Dynamic Factor Analysis Of Non-ferrous Metal Prices

The fluctuation of commodity prices receives close attention for their great and wide influence on the general price in economy. Recently as for the developing countries like China and India entering the critical stage of development, the consumption of raw materials for unit world GDP is increasing. The great consumption deeply changes market structure and price trend. Especially for resource commodity, consumption and production from China have become the main force for the change of commodity price. However, China does not have the right of pricing the commodity despite its great influence. Since 21st century there is a strange phenomenon:if China wants to buy some commodity, the price of it will increase; if China wants to sell some commodity, the price of it will decrease. Thus the discussion about the right of pricing commodity becomes hot recently. In order to solve this problem ultimately we need to know what determines the price of commodity. This paper is based on the structural model on commodity price of Frankel and Rose (2010). Furthermore, we divide the developed economy (represented by U.S.) and developing economy (represented by China), add the monetary factor and adjust data to reduce the influence of exchange rate, and then we study the influence of macroeconomic factors and microeconomic market factors on six base metals traded in London Metal Exchange. As for the econometrics, after the analysis of the data and cooperation of several econometric methods, the partial least square method is chosen for the empirical analysis.The empirical results show that the first component, mainly composed of the trade and production index of U.S. and China, has the greatest explanation power for the base metal prices and they are positively related. The real interest rate consist the second component but has different sign from what the Frankel model forecasts. We explain it from the rational expectations under Taylor Rules. As for why the macroeconomic factors have much more influence on metal prices than monetary and microeconomic factors, we analyze and explain it from the industry concentration of supply, the final and perspective use of metal. Because of the great influence of supply and demand fundamentals, to control the right of pricing the commodity should start from the ways which influence the consumption, e.g. searching for substitute materials, reducing the production cost, etc.