Fluctuations in Base Metals Prices

Abstract

To explain fluctuations of base metals prices we propose a model of short-run pricing based on trade in international exchanges. We introduce the critical tradeoff of choosing the share of material input from risky mining extraction versus risk-free recycling. We show that if more producers participate in the international exchange, or producers are less risk averse, the prices of base metals fluctuate more. If there are more traders, or producers are less risk averse, the prices of base metals fluctuate less. These observations may shed light on price movement during the recent financial crisis and possible future liquidity crises.