Metals, Minerals Prices to Fall More in Long Term - Economist
08/17/2012| 05:27pm US/Eastern
--Nonrenewable mineral resources prices have been trending down since 1920s, Colorado School of Mines economist says
--Price declines have been accompanied by falling costs
--Volatility seen masking long-term downward price trend
By Diana Kinch
RIO DE JANEIRO--Prices of metals and minerals commodities are set to decline over the long term amid pressures of technological change, a mineral economist said Friday.
Average prices of a large number of metals and minerals commodities have been on a consistently falling trend since the 1920s and some, including aluminum prices, have showed a marked decline since that time, John Cuddington, professor of mineral economics at the U.S.'s Colorado School of Mines, said at a commodities seminar in Rio de Janeiro.
Mining companies, however, can still make profits on extraction and sales of nonrenewable resources because the fall in prices has been accompanied by "huge" declines in the marginal costs of discovery, exploration and production, Prof. Cuddington said.
The professor charted data on 100 nonrenewable metal and mineral resource products, including industrial minerals used in construction, to illustrate his claim that average commodity prices are continuing to fall over the long term. Data from the Economist's commodities indexes and the U.S. Geological Survey support this argument, Prof. Cuddington said.
"It's hard to argue there'll be a long-term rise in nonrenewable commodities prices. The long-term trend is negative," he said. "There's a tension between scarcity of resources, caused by population growth, and ongoing technological change."
Price peaks in commodities, and the so-called supercycles, have related to specific industrial movements including the renaissance of Japan's economy after the Second World War, according to the professor.
The long-term falling price trend, however, is masked by growing volatility in metals and minerals markets, which can alter prices by as much as 40% up or down on an annual basis, Prof. Cuddington said.
"We have a profound level of ignorance on long term trends because of the huge volatility," he said. Exchange-based trading may have reduced the volatility of some commodities, he said.
The trend for minerals prices to fall makes long-term investments in these commodities and the companies that produce them a risky business, making diversification of investments more desirable, according to the professor.
"I'd be reluctant to take huge long spot positions in nonrenewable resources," he said. Because of the pace of technological change and the search for product substitutes "some commodities will become obsolete economically before we run out of them," Prof. Cuddington said.
Jan Groen of the Federal Reserve Bank of New York, also speaking at the event, said that futures prices for commodities often "efficiently incorporate public information" about the global economy into commodities prices.
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