Using a Zero-Non-Zero Patterned Error-Correction Model to Examine the Process of Price Formation in Metals Markets

In this paper recent advances in zero-non-zero patterned vector error correction modelling (VECM) have been utilised to test two hypotheses which are important for price formation in the world metal markets. The first hypothesis is the existence of a long-term relationship between metal production and consumption. We have found conclusive support for this hypothesis across a range of metals, including aluminum, copper, nickel, zinc and lead, and this relationship is significant in explaining the price formation processes for metals. The second hypothesis relates to the long-term relationship between metal consumption and general economic activity. Strong support for this long-term relationship is found, although its effects on the price formation appear to be mostly indirect. Another factor which is important for metal price formation is the change in general economic activity. In most cases it contributes significantly to the movements in metal prices