V Minerals and Metals

International Monetary Fund
Published Date:
September 1990
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Following two successive years of strong growth, the overall index of prices for metals and minerals in 1989 rose by 7 percent (Table 8). Increases in annual average prices were recorded for all of the commodities in this index except aluminum (Appendix Table 10). The higher annual averages, however, obscure the general downward trend over the course of the year (Chart 7). During the first quarter of 1989, the index increased by 9 percent over the final quarter of 1988, to a record high, mainly on the strength of advances in prices for nickel (by 31 percent) and zinc (23 percent). Prices began to slide in the second quarter, however, and the index fell by about 18 percent between the first and the final quarter of the year. The downward trend in 1989 would have been more pronounced had it not been for a temporary surge in the price of tin in the second quarter and sustained price increases for iron ore and lead, which continued through the first quarter of 1990.

Table 8.Movements in Prices of Minerals and Metals and Related Economic Indicators, 1983–89(Annual percentage change)
Prices of minerals and metals1
In SDRs8.5–1.3–4.8–
In U.S. dollars4.9–5.2–5.9–5.919.048.22.3
Unit value of manufactured exports
In SDRs0.
In U.S. dollars–2.9––0.3
GNP deflator in major industrial countries34.
Economic activity in major industrial countries3
Real GNP2.
Industrial production3.
Domestic fixed investment3.
Index of world consumption of metals43.55.6–
World supply of minerals and metals4
Index of production1.06.40.7–
Index of supply54.95.4–0.7–
Index of closing stocks–0.9–10.1–4.3–7.0–20.7–1.120.0
Sources: Commodities Division and Current Studies Division, IMF Research Department.

Chart 7.Minerals and Metals: Indices of Prices in SDRs, January 1980–March 1990


Source: Commodities Division, IMF Research Department.

The first quarter of 1989 appears to have marked the end of the recent “metals boom” that started in 1987. In historical perspective, the first half of the 1980s was characterized by steadily declining metals prices induced by the relatively slow growth of output in industrial countries and high energy prices. Over this period, the increase in the index of industrial production averaged just over 2 percent, compared with an annual growth of metals consumption of less than 1 percent, and the ensuing large stock overhang in the market exerted downward pressure on metals prices. In these circumstances, many companies were forced to close unprofitable mines or to cut back operations, which contributed to reductions in wages, labor force, and production capacity. By 1987, stocks for virtually all metals had reached record lows which, in turn, set the stage for the sharp recovery in prices. Hence, the metals boom of 1987–89 was occasioned not only by the low inventory levels but also the recovery of output of both industrial and developing countries. In 1988, economic activity in the major industrial countries rose rapidly, as evidenced by the almost doubling of the rate of growth in the index of industrial production to over 6 percent and an acceleration of domestic fixed investment to 8 percent. Moreover, world metal supplies were constrained by strikes, labor unrest, and natural disasters in various key producing countries. Most notably in Peru and Zambia, various contract disputes had adverse effects on the output of copper, iron, lead, and zinc. These factors contributed to the rise in the index of metals prices by an unprecedented 43 percent in 1988.

Buoyant international prices in 1988 prompted the reactivation of some previously closed facilities, a substantial expansion of existing capacity, and the building of new smelting and refining plants; these efforts continued through 1989. In the case of copper, several new projects have recently been undertaken, including the Olympic Dam project in Australia, the Freeport Ertsberg mine in Indonesia, and the Neves Corvo mine in Portugal. At the same time, capacity was increased substantially at the Chuquicamata and Disputada mines in Chile. With respect to nickel, several new projects were started up in Australia, China, Japan, and Korea. In the case of zinc, a new mine in Red Dog, Alaska, has become operational and should account for a substantial portion of world zinc supplies in the near future.

The effects of having new mines come on stream were manifested in a substantial accumulation of metal stocks in the second half of 1989. Coupled with a slowdown in economic activity, particularly in the U.S. construction and automotive industries, metals prices started to decline in the last three quarters. This decline was, however, partly moderated by supply disruptions that brought about a rally in prices at various times during the year. In the case of copper, for example, prices rose briefly following attacks by disgruntled landowners that forced the closure in May of the Bougainville mines in Papua New Guinea. In the cases of other metals (such as nickel, lead, and zinc), strikes, contract disputes, and other production problems in Canada (Highland Valley), Mexico (Cananea), and Peru (Centromin) also limited the downward pressures on prices during the second half of the year.

Barring any major unforeseen development, prices of virtually all metals and minerals in 1990, with the exception of iron ore, lead, and phosphate rock, are expected to fall substantially, mainly as a result of the recent settlement of supply disruptions and the coming on stream of a number of new large-scale projects. On the other hand, demand for most metals should be adversely affected by a deceleration in the rate of growth in the major industrial countries, particularly in the United States. Most of the decline in the index of prices of minerals and metals in 1990 is expected to stem from falling nickel, zinc, copper, and tin prices. In the case of nickel, apart from prospective increases from new and expanded production facilities in Australia, China, and Korea, prices should continue to be adversely affected by the declining consumption of stainless steel, which accounts for two thirds of the demand for nickel, and growing use of cheaper stainless steel scrap. Likewise, zinc prices will be influenced by larger exports from Latin America and Asia, which should add to the increased flow of supplies from the settlement of strikes and other disruptions to production in Canada, Ireland, and Peru. Despite closure of the copper mines in Papua New Guinea, inventories should continue to accumulate because of new projects in Australia, Indonesia, and Portugal. In addition, there has recently been a rebound of mining production in Peru and Zambia, as well as an expansion of production capacity in Chile. Tin prices are also expected to fall because of a weakness in demand, reflecting recent developments in the automotive and construction sectors in the industrial countries. Moreover, notwithstanding the decision by member countries of the Association of Tin Producing Countries (ATPC) to reduce exports in 1990, large potential surpluses (mainly from Brazil, which is not an ATPC member) continue to loom over the market, which should lead consumers to minimize inventories in anticipation of a further softening of prices.

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