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The metals price boom of 1987-89 : the role of supply disruptions and stock changes

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  • Boum-Jong Choe

Abstract

The markets for base metals have changed remarkably in the last few years. A long period of extremely low prices was followed by a sustained price boom in 1987-89 - which continued into 1990 for copper, nickel, lead, and zinc. The author examines the causes of the price boom in terms of market fundamentals. Because of the importance of supply disturbances and low stocks, the reduced-form price equation specification was extended to incorporate supply-side variables. The resulting estimates exhibit superior fit and greater explanatory power than, for example, those of Gilbert's (1986) model. The estimates of the modeland simulations of the boom period with the model suggest the following: 1) The growth of OECD industrial production was the most important factor in the higher metals prices, 2) US dollar depreciation was the dominant contributor to the metals price increase during the earlier part of the boom, 3) supply disturbances and low stocks had positive impacts on the price increases, and 4) excessive market speculation exacerbated the price increases.

Suggested Citation

  • Boum-Jong Choe, 1990. "The metals price boom of 1987-89 : the role of supply disruptions and stock changes," Policy Research Working Paper Series 542, The World Bank.
    • Handle: RePEc:wbk:wbrwps:542
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    References listed on IDEAS

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    1. repec:crs:wpaper:8909 is not listed on IDEAS
    2. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
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    6. Fama, Eugene F & French, Kenneth R, 1988. "Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-1093, December.
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    Cited by:

    1. Thibault Fally & James Sayre, 2018. "Commodity Trade Matters," 2018 Meeting Papers 172, Society for Economic Dynamics.
    2. Jenkins, Rhys Owen, 2011. "The "China effect" on commodity prices and Latin American export earnings," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.

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