A metal mania is upon us.

World prices for metals such as
copper, nickel, zinc, lead, silver and gold have been rising dramatically. Aluminum and steel have recently joined the party, and those in the know say the trend will continue.

Maybe, but history
suggests otherwise.

Metal prices tend to
fluctuate with the global business cycle. In the past 10 years, we have seen business cycle peaks in 1994-96 and 1999-2000, and global
slowdowns in 1997-98 and 2001. Metal prices have
followed these fluctuations quite closely. We are now entering the first
synchronized global
expansion since 1996, so it makes sense for prices to rise.

The question is, how far? Most
metals have seen huge increases from their 2001 lows: Nickel prices have tripled, copper has doubled, zinc has risen by 40 per cent and aluminum by 30 per cent. But only nickel so far has gone above its mid-1990s cyclical high – the others are still below those peaks.

The fact is, metal prices have generally not kept pace with overall inflation for at least the past century, and each cyclical peak has
usually been below the
previous one, after adjusting for inflation. Why?

First, the share of services in the economy increases as global prosperity rises, and services use fewer natural resources to produce than do material goods.

Second, the
efficiency of exploration, mining and refining has improved over time, and through
competition these benefits have been passed on to the consumer.

Third, when a commodity gets too pricey, the
engineers can often find a substitute that will reduce costs. Thus, commodity prices have been declining relative to the overall prices for most of recorded economic history.

It is both ironic and instructive that in 1972 the Club of Rome published a book titled The Limits to Growth,
which calculated that the world could run out of copper by the early 1990s. Even assuming reserves were five times those identified at the time, we were expected to run out of copper by 2020. But what it did not forecast was the invention of optical fibre, a technology based on silicon – and no shortage of sand (or copper, for that matter) is in prospect, yet.

Today, growing demand for material goods by China is cited as the main
reason to expect metal prices to boom. But how is that different from the growth in North American material well-being during the 1950s and 1960s, or Japan’s growth of the 1970s and 1980s? The major bull markets in metals have been during the two world wars and the rebuilding period of 1945-50, and in the early 1970s in the wake of the collapse of the world monetary system and the rejigging of the global
market for gold. The latter episode was almost entirely due to global inflation, an experience unlikely to be repeated during the next five years.

The bottom line? The bullish
outlook for the world economy almost certainly will translate into further upside for many metal prices. It is
possible that China’s explosion of
consumer growth will mean an extended period of above-trend prices,
perhaps around 1996 peak levels.

But in a non-inflationary
environment where new mines and new technologies are being developed every day, there surely is a limit to how high metal prices can go.

(Stephen Poloz is vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)