Biggest Shocks to the Copper Market

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Cryptal global

11 min readDec 13, 2022

The COVID-19 pandemic caused a worldwide recession in 2020, which had a significant impact on commodities markets. Between pre-pandemic levels and their low point in April, oil prices fell by 60% and metal prices by 16%, although they have since rebounded. Since many developing and emerging market countries heavily rely on the export of metals, particularly copper and aluminum, these sudden price changes might have a significant macroeconomic impact on commodity exporters. The effects of metal price shocks tend to be asymmetric, with price rises being linked to modest, transient increases in activity. In contrast, price falls are linked to more dramatic economic slowdowns and fiscal and export revenue losses. These findings underline the significance of countercyclical policy actions when reacting to fluctuations in commodity prices.

Different commodity groupings were affected differently by the COVID-19 epidemic (World Bank 2020a). At the beginning of the pandemic, the cost of energy, notably crude oil, skyrocketed. Brent crude oil’s price fell by more than 60%, from $64 per barrel in January 2020 to a low of $23 in April 2020. On the other hand, metal prices fell by only 16 percent during the same period and quickly returned to their pre-pandemic peak. The cost of various metals has risen to its highest point in a decade by March 2021.

Common shocks like global recessions and their subsequent recoveries can impact metal prices, causing prices to fluctuate simultaneously. For instance, prices for both energy and metals fell during the global recession of 2009, then increased during the recovery that followed. The price cycles of oil and metals coincided in the early 1970s to mid-1980s and the early 2000s to late 2010s, while metal prices underwent an extra cycle in the mid-1990s. These periods of synchronized price movements can occur both in the short- and long term.

However, there are occasions when metals respond differently to a general shock or are buffeted by special shocks to that commodity, such as supply shocks and technological development. One instance is the COVID-19 pandemic, where lockdown measures that disproportionately impeded travel caused metal prices, particularly copper, to be much more affected than metals.

A significant source of macroeconomic instability in Emerging Markets and Developing Economies (EMDEs) comes from changes in commodity prices. The impact of terms-of-trade shocks can be asymmetrical, with export price shocks having a far higher impact than import price shocks, and they can be responsible for up to half of business cycle swings.

Metal commodities are important sources of export and fiscal revenue (EMDEs) for about two-thirds of emerging markets and developing economies. Given the disparity in pricing, the prospects for these economies rely largely on the kind of goods they export. The literature on the effects of metal price shocks, particularly for EMDEs, is substantially smaller compared to that on the effects of oil price shocks on the global economy, oil exporters, and oil importers. Nevertheless, in comparison to energy commodities, how vital is copper to the global economy and EMDEs? What causes copper price fluctuations? Or what are the consequences of copper price changes for EMDE economic activity?

Metals’ significance in EMDEs

While base metals do not now play as major a part in global economic activity as oil, at least in global commodity consumption, they are crucial in around one-third of EMDEs. Furthermore, as the energy shift away from fossil fuels progresses, base metals’ significance in the global economy is likely to grow significantly, as base metals are largely employed in both renewable power generation and electric cars.

The importance of metals in global commodity consumption. Base metals account for 7% of world commodity demand in value terms, or roughly one-sixth of crude oil, which accounts for 42% of global commodity demand (BP 2020). Copper and aluminum contributed 3% and 2% of total world commodity consumption, respectively. Copper, lead, nickel, and tin have grown their proportion of global commodity consumption since 2000, while aluminum has remained steady, showing a significant increase in quantities but relatively unchanged pricing. Despite their modest fraction of global commodity consumption, several basic metals play an outsized role in global economic activity.

EMDE commodity exporters’ dependency on commodities Oil exporters is often more reliant on oil than metal exporters are on metals. Copper exporters were the most commodity-dependent base metal exporters, with a median proportion of 22 percent of goods exports and a maximum share of 73 percent of goods exports for Zambia, the most concentrated exporter. Aluminum exporters were the second most concentrated, accounting for a median of 15% of total exports and a high of 48% of total exports in Guinea.

Metal ore deposits are concentrated. Global ore reserves, ore production, and refined output are heavily concentrated in a small number of nations and are far less diverse than global oil production. The top four nations with the biggest share of reserves account for 50–75 percent of total reserves for each of the six basic metals (USGS 2020a-f). Chile has 23 percent of known copper deposits, whereas Australia and Peru have 10 percent (USGS 2020a). Guinea has the world’s greatest reserves of bauxite, which is used in the manufacturing of aluminum (25 percent of the total); Indonesia has the world’s largest nickel ore reserves (24 percent); Australia has the world’s largest lead ore reserves (40 percent) (27 percent); China has the world’s greatest deposits of tin ore (23 percent).

Production of metal ore concentration. While the character of geographical deposits contributes to the concentration of ore reserves and production, refined output is less dependent on resource endowments. Despite not having the world’s greatest metal deposits, China is currently the largest producer of lead, tin, and zinc ores and the second-largest producer of bauxite. China possesses around 3% of the world’s known deposits of bauxite/aluminum, copper, and nickel, as well as approximately one-fifth of known reserves of lead, tin, and zinc. However, it mines these ores far more quickly than other nations do.

Concentration changes over the 2000s. The concentration of worldwide production of all refined metals and certain metal ores has increased dramatically during the last two decades, owing mostly to China’s fast output development. Since 2000, China’s proportion of world refined nickel output has almost quadrupled, its share of global refined aluminum and copper production has quadrupled, and its share of global refined lead and zinc production has tripled. China’s portion of world bauxite output has quadrupled, while its copper, lead, and zinc production share has almost doubled.

Global metal consumption concentration. Growth in China has also influenced the global use of refined base metals during the last two decades. Although the United States was the single greatest user of most metals in 2000, it only accounted for 15 to 25% of total base metal consumption. However, during the last two decades, China’s commodity consumption has climbed substantially to the point that it is now the single greatest consumer of all refined base metals, accounting for 45–57 percent of global consumption.

Copper price shocks causes

With over two-thirds of EMDEs strongly reliant on commodities for fiscal and export income, huge commodity price movements have occasionally jeopardized their macroeconomic and financial stability. Long-term commodity price shifts have often necessitated painful macroeconomic adjustments, but even transitory price swings have occasionally resulted in catastrophic downturns.

The first addresses price cycles, which are often divided into temporary and permanent components, but without specifying the price drivers. Short-term business cycle shocks often have the most significant impact on metal prices.

Price fluctuations. This comprises short-term or business cycles, medium-term cycles (lasting between 8 and 20 years), and “supercycles,” which cover many commodities and persist for decades. The business cycle component of shocks accounts for a substantially more significant percentage of fluctuation in copper prices than in other commodities, accounting for around twice as much of the variance in metal prices as in energy and agriculture.

The short- and medium-term cycles are driven by transitory shocks, which can come from a variety of sources, including recessions, such as the 2007–09 global financial crisis, as well as accidents (e.g., the 2019 Vale accident in Brazil, which disrupted iron ore supplies), conflicts (such as the first Gulf war, when Iraq/Kuwait oil production was halted), or terrorist attacks (e.g., the attacks on Saudi Arabian oil facilities in 2019, which temporarily disrupted Permanent shocks, on the other hand, such as technological and policy changes, can have a long-term influence on commodities markets — and prices.

Determinants of commodity price shocks. Utilizing data on commodity prices, demand, and supply (and occasionally inventories), price shocks are decomposed into aggregate global demand shocks, commodity-specific supply shocks, and commodity-specific demand shocks. Aggregate global demand shocks include global recessions (such as the one associated with the 2008–09 global financial crisis) and pronounced expansions, typically resulting from industrialization or urbanization (such as China’s expansion in the 2000s). Commodity-specific supply shocks include accidents, strikes, conflicts, cartel production decisions, government policies, and weather events.

The residual component of the SVAR model is typically used to capture commodity-specific demand shocks, which take into account inventories (due to government stockpiling, producer inventories, and market-driven purchases), technological advancements, changes in consumer preferences, and the effects of governmental policies (for example, a carbon tax).

Shocks to the price of copper’s macroeconomic effects

Shocks in commodity prices can significantly impact national economies or the global economy. Sharp price changes for some commodities, like crude oil, can create economic cycle swings on a global and national scale, albeit these impacts are often transient. Tin and other commodities, which are essential inputs for particular industries (such as the electronics industry) and significant for the few nations that manufacture or export them, may not significantly impact the global business cycle.

Characteristics of significant price increases and falls in metal. The four worldwide recessions (1974–75, 1981–82, 1990–91, and 2008–09) and three global slowdowns (1998, 2001, and 2012) that have occurred since 1970 are particularly notable for the clustering of metal price rises and falls. 2020 also saw a global recession, which is not mentioned here. Generally speaking, the increases in metal prices took place in the years before global slowdowns and recessions (such as 1973, 1980, and 2006) and in the years that followed when global recoveries were in full swing (such as in 1983, 1999, and 2009). On the other hand, price crashes often happen during global slowdowns and recessions (such as in 1974, 1991, and 2008).

Shocks to metal prices’ effects

A positive metal price shock for EMDE metal exporters led to a steady increase in output that became statistically significant after two years, steadily decreased after four years, and then became statistically insignificant. The findings show that two years after the shock, an increase in metal prices of 20% was followed by an increase in economic activity of 0.32 percent. There was no statistically significant impact on EMDE metal importers. For metal importers, metal imports generally represent a tiny portion of overall goods imports (about 5%, on average, in the sample), which might explain why metal price shocks did not have a statistically significant impact. Even less of a percentage is allocated to each basic metal, with copper receiving 0.6 percent and aluminum receiving 0.4 percent. Metals only made up a modest portion of imports, even for China, the greatest user of all the metals we have considered. Copper was the largest of the basic metals, accounting for around 3% of all imports. This is a notable contrast to oil, which makes up a far greater portion of EMDE imports — for instance, it makes up around 14 percent of China’s imports.

Impacts of asymmetric metal price shocks. The combined data obscure the asymmetric effects of metal price spikes and falls, which are represented by more than 20 percent price changes. Price increases did boost the economy in countries that export metals, but the impacts were modest and short-lived (0.1 percent gain in production after two years). However, price declines had far more of an impact than price jumps — eight times more so, reaching 0.76 percent in the second year and lasting twice as long. Importers of metal experienced minimal consequences.

Possible causes of asymmetrical effects. This procyclicality of fiscal policy in EMDEs may be reflected in the fact that price drops have a disproportionately greater impact than price increases. Fiscal tightening during price crashes can deepen a recession, whereas increased fiscal expenditure during booms can be used for counterproductive things like greater public sector compensation. Given that public investment, such as expenditure on infrastructure, is often the first component of public spending to be slashed, this can also have long-lasting detrimental consequences on growth.

Shocks to the price of copper

Results for copper when the model was computed for individual metals were largely comparable. Economic activity rose statistically considerably in copper EMDE exporters after a price rise; however, in copper importers, no significant effect was discovered, in accordance with the findings for metals more generally. Asymmetric responses were also seen in copper exporters: after two years, a copper price increase increased output in copper exporting EMDEs by 0.7%, but the effect quickly vanished; after two years, a copper price fall decreased output by more than three times as much (0.22%), and the effect persisted for three years.

In conclusion, base metals are not expected (yet) to have the same impact on the global economy as oil, at least in terms of their share of global commodity demand. Similar to how much less dependent the typical oil exporter is on oil exports, so is the typical exporter of metals.

However, when seen as a simple proportion of EMDEs, base metals represent a significant portion of total exports. Their economic stability is, therefore, vulnerable to fluctuations in metal prices. Since global demand shocks are what primarily determine metal prices, world upheavals and downturns — or vice versa — will have a greater impact on metal exporters when metal prices are volatile. Empirically, this has mostly been the case for copper exporters, who rely more heavily on copper than other exporters of metals for their exports. Copper price crashes have severe and long-lasting negative economic repercussions for copper exporters, whereas copper price increases have more transient and transitory advantages. Other metal price changes have largely had negligible effects.

These findings suggest that a counter-cyclical strategy is required for legislators in metal-exporting countries to shield the economy from metal price volatility. Given that the price rises are only temporary, it is advisable to preserve all extra money so that there will be resources to support activities while costs are high. The urge to enact income wraps or lower non-Backlogging taxes can be resisted with stronger tax laws, such as tax regulations and structural budget requirements. Making the circumstances for these rules’ foundation is important, but it is not essential to their achievement. Additionally, funds for the wealth of sovereignty, such as stability funds, might be an asset. Monetary and exchange rate reforms can ensure more flexible change adaptations and enhance resilience to oil price changes.

According to empirical studies, increased export diversity may help lessen the impact of shocks on commodity prices. Despite the statistically insignificant effects of fee shocks on different steel exporters, copper exporters — who, on average, are most dependent on steel exporters — have been significantly impacted by fluctuations in copper prices. This emphasizes the necessity of diversification for economies that depend on natural resources. Diversification can be helped by steps to move resource sectors toward higher value-added industries, strengthen institutions, and encourage human capital accumulation.

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