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Is There A Common Metals Demand Curve?: M. Evans, Andrew C. Lewis
Is There A Common Metals Demand Curve?: M. Evans, Andrew C. Lewis
www.elsevier.com/locate/resourpol
Received 3 September 2002; received in revised form 1 October 2002; accepted 6 June 2003
Abstract
Previous studies have identified a single, stable and strong correlation between the price of metals and their consumption, such
that low priced metals are always used in large amounts and visa versa. Some have interpreted this as evidence that metals share
a common demand curve so that a single price elasticity of demand exists. This paper reviews and tests this hypothesis against a
number of other possible explanations, including the idea that the relationship is an empirical curiosity. Modifications to the demand
curve were tested by allowing metals to have different intercepts and price elasticities. The results from this analysis suggest that
metals do not share a common demand curve and that the correlation identified between the price of metals and their level of
consumption is an empirical curiosity. As such, the singular price elasticities published in past papers should not be used for
assessing future rates of metals substitution.
2003 Elsevier Ltd. All rights reserved.
0301-4207/$ - see front matter 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/S0301-4207(03)00026-6
96 M. Evans, A.C. Lewis / Resources Policy 28 (2002) 95–104
In order to meet these objectives, the paper is struc- (aluminium, copper, chrome, gold, iron, lead, niobium,
tured as follows. The next section reviews a number of nickel, platinum, silver, tin, titanium, vanadium, and
approaches to the study of metals demand and their zinc) and their levels of consumption in 1972
prices. Emphasis is placed on those studies that have
estimated (1) and a number of different explanations for ln(Pi) ⫽ ln(a) ⫹ bln(Ci) (2)
such an overall relationship are given. The following Later, Nutting (1977) supplemented the data of
section then proposes a number of tests to help differen- Hughes (1972) with his own for the year 1977 and ident-
tiate between these opposing explanations. This is then ified exactly the same relationship. Like Hughes before
followed by a section describing the origins of the data him, the price elasticity of demand for these 14 metals
used in this paper. The results of various tests of the was estimated to be around 1.5 (i.e. b = 0.66). As antici-
common metals demand hypothesis are then given in the pated for a cross-section model of this nature, Nutting
penultimate section. Conclusions are then drawn. found that the value for a in 1977 was higher than that
estimated by Hughes reflecting the influence of world
inflation over this period. However, the value of b
Past approaches to studying metals demand and changes little between the two years.
their prices Jacobson and Evans (1985) extended this type of
analysis. They collected data for 16 different commercial
Time series and other studies metals (tellurium, antimony, magnesium, lead, zinc, pig
iron, aluminium, cadmium, cobalt, copper, gold, mer-
Where data are available, detailed input–output analy- cury, nickel, selenium, silver and tin) over a period of
sis has been carried out (Myers, 1986) to identify the 20 years—from 1961 to 1980. They found that the first
influence of materials substitution and new technology six of these metals fell consistently close to a series of
on metals demand. When data are less disaggregated, straight lines given by
authors such as Tilton (1990), Tilton et al. (1996), Tilton
and Fanyu (1999), Valdes (1990), and Evans (1996) ln(Pit) ⫽ ln(at) ⫹ btln(Cit) (3)
have made use of the intensity of use technique to for each of the 20 years. They also found that the slopes
explain metals demand in terms of movements in the of these lines remained virtually constant from year to
material composition of products and the product com- year. The mean value for bt was estimated to be ⫺0.357
position of national income. The former of these is in (with a standard error of 0.026). Taking 1980 as an illus-
turn related to technological change and material prices tration, Jacabson and Evans’s estimate of (3) was
whilst the latter is related to structural changes taking
place within a given economy. ln(Pi) ⫽ 5.43 ⫺ 0.369ln(Ci)
(0.10) (0.017) Standard error
A more common approach to analysing metals 54.3 21.71 t statistic
demand is through the estimation and specification of
R2 = 99.2%.
either production functions (Slade, 1981) or demand
functions. In the latter category, Bozdogan and Hartman This relationship between the average price and the
(1979) assumed that copper demand was a function of annual consumption of metals was further studied by
the copper price, the price of substitutes (mainly Georgentalis et al. (1990) over a nine-year period from
aluminium) and gross domestic product. In a more recent 1975 to 1983 using the same 14 metals that Nutting stud-
study, Figuerola-Ferretti and Gilbert (2001) modelled, ied. They also found that the slopes of these lines
using time series techniques, copper, tin and zinc con- remained virtually constant from year to year. The mean
sumption as a function of technological change, changes value for bt in (3) was estimated to be ⫺0.698 (with a
in industrial production, changes in real prices and price standard error of 0.092). Their estimate of (3) for
volatility. In a study by Labson and Crompton (1993), 1980 was
the intensity of use and demand function approaches
were brought together using the cointegration method- ln(Pi) ⫽ 5.693 ⫺ 0.714ln(Ci)
(0.323) (0.105) Standard error
ology. 17.63 6.80 t statistic
R2 = 79.6%, DW = 1.83.
Cross-section and time series studies
They also found that over this period, the value for
Recently, a number of studies have been carried out ln(at) in (3) could be explained using measures of world
that involve the estimation of demand functions from inflation and industrial activity
panel data sets that contain a combination of time series ln(at) ⫽ 1.249ln(P̄t) ⫹ 1.582ln(Īt)
and cross-section date. The first appeared in 1972, when
Hughes (1972) identified the following inverse corre- where P̄t was taken to be the wholesale price index for
lation between the price, in 1972, of 14 different metals all countries and Īt, world economic activity. Indeed,
M. Evans, A.C. Lewis / Resources Policy 28 (2002) 95–104 97
these two variables accounted for 99.9% of the variation such as mining conditions and the economic consider-
in the estimated values for ln(at). (The authors did not ations of previous periods. In such a case, the world mar-
supply standard errors and t statistics for each ket price adjusts to a predetermined level of metal pro-
parameter.) duction so that price, rather than consumption, is the
MacAvoy (1988) carried out a study over the period correct dependent variable.
1960–1986 for seven metals (copper, lead, aluminium, For a common demand curve to exist between metals,
zinc, iron, nickel and molybdenum). The price level equ- all the metals placed on it must be equally good substi-
ation used by MacAvoy took the form tutes in each of their main end use markets. Georgentalis
et al. understood that this in part may be true for they
(Pit) ⫽ b0i ⫹ b1(P̄t) ⫹ b2(Īt) ⫹ b3(Sit⫺1) ⫹ b4(ERt), (4)
stated “if gold were as cheap as copper, it would be used
where ER is the exchange rate and S is the metal stock in place of copper”. Even more striking is the case of
level. Such an equation is obtained as the competitive aluminium over the last 130 years. Prior to the introduc-
equilibrium solution to a system of supply and tion of the Hall–Heroult process for the production of
demand equations. aluminium in 1876, aluminium was actually more
expensive than gold and the corresponding production
Interpretations of aluminium was less than that of gold (147 tonnes of
gold compared to 1 ton of aluminium in 1870). Now
What stands out from these panel data studies is that aluminium is the second most widely used metal and its
low priced metals are used in large amounts and high price is just about that to be expected from the substi-
priced metals are used in small amounts and this inverse tution of the annual consumption in Nutting’s law.
correlation appears to be remarkably stable over time. However, and at the theoretical level, it seems
Indeed, Nutting found it extremely surprising that such unlikely that all the 14 metals considered by Nutting are
a correlation should hold over five orders of magnitude equally good substitutes in all their main markets. Con-
in relation to price and over eight orders of magnitude sider, for example, aluminium. Its main markets are
in relation to consumption. The observations led him to packaging (30% in 1994), building (17%) and transpor-
propose Nutting’s first law—“As the price of a metal tation (26%). In all these markets, steel is a very close
increases relative to other metals by a factor of two, the substitute, but titanium is only a close substitute in trans-
consumption decreases relative to other metals by a fac- portation. Apart from copper, that competes with alu-
tor of three”. Such a law implies causation and that met- minium in the electronics sector, none of the other 14
als have a common price elasticity of demand so that metals studied by Nutting can be considered as a substi-
one interpretation of the above overall relationship is that tute for aluminium. Consider also the example of copper.
all metals have a common demand curve. Its main markets are electrical (22% in 1994), construc-
This is visualised in Fig. 1 for the simpler case of tion (42%) and transport (13%). Whilst aluminium and
three metals, labelled A–C, in any one year. Each metal gold are close substitutes in electrical applications, they
has a different level of supply, but a common demand are not for construction, where plastics would be a pre-
curve, giving the three equilibriums that determine the ferred substitute in plumbing due to weight consider-
observed price–consumption pairings for each metal. ations. The main market for gold is jewellery (73% in
Note that in this illustration, the world supply or pro- 1994), and here, the close substitutes are platinum and
duction of a metal is predetermined by exogenous factors silver. In the other main markets for gold (electronics at
14%), the only close substitutes are tin and nickel. As a
final example, consider lead. In 1994, 84% of lead use
were in batteries with the only close substitutes being
nickel and zinc.
It is clear from the above examples, that whilst some
metals might be easily interchangeable with some other
metals if the price was right, it is not clear, at the theor-
etical level, whether the actually substitutional possi-
bilities are strong enough to generate a common metals
demand curve—even for such metals.
Another possible explanation for the stable inverse
relationship between metal price and consumption is that
the value for bt in (1) is an average value of the exponent
in year t for each individual metal, that is to say, an
overall index of the ease of substitution within the family
of metals considered. Some support for this view is
Fig. 1. A common metals demand curve. given by the Jacobson and Evans study mentioned
98 M. Evans, A.C. Lewis / Resources Policy 28 (2002) 95–104
above, where a value for bt of about 1/3 was found for down to their common characteristics of being subject
the select group of six base metals. This result may rep- to a steady demand, mainly from long established appli-
resent the lower bound solution. cations such as in heavy engineering and construction,
This average interpretation for bt in (1) can be looked and the fact that their commercial ores are widely distrib-
at from a slightly different perspective, namely that of uted and contain these metals in concentrates between
a statistical curiosity. This is illustrated in Fig. 2 again 1% and 20%. As such, their extraction presents no real
for the simpler case of three metals, labelled A–C, in problems. They suggest that all these factors combine to
any one year. Unlike Fig. 1, there is no longer a common produce lacklustre associations and help to encourage
metals demand curve. Each metal has its own price elas- their stable position in the market. They also explain
ticity of demand that is different from the other metals. why these metals appear to establish the minimum econ-
Each metals supply and demand function determines the omic price for metal production at a given level of con-
three equilibriums that generate the observed price–con- sumption.
sumption pairings for each metal. When a best fit line As further evidence for this theory they noted that the
is then put through the observed price–consumption data, metals aluminium, cobalt, copper, gold, nickel, silver
a line similar to the shown mongrel function will be and tin always had prices above the base line. They
obtained. Such a function is neither a demand nor a sup- accounted for this by showing that all these metals
ply curve but a mixture of the two—even though it looks (except aluminium) are obtained from ores with concen-
for all the world as if a common demand function has trates well below 1%. The extent to which prices lie
been estimated. Eq. (2) can be interpreted as such a mon- above the base line was therefore attributed to ease or
grel function, so that the results of Nutting, Jacobson otherwise of extraction. Prices below the base line were
and Evans and Georgentalis et al. can be considered as then interpreted as unstable prices which betray major
spurious regressions. Indeed, the slope of such a mongrel market weaknesses.
function may well turn out to be the average for all the
individual metal demand functions. Then, if the slopes
of the individual demand curves are not too different Empirical tests for differentiating between
from the mongrel function, the slope of this latter func- competing theories
tion may provide a reasonable estimate of substitution
rates for all metals following price changes. Over- and underpricing
A final interpretation for the observed stable inverse
If (3) represents a common metals demand curve, then
correlation between metal price and consumption is that
a metal whose price is above such a common demand
such a relationship actually identifies a minimum econ-
curve can be interpreted as a metal that is overpriced
omic price for metal production at a given level of con-
(i.e. supply exceeds demand). Likewise, a metal whose
sumption. As briefly described above, Jacobson and
price is below the common demand curve could be inter-
Evans estimated (3) using data for six metals (tellurium,
preted as a metal that is underpriced (i.e. demand
antimony, magnesium, lead, zinc, pig iron), which they
exceeds supply over such a time span). However, such
called the base metals. Over time they observed that
over- or underpricing should not persist for prolonged
these six metals consistently lay close to such a fitted
periods of time. Eventually, the forces of supply and
line with bt = ⫺0.357. They called this the base line.
demand will ensure that markets equilibriate and so
This overriding stability of the base metals they put
prices should tend towards the common demand curve
over time. Unless, of course, (3) is a mongrel curve and
each metal has its own demand curve. Then prices can
be persistently above or below (3) depending upon each
metals supply and demand conditions.
Thus a simple test for a common demand curve, as
opposed to a mongrel function, is to plot the extent of
over- and underpricing over time and observe the tend-
ency (or lack there of) for such pricing to dissipate over
time. A tendency for a metals price to be continuously
above or below (3) is evidence to indicate that that there
is no common demand curve amongst metals.
Another test for a common metals demand curve
would be to generalise (3) and test the validity of such
a generalisation. For example, the following is a more
general specification for (3):
Fig. 2. A mongrel function. ln(Pit) ⫽ ln(ait) ⫹ btln(Cit). (5)
M. Evans, A.C. Lewis / Resources Policy 28 (2002) 95–104 99
Under this specification, each metal has a common Then, (7) can be estimated by applying the least squares
price elasticity of demand but each metals demand curve procedure to
冘
has a different intercept term. This specification is very q
similar to a model estimated by MacAvoy (1988). (Pit) ⫽ a01 ⫹ a0i Di ⫹ a1lnP̄t ⫹ a2lnĪt
Another generalisation for (3) is i⫽2
冘
q consumption data, measured in metric tonnes, were col-
(Pit) ⫽ a01 ⫹ a0iDi ⫹ a1lnP̄t ⫹ a2lnĪt (8) lected for each of the 14 metals over the period 1980–
i⫽2 1999 from annual issues of Metals Bulletin, Minerals
Handbook and Platinum. However, for iron, no con-
⫹ bln Cit sumption data were available and so the production of
where Di takes on a value of 1 when it refers to metal iron ore (Fe content) was used instead. Metal prices were
i and zero otherwise. Thus, a0i measure the extent to measured in US dollars per metric ton and were obtained
which a metals demand curve is shifted up or down rela- from various issues of International Financial Statistics
tive to the first i = 1 metal, which is taken to be alu- Yearbook (1980–1989), Metals Bulletin (1980–1989),
minium in this study. In total, there are q = 14 such Minerals Handbook (1980–1989), and Platinum (1980–
metals. Similarly, (6) can now be estimated by applying 1989).
the least squares procedure to World inflation, P̄t, was taken to be the wholesale
price index for all countries as published in various
(Pit) ⫽ a0 ⫹ a1lnP̄t ⫹ a2lnĪt ⫹ b1 lnCit (9) issues of International Financial Statistics Yearbook and
冘
q Īt, world economic activity, was taken to be the index
⫹ bi DilnCit for industrial production (at constant value terms) for the
i⫽2 industrialised nations, again as published in International
100 M. Evans, A.C. Lewis / Resources Policy 28 (2002) 95–104
Year ln(at) at R2
Empirical results
1980 20.720 (1.478) –0.908 (0.109) 85.26
Comparisons with previous results 1981 20.216 (1.409) –0.884 (0.104) 85.74
1982 19.778 (1.421) –0.866 (0.105) 84.89
Fig. 3 contains price and consumption data for the 14 1983 19.735 (1.569) –0.863 (0.117) 82.05
1984 19.643 (1.535) –0.856 (0.113) 82.62
metals mentioned above for the year 1999. Also shown 1985 19.635 (1.542) –0.858 (0.113) 82.66
is the fit given by (3) to this set of data. The full set of 1986 19.828 (1.619) –0.872 (0.119) 81.74
regression results for this year is 1987 19.832 (1.712) –0.861 (0.126) 79.65
1988 20.033 (1.731) –0.855 (0.126) 79.24
ln(Pi) ⫽ 19.953 ⫺ 0.855ln(Ci) 1989 19.876 (1.653) –0.838 (0.121) 80.12
1.684 (0.121) Standard error
11.84 7.07 t statistic 1990 19.715 (1.672) –0.833 (0.122) 79.55
1991 19.607 (1.680) –0.837 (0.123) 79.47
R 2 = 80.48%. 1992 19.520 (1.730) –0.834 (0.127) 78.33
1993 19.527 (1.803) –0.843 (0.132) 77.27
It can be seen that after some 16 years since Georgen- 1994 19.714 (1.809) –0.846 (0.132) 77.40
talis et al. first published their results, there is still a very 1995 20.027 (1.716) –0.853 (0.125) 79.64
strong inverse correlation between metal price and metal 1996 19.945 (1.682) –0.848 (0.122) 80.05
consumption—with some 80.48% of the variation in 1997 19.990 (1.653) –0.848 (0.120) 80.76
1998 20.220 (1.577) –0.870 (0.114) 82.94
metal prices being explained by variations in metals con-
1999 19.953 (1.684) –0.855 (0.121) 80.48
sumption. However, the estimated value for bt appears
to be a little higher than the average value obtained by 1980–1999 19.876 (1.633) –0.856 (0.120)
Georgentalis et al. Table 1 gives the ln(at) and bt values (mean)
obtained for each of the remaining years from 1980 to
1999 (together with their standard errors and R2 values). R2 is the coefficient of determination measuring the percentage vari-
ation in ln(Pit) explained by variations in ln(Cit). Standard errors are
As can be seen, and in line with other studies in this
shown in parentheses.
area, they observed very little variation in the value for
bt over time and in fact none of the estimated bt values
were significantly different from each other.
be closer to ⫺0.74 over the period 1961–1980. Having
Fig. 4 compares the results shown in Table 1 with the
said that, when the two sets of bt values are plotted
bt estimates made by Georgentalis et al. It can be seen
alongside their respective and approximate 95% confi-
that for the overlap years 1980–1983, the current
dence intervals, as in Fig. 4, it becomes clear that the
authors’ estimates for bt are higher than those obtained
observed differences are not statistically significant. That
by Georgentalis et al. Reasons for this are difficult to
is, the confidence intervals for the two separate estimates
find because the original data used by Georgentalis et
of bt over the period 1980–1983 overlap and so there is
al. are no longer available. It is interesting to note that
not enough evidence to conclude that these two estimates
a similar observation was made by Jacobson and Evans
are actually different.
when comparing their work to that of Nutting. Recall
that for 1977, Nutting estimated bt to be ⫺0.67, but
Results of testing for a common metals demand curve
Jacobson and Evans found the average value for bt to
using over- and underpricing
Fig. 4. Values for βt as obtained by Goergentalis et al. for the period 1975–1983 and by present authors for 1980–1999.
Fig. 5. (a) Extent of overpricing for aluminium, copper, iron and gold assuming a common metals demand curve. (b) Extent of overpricing for
nickel, zinc, silver and platinum assuming a common metals demand curve. (c) Extent of overpricing for titanium, vanadium, niobium and chromium
assuming a common metals demand curve. (d) Extent of overpricing for tin and lead assuming a common metals demand curve.
is correct, then the prices given by (3) can be interpreted product markets rarely clear instantaneously following a
as market clearing prices. Overpricing then corresponds change in demand or supply conditions, it is highly
to excess supply and underpricing, excess demand. Fig. unlikely that the prices of all the metals shown in Fig.
5a,c shows that the metals aluminium, copper, iron and 5a,c could remain so far away from market clearing lev-
gold are all “overpriced” to a considerable extent for the els for such long periods of time. It would therefore
whole length of the sample, whilst the metals titanium, appear that Fig. 5 provides some evidence to suggest
vanadium, niobium and chromium are “underpriced” to that these metals do not have a common demand curve.
a considerable extent for the whole length of the sample. Put differently, the prices given by (3) are not market
Fig. 5b shows that the metals nickel, zinc, silver and clearing prices. Tin and lead remained overpriced for the
platinum also remained “overpriced” during the full first half of the 1980s, but since then have remained mar-
length of the sample period but to a lesser extent than ginally underpriced (Fig. 5d).
those metals shown in Fig. 5a. Whilst it is believed that
102 M. Evans, A.C. Lewis / Resources Policy 28 (2002) 95–104
Table 5 ore. Table 7 shows the estimated demand curves for the
Ordinary least squares estimate of the coefficients of (9) remaining metals. It can be seen from this table that the
metals gold, silver and platinum are more price elastic
Metal Coefficient Estimated value t-value
than aluminium and the metals lead, nickel, tin, zinc,
Aluminium b1 –0.6554 –12.3∗ iron ore, chrome, titanium, vanadium and niobium are
Copper b2 –0.0013 –0.23 less price elastic than aluminium.
Lead b3 –0.1117 –16.0∗ The Student t values in Table 5 suggest that two met-
Nickel b4 –0.0390 –2.88∗ als appear to share a common price elasticity of
Tin b5 –0.0987 –4.90∗ demand—aluminium and copper (metal i = 1 and i =
Zinc b6 –0.0643 –9.94∗
Iron ore b7 –0.0865 –8.49∗ 2). This may reflect the competition between aluminium
Gold b8 0.4067 6.48∗ and copper in the transport sector (which was around
Silver b9 0.0391 1.01 15% of the copper market in 1994) and the electronics
Platinum b10 0.2702 1.98∗ sector (which accounted for around 25% of the markets
Chromium b11 –0.2781 –36.3∗ for copper). All the remaining metals however have price
Titanium b12 –0.1611 –20.7∗
Vanadium b13 –0.2565 –7.92∗ elasticities that differ significantly to that associated with
Niobium b14 –0.2978 –7.61∗ the metal aluminium and so it is clear that most of the
– a0 8.1256 4.02∗ 14 metals studied do not share a common demand curve.
– a1 –0.3185 –3.95∗ It would appear that most metals have demand curves
– a2 2.5084 4.89∗ with differing slopes—as in Fig. 2—so that (3) depicts
∗
the mongrel function that is neither a supply nor a
Coefficient significant at the 5% significance level.
demand curve. Yet Table 7 reveals that most metals have
a similar, but statistically different price elasticity of
demand. Gold and platinum appear to be more price
The results are shown in Table 6. The inverse of the elastic than most, whilst niobium, vanadium and chro-
price elasticity of the demand for aluminium is mium are more price inelastic than most. The remaining
nine metals have inverse price elasticities close to 0.7.
b1 ⫽ ⫺0.6524,
This is a lot lower than the bt values shown in Table 1,
whilst the inverse of the price elasticity of demand for and so it would be dangerous to use such values to infer
iron ore (i = 7) is something on rates of future substitution between metals.
The final generalisation of (3) to be considered in this
b1 ⫹ b7 ⫽ ⫺0.6524⫺0.0865 ⫽ ⫺0.7389. paper is to allow each metal demand curve to have a
Aluminium is therefore more price elastic than iron different slopes or price elasticities of demand and dif-
ferent intercepts as in (10). However, the results obtained
for such a generalisation were not satisfactory. Table 8
shows the simplified estimated demand curve for each
Table 6
Ordinary least squares estimate of the simplified version of (9)
Table 7
Metal Coefficient Estimated value t-value Estimated individual metals demand curves under specification (9)
Table 8 ticity of demand and this is consistent with the fact that
Estimated individual metals demand curves under specification (10) these metals compete in some of their major markets.
Metal Intercept, a0i a1 a2 bi