Leaning against the wind: low-price benchmarks for acting anticyclically in the metal markets

Abstract

Real prices for metals seem to have developed at a constant price level over a long period of time, up to 100 years. Based on real prices for 28 metals, using the US Producer Price Index as a deflator, we have defined long-term and short-term low-price benchmarks. The results show that real prices which developed in cycles or reacted to shocks normally returned to a certain floor price, defined as the long-term low-price benchmark in this study. Using long-term low-price benchmarks as a price signal is a useful tool for investors and buyers to act anticyclically between cycles or shocks, either to secure long-term offtake agreements or to farm into new mining assets at a low price. A combined analysis with average real total cash cost data for 11 mineral raw materials supports the low-price benchmark approach and leads to a discussion whether the lessons of the past hold true for the future. We propose that these learning effects still take place and, in consequence, the long-term real price benchmarks may be extrapolated into the next decade. However, it is possible that the cost pressure to retain or obtain the social licence to operate increases to such a degree that technical rationalization cannot keep up with the cost increases. Consequently, the operating costs at mines and the ratio of the established long-term low-price benchmark to the total cash costs are important aspects to monitor.