expected increases in demand and keep prices low for much of the 1990s. Long-term price prospects for lead continue to look poorer than for zinc.

Bourn-Jong Choe

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