Commodity Pricing

Ever wondered why commodity prices seem detached from their supply-demand fundamentals? In the mining industry, discussions on future prices, supply constraints, and demand dynamics flood my global WhatsApp group. It’s a deep dive into the ‘Green Revolution’ impact, emerging market investments, and specific commodity use cases. Take ostrich feathers—a market collapsed despite supply-demand shifts when fashion moved on. Similar disconnects persist today in commodity markets. So, I turned to a GPT assistant, like Bard, for insight. Research revealed centuries-old financial speculation in metal markets. The rise of futures and options trading in the late 19th century spurred modern speculation. Factors like globalization, institutional investors, and tech advancements fueled this trend. Speculation’s effects on markets remain debatable—some say it adds liquidity and efficient pricing, others highlight volatility and price spikes. Here’s the kicker: speculation volumes greatly surpass actual production. In 2012, commodity futures trading volume exceeded global production by 15 times! Why? Various participants use futures for hedging, inventory management, and passive investment vehicles spiked trading. Critics fear distortion of prices, increased volatility, and limited accessibility to metals at fair prices. The debate rages on—does speculation help or harm metal markets? Studies conflict, offering no clear-cut answers. Metal markets often dance along production cost curves, with ‘bull periods’ for growth and sharp corrections unrelated to market realities, swayed by global geopolitics and speculative sentiments shifting between risk-on and risk-off modes based on geopolitical narratives and currency risks. Speculation dominates—15 times more than actual production and producer hedging combined. Investing in new capacity hinges on timing the ‘happiness index’ of global geopolitics driven by ideology, prosperity, health, and risk of major conflicts. It’s a sentiment-driven lottery, detached from fundamentals. Bottom line? Metal market dynamics are complex, driven more by sentiment than fundamentals. Long-term investment in new commodity capacity? It’s a gamble tied to global sentiment and geopolitical shifts, not just supply-demand metrics.


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