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The world metals prices increased by 56% in 2006 mostly due to a spike in copper, zinc, and nickel. As a group, world prices of aluminum, copper, zinc, lead, nickel and tin closed 2006 some 200% higher than the average in the cyclical low-pricing year of 2001.

First the good news… According to the market experts, as the decade progresses, chronic shortages are NOT expected for any manufacturing raw materials. As far as supply goes, the earth has abundant sources of anufacturing metals—for example, aluminum accounts for 8%+ of the earth’s crust while iron ore is 5%. The resource base for many metals could, therefore, last hundreds of years; however, prices are high because only a fraction of these supplies can be extracted profitably using the current technology. But, if recycling kicks into high gear worldwide, prices could come down since these metals are not destroyed when used.

Global inventories remain at historic lows, while the new capacity has been delayed because of high energy and equipment costs and labor shortages. A surge in speculators has come hand in hand with the tightening of market supplies. Looking ahead, despite an expected capacity increase this year, the tight market situation will probably continue through 2008, until enough new capacity comes online.

The million dollar question is whether the recent run-up in prices will last. A recent study by IMF analysts suggest that the current high prices may not be sustained through 2010. The IM economist Sommer projects that “over the next five years, the futures prices of metals will retain only about one-half of the increase accumulated since 2002 (in real terms, metals prices fall by 45% percent from current levels).” Of course, there are differences within the group of metals—for example, aluminum futures prices are seen declining less over time (by 31%) than copper futures prices (49%).

During 2002–2005, China contributed almost all of the increase in the world consumption of nickel and tin. In the cases of lead and zinc, China’s contribution even exceeded net world consumption growth. For aluminum, copper and steel, the contribution of China to world consumption growth was about 50%.

In Summary
• Metals prices will remain volatile
• Demand showing no signs of a major drop-off or the “r-word”
• “Buy America” complicates markets – it’s not always clear what’s bought where
• China & India will set the demand trend for world metals
• Supply worries aren’t expected to lead to chronic shortages in any base metals
• Steel trading could be a factor – 2010 may look a lot different