Duration of Metal Price Cycles

The PortfolioDirect monthly metal price index has been calculated using monthly average prices for the six principal London Metal Exchange nonferrous metals - aluminium, copper, lead, nickel, tin and zinc. The index begins in January 1960.

Using the index, 10 cyclical price peaks have been identified since 1960.  An eleventh has been tentatively identified as starting in February 2018.

The first chart shows the time in months between each of the cyclical peaks and the subsequent troughs.  The average duration has been 36 months but that included the relatively long duration cycles in the 1980s.

 

The second chart shows the number of months between each cyclical trough and the subsequent price peak.  The average duration of cyclical upswings has been 27 months.  This average has been affected by the noticeably long post-2002 upswing driven by rapidly rising Chinese metal demand.  That period aside, the cycles have been remarkably similar. 

The latest cyclical upswing was deemed to have started in January 2016.  If it did reach a peak in February, the cycle will have lasted 25 months, very close to the average for the historical movements.

 

The third chart superimposes onto the first chart a line showing average global GDP growth over the peak-to-trough cycle.  Growth has typically been below average when the cyclical decline has been most prolonged. 

The growth estimates should be treated as indicative only since they involve interpolating annual data to match the monthly timing of changes in cyclical direction.

 

The next three charts show the relationship between cycle durations and US yield curves (i.e. the difference between the Fed Funds policy rate and 10 year bond yields).  The yield curve is a guide to the bias of policy and the pressures on growth through the cycle.

The first of this group of charts shows the yield curve at the time of each cycle peak.  The chart shows that the curve has been more often than not inverted (i.e. Fed Funds are higher than the 10 year bond yield) when the metal price cycle was peaking.

The next chart shows the change in the yield curve over the 12 months leading to the cyclical peak - as an indicator of the changing stance of monetary policy.  In every instance, the market experienced policy rates rising relative to long term rates in the lead-up to a cyclical peak.  The yield curve change was particularly aggressive in the 1970s and 1980s, contributing significantly to the duration of the subsequent cyclical declines.

 

The next chart shows the change in the yield curve over the 12 months approaching each cyclical trough.  In all but one (minor) instance, short rates were falling relative to rates on long date securities, indicating that policy was supporting a cyclical upswing.

The next chart shows shows the magnitude of cyclical price movements.  The blue line shows the average adjustment following each cyclical price peak.

The average peak to trough price fall across the 10 cycles has been 29%.

The cyan line in the chart is the trajectory of the current cycle which was 44 months old at the end of March 2018.

 

Together, the charts indicate that the cyclical upswing which began in 2014 was quite mature by the beginning of 2018, consistent with the possibility that prices could have peaked in February. 

Of course, there can always be special factors which might truncate or extend cycle timing to cause possibly significant deviations from any averages but the recent history does appear to be strikingly ordinary in its match with history. 

Consistent with a history of maturing cycles, policy is becoming less accommodating during 2018 although growth does not appear to be under significant threat of a major decline due to an aggressive implementation of monetary policy. 

Likely moderate rises in short term rates might mean that any upcoming cyclical downturn will prove relatively modest with a duration toward the lower end of the range of historical outcomes.

April 2018