Deflationary Cycles and Metals Prices

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Yesterday we spent some time covering the various elements that impact the price of metal. Here specifically are the key factors we watch:

1. actual and expected demand
2. actual supply (this includes supply disruptions)
3. currency trends and exchange rates (e.g. is the dollar going up or down relative to other major currencies)
4. global interest rates
5. the degree and amount of speculation in the particular market
6. raw material input costs (in the case of steel)
7. energy costs
8. costs to extract metals
9. and a plethora of smaller factors which impact the price of metals such as transportation, alloying elements etc.
10. We also like to look at the historical price of a particular metal

We have covered each of these points in great detail on MetalMiner. Today we thought we would cover the notion of deflation and its potential impact on commodity prices in general and metals prices in particular. According to this recent New York Times article , deflation, “the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years,” appears to be a concern among some economists. Deflation occurred during the Great Depression and more recently during the 1990’s in Japan. And according to the Times article, prices are falling for tools, hardware, furniture and bedding.

Policy options also differ greatly between inflationary and deflationary cycles. Inflation can be treated with higher interest rates and economic policies designed to cool down growth numbers. But deflationary cycles work differently. If demand falters, prices drop and companies don’t invest in new capabilities during downward price cycles. The concern as the article explains is that companies that have made massive investments like China and India could dump products onto the global market place, further depressing prices. Please see our own analysis on steel price trends in China

Are these fears justified and how do they relate to metals supply markets? That will undoubtedly be the subject of future posts. Part of the malaise in Japan had do with the [slow] speed in which it took the government and the banking system to implement reforms designed to fix some of the deflationary price pressures. As we know most metals prices are way down though some have yet to reach their historical averages (e.g. steel). Producers have been very fast to shut down capacity to better match supply with demand. But that only impacts the semi-finished or wholesale prices. What happens on the consumer side is an entirely different matter.

–Lisa Reisman

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