Forecasts and market analysis based on price assessments from Fastmarkets MB and Fastmarkets AMM

Change font size:   

February 2016 | Base Metals

Commodity prices: A 100-year history

Your comment has been submitted and will appear once approved by the editor.

Thank you.
Your email has been sent. Thank you.

Go to the homepage.
Email article

All fields are compulsory

  • Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Email the editor

All fields are compulsory

Add Your Comment

All comments are subject to editorial review

Comments There are currently no comments to display for this article.

We take a longer-term look at base metals and crude oil to see just how prices now compare in real terms to those over the last 100 years.

In putting together this article, we have used our own historic data, as well as that available from other sources, in order to create such long-term pricing histories. All prices have been rebased to 2015 price levels, using historic US inflation figures.

As can be seen in the charts, all of the base metals, as well as oil, are now trading at prices below their long-term real averages seen since 1915. Some look particularly cheap – aluminium and nickel for example are significantly below their long-term real average prices.

Long-term prices (real terms, 2015$/tonne)

Long-term prices (real terms, 2015$/tonne)

Long-term oil prices (real terms, 2015$/bbl)

Economic theory would generally have it that this is what should be expected. In real terms, prices of goods are generally expected to head down eventually. This is due to improved efficiency through technological advance, and through substitution and supply increases should prices increase too much.

Certainly we have historical examples of this, the changing story of aluminium being particularly well-known. For the unfamiliar, the metal used to be so expensive that Napoleon III possessed an aluminium cutlery set for the use of special guests (undeserving guests had to make do with silver). The Washington Monument meanwhile, completed in 1884, was adorned with an apex made of aluminium, still present today, in order to demonstrate the USA’s growing wealth and industrial might.

Technological advance of course soon turned aluminium into the everyday metal it is now, used in a wide variety of applications from beverage cans to automotive parts.

Oil and nickel throw up other, more recent examples of "human ingenuity" in response to rising prices. We speak of fracking and the development of the shale oil industry in the case of oil, and the wider use of lower-grade ores and development of the nickel-pig iron industry in the case of nickel.

Looking to the future as well, there has long been speculation that advances in the production of carbon fibre and other composite materials will do away with much of the steel industry. A technological leap in titanium production would likewise have a dramatic impact.

Economists, not typically known for the accuracy of their projections but certainly their confidence, have even placed money on real prices falling over the long term.

During the 1960s and 1970s for example, rising commodity prices brought out renewed Malthusian fears regarding the planet’s resources, impending shortages and mass starvation.

One such pessimist, biologist and author of ‘The Population Bomb’, Paul Ehrlich, agreed to enter into a bet with the economist Julian Simon in 1980, who argued that the prices of any five commodities chosen by Ehrlich (in the end, he chose chromium, copper, nickel, tin, and tungsten) would be lower in real terms once 1990 arrived.

In the end, Simon won the bet comfortably with real prices for all five commodities falling. As he predicted, and used as the title for his own book, human ingenuity was "the ultimate resource".

But the reality of history shows that the argument is far from clear cut. Analysing the data in our charts, we find that, during any given 10-year period, real prices have fallen just as often as they have increased. Indeed, there is no notable and overriding downward trend in the charts above. Perhaps Simon just got lucky with his timing.

With this information, is there anything that can be said about the direction of prices over the coming years?

Given that all of the commodities discussed here are now trading at real prices below their long-term historic averages, it would certainly be a brave economist that made the same bet as Simon did in 1980.

At the same time, previous large jumps in prices can be explained – the post-war economic boom in Europe, the oil price shocks of the 1970s, and most recently the rapid economic development of China.

What, if anything, is the next big story? If there isn’t one, demand could take much longer than usual to catch up with the vast expansion in supply created to feed the Chinese economic boom.

The only certainty is that nothing is permanent in commodity markets. This is as true when prices are relatively low, as they are today, as when they are high.

And, just as the cure for high prices is the high prices themselves, so the reverse is true. With losses mounting and announcements of capacity shutdowns increasing, albeit slowly, the cure for the low prices being seen today are the low prices themselves.

Robert Cartman
Metal Bulletin Research