GRACELIN BASKARAN: Interest rate cuts should increase commodity prices

The US Federal Reserve has announced that interest rate hikes are probably over — and that we’re likely to see three rate cuts in 2024. This is welcome news for commodity prices, which declined precipitously over the last two years.

I recently spoke at an event at the US Federal Reserve of Chicago, and it’s a burning question for many: why are commodity prices low, given the medium- and long-term forecasts that the demand for base metals will significantly outstrip supply owing to their use in the clean energy transition? 

The relationship between interest rates and metal prices hinges on the fact that people are less likely to buy new cars, computers, household appliances and other “luxury” goods when the cost of borrowing is high. These are the very goods that require base critical minerals and metals. As a result, it makes sense that lithium prices were down 70% from the start of 2023, nickel prices down 40% and cobalt edging three-year lows after 11 consecutive rate hikes by the Fed. 

It’s welcome news for commodities firms, and countries that rely on this revenue, that interest rates will come down and prices look like they’re heading upwards for 2024. Cobalt is a good example. At the end of 2023 the US’s only cobalt mine in Idaho stopped production shortly after the ribbon had been cut to open the mine just months earlier.

The firm didn’t hide its reasoning: cobalt prices, which started at $40/lb at the beginning of 2022, declined to $25/lb when the mine opened, and further fell to $15/lb by the end of 2023 — at which price point extracting would be cash negative. So it didn’t extract anything. Instead, the firm stopped operations and retrenched nearly 300 people. 

Cobalt is used in goods such as electric vehicles and phones. The majority of people finance these goods — and it was hard to stomach taking out the loan given that most major central banks, other than China, had been increasing interest rates. 

However, it is unclear whether other major central banks will take divergent paths with the reduction in rates. Many analysts have predicted that the Reserve Bank of India will execute two rate cuts over the course of 2024. In December the European Central Bank noted that inflation has declined a bit, and Eurosystem staff projections show that inflation is expected to decline further over 2024, which makes rate cuts possible this year.

On the other hand, inflation remains quite high in the UK — and the Bank of England has not indicated that rate hikes are off the table for 2024. But the UK is a small piece of the global population. The US population sits at 332-million, compared to 67-million in the UK — so the sheer market size of the US, the world’s third most populous country, should help drive commodity prices upwards in 2024, even if you hold China’s sluggish economy constant.

When you factor in likely cuts from India, the world’s most populous country with 1.4-billion people, and possibly in the EU, with 448-million people, it’s a positive outlook. We won’t return to what JPMorgan deemed the start of a commodity super cycle at the start of 2022, in which prices remained high for at least 10 years. That pipe dream was short-lived — prices declined precipitously over the next six months.

This coincided with Fed interest rate hikes, which began with a 25 basis point increase in March 2022, followed by another six rate increases in 2022 and four in 2023, before rates were held constant for the second half of the year. 

Global macro conditions have a profound effect on commodity prices. While interest rate trajectories may diverge a bit, announced or likely rate cuts from two of the three most populous countries will drive up aggregate demand and give mining companies some reprieve. 

• Dr Baskaran (@gracebaskaran), a development economist, is research director for energy security & climate change at the Centre for Strategic & International Studies in Washington DC