Beruflich Dokumente
Kultur Dokumente
opacity-induced
minor
metal
market
volatility
a
threat
to
promising
green
technologies?
A
study
of
the
tellurium
market
Fredrik
Sderqvist
Master
of
Science
Thesis
Uppsala
University
Department
of
Economics
Submitted
June
7,
2013
Supervisor:
Associate
Professor
Mikael
Bask
F. Sderqvist
F. Sderqvist
This master thesis was written in the spring of 2013 as part of the Uppsala University Master Programme in Economics. I would like to thank Sander de Leeuw at New Boliden AB for the support, inspiration, and data access he has generously granted me, and my supervisor Mikael Bask for his thoughtful guidance and meticulous supervision of this thesis. For questions, comments or inquiries regarding the content, methods, data or conclusions drawn in this thesis, please contact fredrik.soderqvist@gmail.com
F. Sderqvist
Abstract
Tellurium is one of the rarest metals in the earths crust. Increased demand for cadmium telluride photovoltaic cells along with an opaque pricing and quantity- reporting system, have recently caused high price volatility and a speculative bubble in the tellurium market, resulting in overstocking and depressed prices. In a longer perspective this may be a threat to cadmium telluride photovoltaics as a power-generating technology. This master thesis compares how actors may perceive news innovation in the opaque tellurium market compared to the more transparent molybdenum market. A quantitative analysis of industry news reporting on the two metals, combined with a SVAR impulse response analysis, helps me determine which actors and factors exert most influence on spot market prices. In the opaque tellurium market, relatively unreliable proxies of supply and demand are most frequent in the news reporting while having a big impact on prices, whereas the transparent molybdenum market uses more reliable variables such as futures prices and transparent supply information, whilst also relying on a frequent stream of dependable proxies to scope market sentiments. My findings lead me to recommend policy makers to implement measures to increase market transparency, which may be accomplished by extending the data-sharing regime of the REACH database to minor metal markets. Attempting to limit speculation in minor metal markets is perhaps too blunt a tool to fix an inherent problem of a free exchange-pricing mechanism.
Sammanfattning
Tellur
r
en
av
de
mest
sllsynta
metallerna
p
Jorden.
kad
efterfrgan
av
kadmiumtelluridsolpaneler
har
nyligen
orsakat
stor
volatilitet
p
tellurmarknaden.
Ett
opakt
prissttnings-och
kvantitetsrapporteringssystem
har
bidragit
till
att
en
prisbubbla
bildats
och
spruckit,
vilket
resulterat
i
att
marknadsaktrer
kpt
p
sig
stora
lager
till
hga
priser
som
de
sedan
inte
kunnat
slja
vidare.
I
ett
lngre
perspektiv
kan
detta
innebra
begrnsningar
vid
tillverkning
av
solcellsteknologi
baserad
p
kadmiumtellurid,
d
ett
volatilt
pris
kan
gra
nya
tellurgruvprojekt
alltfr
riskabla.
Denna
masteruppsats
jmfr
hur
en
typisk
marknadsaktr
kan
reagera
p
prisinnovationer
i
den
opaka
tellurmarkanden
och
den
mer
transparenta
molybdenmarknaden.
Metoden
bestr
av
en
kvantitativ
analys
av
facknyheter
rrande
de
tv
metallerna,
varifrn
variabler
vljs
till
en
SVAR
modell
med
impuls-responsanalys.
Urvalet
av
variabler
r
f
och
volatila
p
den
opaka
tellurmarknaden,
medan
den
mer
transparenta
molybdenmarknaden
har
ett
strre
utbud
av
variabler
som
knnetecknas
av
god
transparens
och
relativ
frutsgbarhet.
Mina
slutsatser
leder
mig
till
att
rekommendera
beslutsfattare
att
vidta
tgrder
fr
att
ka
tellurmarknadens
transparens
genom
EU-samarbetet,
frslagsvis
genom
att
gra
anonymiserad
data
frn
REACH
databasen
tillgnglig
fr
allmnheten.
Samtidigt
avrder
jag
frn
tgrder
som
syftar
till
att
minska
spekulation,
d
implementering
av
en
sdan
policy
kan
bli
bde
dyr
och
komplicerad.
Key
words:
Tellurium,
Minor
Metal,
Market
Volatility,
Market
Transparency,
Molybdenum,
Market
Efficiency,
REACH,
SVAR,
Quantitative
Analysis,
London
Metal
Exchange.
JEL
codes:
G13,
G28,
Q02,
Q31,
Q32,
Q38,
Q55.
F. Sderqvist
Table
of
Contents
IS
OPACITY-INDUCED
MINOR
METAL
MARKET
VOLATILITY
A
THREAT
TO
PROMISING
GREEN
TECHNOLOGIES?
A
STUDY
OF
THE
TELLURIUM
MARKET
.............
1
ABSTRACT
..........................................................................................................................................
4
SAMMANFATTNING
........................................................................................................................
4
1.
INTRODUCTION
...........................................................................................................................
6
2.
BACKGROUND
..............................................................................................................................
8
2.1
TELLURIUM
.................................................................................................................................................
8
2.2
TELLURIUM
SUPPLY
...................................................................................................................................
9
2.3
TELLURIUM
DEMAND
..............................................................................................................................
11
2.4
THE
TELLURIUM
MARKETPLACE
...........................................................................................................
12
2.5
THE
TELLURIUM
MARKET
TODAY
..........................................................................................................
13
2.6
MOLYBDENUM
-
A
NOT-SO
MINOR
METAL
...........................................................................................
14
2.7
CRITICAL
MINOR
METALS
.......................................................................................................................
15
2.8
PREVIOUS
STUDIES
OF
MINOR
METAL
MARKETS
................................................................................
15
3.
METHOD:
DETERMINING
THE
PRICE
MECHANISMS
OF
TELLURIUM
AND
MOLYBDENUM
...............................................................................................................................
17
3.1
SVAR
AND
IMPULSE
RESPONSE
FUNCTIONS
.......................................................................................
17
3.2
QUANTITATIVE
ANALYSIS
.......................................................................................................................
18
4.
DATA
AND
RESULTS
................................................................................................................
22
4.1
SPOT
PRICES
AND
RETURNS
...................................................................................................................
22
4.2
QUANTITATIVE
ANALYSIS
FINDINGS
.....................................................................................................
24
4.3
INCORPORATING
APPROPRIATE
ACTORS
AND
FACTORS
INTO
THE
SVAR
MODEL
.......................
28
4.3.1
The
Yu
et
al
(2012)
model
on
applied
on
tellurium
.........................................................
28
4.3.2
A
market-
specific
tellurium
model
.........................................................................................
32
4.3.3
A
market-specific
molybdenum
model
..................................................................................
36
4.4
OTHER
FINDINGS
FROM
THE
QUANTITATIVE
ANALYSIS
....................................................................
40
5.
CONCLUSIONS
............................................................................................................................
44
REFERENCES
...................................................................................................................................
46
APPENDIX
........................................................................................................................................
50
LIST
OF
ABBREVIATIONS
................................................................................................................................
50
VAR
AND
SVAR
FUNCTION
DERIVATION
...................................................................................................
51
QUANTITATIVE
ANALYSIS
CODING
EXAMPLE
.............................................................................................
53
COMPLETE
STRUCTURAL
INNOVATION
GRAPHS
........................................................................................
54
F. Sderqvist
1. Introduction
As photovoltaic (PV) technologies recently reached grid parity without government subsidies in several places and thus becoming a cheaper source of power compared to buying electricity from the power grid1, demand for critical materials in PV technologies is expected to increase. One of these critical materials is tellurium (Te), a minor metal2 and one of the rarest metals in the Earths crust. Until recently, Te has mainly been used as a machinability- increasing alloying agent in steel manufacturing. The metals semi-conducting properties when bound with cadmium to produce Cadmium Telluride (CdTe) have proven excellent at converting solar radiation into electricity in CdTe PV solar cells. CdTe PV is, as of February 2013, the most efficient technology to harness the power of the sun with regards to costs per watt produced ($/Wp) and conversion efficiency; however, long term CdTe growth may be hemmed by the limited supply of Te and its relative rarity. Despite demand looking positive in the long run, the spot market price for Te tells a conflicting story. Prices have rocketed and fallen in recent years, and thus volatility is very high. To compare the highs and lows; in June 2004 99.99% pure Te cost $31 per kg on the open market, seven years later in June 2011 it cost $430 per kg, and in June 2012 the spot price was only $145 per kg. Like most minor metals, Te is not listed on any commodities bourse, and there exists little reporting of traded quantities. This makes business and long-term investment difficult for actors on the market and could threaten future development of CdTe PV production. At a UK House of Commons Science and Technology Committee (2011)- hearing, it was suggested that critical metal market supply-information, such as Te supply, should be improved, and measures to limit speculative buying should be considered in order to remedy volatility in minor metal markets. This thesis is an attempt to determine what causes volatility in the Te metal market. The two main research questions are: which factors, actors, and market institutions have the biggest impact on Te prices, and what does this tell us about the overall trading conditions on the market? The results and methodology could lend conclusions valid to other industry-critical, opaquely traded minor metals, and add to the discussion as to what can be done to reduce volatility in these markets. This thesis also contributes to the scientific literature concerning Te supply limitations to CdTe PV, which to my knowledge has not focused on the threat to the future supply of Te that high price volatility may pose. In order to determine what makes the Te price fluctuate, a SVAR-model with impulse response functions is estimated using the same aggregated macroeconomic variables which Yu et al (2012) used to attempt to determine price fluctuations in the photovoltaic silicon feedstock (PVSF) spot market. PVSF is a highly price volatile, critical material in a rival PV solar cell technology. A 1 REneweconomy article UBS: Boom in unsubsidised solar PV flags energy revolution: http://reneweconomy.com.au/2013/ubs-boom-in-unsubsidised- solar-pv-flags-energy-revolution-60218 (accessed May 21 2013). 2 A metal included in the Minor Metal Trade Association: http://www.mmta.co.uk/history-and-change (accessed May 21 2013).
F. Sderqvist
quantitative analysis is then applied to a set of articles published in an industry newspaper, the Metal Bulletin, in order to better select variables that are more market-specific. In order to benchmark and better relate the Te results, the same method is applied to molybdenum (Mo), which is a minor metal with similar characteristics and applications as Te. The selection of Mo is mainly motivated by its introduction to the London Metal Exchange (LME) in 2010; a market regime transition that introduced futures contracts, and transparent pricing and quantitative reporting mechanisms. My findings indicate that market-specific actors, factors and institutions amply describe price fluctuations in both the Te and Mo markets, whereas the aggregate macroeconomic variables presented by Yu et al (2012) do not explain price fluctuations well. The quantitative analysis suggests that there are few variables to choose from in the Te market (mainly market specific stock companies). These variables explain price fluctuations quite well, but are not very transparent. On the Mo market there are plenty of proxies of supply, indices, and futures prices that amply explain variation, whilst exhibiting steady information flows of transparent price and quantity reports. From this I advise that measures are taken in the Te market to introduce some of the institutions that help reduce volatility on the Mo market. I deem that the most critical measure would be to improve quantitative transparency in the market, which could be done within the data-sharing regime of the REACH framework. In the second chapter, a background to Te, its supply, demand, marketplace, and market today is given, along with a brief introduction to the Mo market, a definition of minor metals, and a summary of older studies regarding minor metal market information, efficiencies, deficiencies and transparency. In the third chapter, the SVAR model, as presented by Yu et al (2012) is introduced, along with a description of my quantitative analysis. In the fourth chapter, spot prices and returns of Te and Mo are selected. Results from the quantitative analysis are then presented, from which variable selection is made, followed by SVAR and impulse response function results from the Yu et al, Te-market specific and Mo- market specific SVAR models. Finally, other findings from the quantitative analysis are presented. In the last chapter I discuss my conclusions and policy recommendations.
F. Sderqvist
2.
Background
2.1
Tellurium
Te
is
an
element
in
the
same
family
as
oxygen,
sulphur,
selenium
and
polonium.
Its
abundance
on
Earth,
as
displayed
in
Figure
1,
shows
that
it
is
one
of
the
nine
rarest
metals,
where
seven
of
these
are
considered
precious
(Green
2010).
Te
has
semi
conducting
properties,
meaning
it
has
the
electrical
properties
of
both
a
conducting
metal
and
an
insulator
(Nussbaum
1962).
Te
supply
has
traditionally
been
a
by-product
of
copper,
lead,
and
zinc
processing,
but
can
also
be
extracted
from
gold
processing
(Green
2009,
New
Boliden
2011)
and
is
mined
as
a
primary
metal
on
two
locations
in
China,
and
one
in
Mexico
(USGS,
2013a).
Figure 1 Shows that Te (inside the yellow Rarest metals-cloud) is one of the 9 rarest metals in the Earths crust. Its abundance is similar to that of gold (Au) and platinum (Pt). Source: USGS 2002.
In recent years, an increase in demand for Te has taken place due to a change in the primary industrial usages of the metal. The Selenium Tellurium Development Association (STDA), whose members include most of the worlds major producers of Te, estimates that global distribution by consumption is 40% in solar cells, 30% in thermoelectric and photoelectric copying devices, 15% in metallurgy as an alloying metal, 5% in rubber formulation as a vulcanisation- and acceleration in rubber compounding processes, and 10% in other applications such as in blasting caps and ceramic- and glass pigments (STDA, 2012, USGS 2012a). The 40% final consumption in photovoltaic cells is due to a recent demand surge that started around the year 2000, when production of CdTe thin PV solar panels increased as a result of technological advancements and government subsidies of PV (Candelise et al, 2011).
F. Sderqvist
F. Sderqvist
10
including Te which could be extracted when recycling spent CdTe PV units. The study concludes that future Te supply available for CdTe PV production is expected to be slightly lower than in previous studies. These global flows and feedback loops may in the end influence both supply and demand. Figure 2 illustrates how loops of Te supply are determinant for the production of CdTe PV.
Figure 2 The CdTe casual loop diagram, which highlights areas where production costs of producing CdTe PV can be reduced. Source: Houari et al (2013).
Figure 3, the dynamic model, visualises where future sources of Te may come from, and where it may end up.
Figure 3 The system dynamics model where annual Te production plays a big role. Source: Houari et al (2013).
A common problem in these studies is that they fail to include the estimated 41 tonne yearly output from Kankbergsgruvan in Vsterbotten (Boliden 2011) extracted from gold a method which until recently has faultily been deemed unprofitable for Te-prices under $800/kg (Green 2009). Another, more recent threat to future supplies are new, more efficient copper processing techniques, which are not able to extract Te from the anode slimes, and are expected to decrease world Te output as the use of these techniques increase in application (Oakdene Hollins, 2012).
F. Sderqvist
11
Figure 4 Illustration of composition of a CdTe thin film solar cell. The thickness of the Active CdTe is an area believed possible to make thinner, which would decrease future demand for Te. Source: Speirs et al (2011).
Speirs et al (2011) continues to conclude that CdTe demand for Te in 2030 ranges from 480 to 1800 tonnes per year, which exceeds current supply of Te, including Te usages for in other applications. This is an indication of future
F. Sderqvist
12
supply shortages, which will ultimately lead to higher prices. The previously mentioned papers on the possible limitations on CdTe PV posed by supply shortages make some estimates to a maximum price where power generation would still be profitable, such as Candelise et al (2011), who estimate a maximum spot price of $700/kg of 99.99% Te, and Green (2009) at $800/kg. Woodhouse et al (2012) estimate that at current prices, production in 2020 will be constrained at 10 GW of annual production, which may only be remedied with higher prices that make future mining projects more profitable. Thus, Te availability ought not to constrict future production of CdTe PV as long as costs for Te do not exceed a certain threshold, and the active CdTe layers in the panels continue to decrease. This thesis attempts to fill a gap in the scientific literature, namely to provide a more robust study of how price mechanisms can affect future Te price scenarios, which has been requested in most of the key literature used in this thesis (Candelise et al 2011, 2012, Green 2009, 2010, and Speirs et al 2011).
Te is traded through long-term supply contracts and individual trades between large consumers and suppliers. Potential buyers and sellers can list proposed prices on specialist websites, which are then matched. Price quotes usually represent expert estimates of representative prices in trades being executed on a particular day, and not actual traded volumes and prices (Oakdene Hollins 2012). My anonymous source (2013) with good insight in the market adds minor metal conferences and companies existing costumer networks as possible forums to meet potential customers. These marketplaces are thus thoroughly opaque to outsiders. The only open marketplace I have found is the Chinese trading website Alibaba, where sellers can post advertisements to sell various qualities and quantities of Te.4 Te prices are posted on several trading and market news sites, including the Metal Bulletin, a UK-based paper that reports on global non-ferrous metals and steel markets (Metal Bulletin 2013a). As tellurium is not traded on any bourse, prices are estimated with the aid of different metal warehouses. Metal Bulletin, which lists many different spot prices of metals and commodities, has done this for many years. The goal is to discover at what level market participants have concluded business, made offers or received bids over a certain time period; usually the period between the last price-listing in the paper. After interaction with market actors, Metal Bulletin confirm the transaction with both sides, weigh the price and quantity to other transactions during the time period, and finally post a price listing consisting of a low and high price. They reserve the right to remove any data they consider outliers or discount prices they consider questionable. Metal Bulletin stress that they attempt to engage (and encourage engagement) with all sellers and buyers on the market, irrespective of size, are 4 This market can be accessed by searching for Tellurium on www.alibaba.com or via the link: http://www.alibaba.com/trade/search?fsb=y&IndexArea=product_en&CatId=& SearchText=tellurium.
F. Sderqvist
13
impartial and independent, and do not have any vested commercial interests in pricing of their listed metals. The smallest traded lots taken into consideration when determining the price of Te is 250kg, which recently changed from 500kg (Metal Bulletin 2013b). Figure 5 illustrates how volatile the spot price of Te is, which is a common trait for many minor metals (Candelise et al 2012).
Figure 5 Te average weekly price from February 6 2006 to February 28 2013. Note: There are no price listings for June 12 and 26, as well as October 2 2009. Source: FOB USA Warehouse (February 4 2006 to June 22 2012) and Metal Bulletin (June 29 2012 to February 22 2013).
In a volatile spot market based on estimates of long-term contracts, there may be incentives for actors to ride bubbles for short-term profits (Harrison et al 1978, Biasis et al 1998). For example, in June 2011 the price of Te peaked at $430/kg, up from $165/kg in 2009. After the 2011-peak, spot prices declined steadily for a year and are stabilised at levels just above $100/kg. This is indicative that the two-year 160% increase in price bears the markings of a speculative bubble. A similar phenomenon can be observed for the years 2006 to 2008, when prices more than doubled and then dropped to half its peak value. It has been suggested that these bubbles were initiated by speculative buying of Te under the pretext that the limited supply of the metal would be insufficient to meet future demand (USGS, 2013b). This lead to a hoarding of the material in warehouses, bought at inflated prices. Once the market discovered this, the price rapidly fell, and prices are still depressed, as the stocked Te bought during the bubble has yet been depleted (Oakdene Hollins, 2012). The recent change in minimum reported quantities in the Metal Bulletin from 500kg to 250kg might further be interpreted as an indicator that volumes on the market are currently so low, that making statistical samples of market interactions are difficult at these volumes. Recent statements by major actors on the Te market predict that 2013 prices will remain in the $100-150/kg range, stressing the market would benefit from
F. Sderqvist
14
reduced volatility, or else suppliers would find it hard to finance future mining projects of the metal.5 The bubble may be the result of speculative trading on an opaque market that lacks transparent reporting over whom trades what to where, which has resulted in high volatility. In a conference paper, Green (2010) compares Te price fluctuations to those experienced by photovoltaic silicon feedstock (PVSF), which is a material whose price has recently been studied by Yu et al (2011). This observation is discussed further in the method chapter. In order to compare how an opaquely traded minor metal may differ from a transparently traded minor metal, I make an assessment of the market for molybdenum (Mo), which is traded under a more transparent market regime, and is listed on the London Metal Exchange (LME).
F. Sderqvist
15
Mo spot prices are reported using the same sampling procedure as Te (Metal Bulletin, 2013). Recently, an official cash price was also made available via the LME, which differs slightly in sampling procedure, but will not be used in this thesis due to the limited time span of the data. The main difference between the two metals is there exists a futures market for Mo via the London Metal Exchange (LME, 2013), and thus the spot prices can be seen as a reflection of long-term contracts traded transparently on a free market. Although only 6 702 tonnes of Mo had been traded on the bourse between its opening and March 2012, which amounts to approximately 1 % of total estimated traded volumes (Oakdene Hollins, 2012), one can argue that the mere existence of a regulated futures market will reduce volatility (Slade, 1988).
Apart from being considered minor metals, Mo and Te have both been assessed for their criticality by the European Commission (2010). To qualify as a critical material, a raw material must face high risks with regard to access to it, i.e. high supply risks or high environmental risks, and be of high economic importance the likelihood that impediments to access occur is relatively high and impacts for the whole EU economy would be relatively significant. Many of the materials considered in the report are minor metals. Although this assessment from 2010 did not qualify Mo or Te as critical materials, the 2011 the Commissions Joint Research Centre (JRC, 2011) added Te to the list due to it being a critical material in strategic energy technologies. In January 2013 the US Federal Energy Department (2013) followed suit by adding Te to a research hub of critical materials known as the Critical Materials Institute (CMI). The hub mainly focuses on research that reduces supply risks to the metal, which includes making extraction techniques more efficient and reducing the usage in production and manufacturing.
F. Sderqvist
16
cost of increased market volatility. Apart from profits, the exchange system has a significant advantage due to its pricing transparency, which means that the transaction price is always true and uniform to all customers. Well functioning institutional rules, such as contract enforcement, where breaches may lead to (a very public) expulsion from the exchange, is another reason why a system shift took place. Slades description of a period of transition between two systems of price setting captures the resistance many had (and still have) to future markets; namely that they are inherently risky and bubble-inducing. More recent studies have disproved this, and attribute this superstition to a lack of understanding of how transparent futures market actually work (Irwin et al, 2009). Hallwood (1988) argues that an unregulated exchange market is not as efficient as a regulated one. At the time, copper contracts were traded on the LME, but industry preference meant contracts were often negotiated using LME futures as a benchmark. These prices are by definition less efficient than the LME- negotiated contracts, and caused prices that fluctuated more than actual cyclical demand. According to this argument, the low-volume Mo market of today will become less volatile if higher volumes are traded over the LME. Eggert (1991) looked at how prices of more commonly traded metals and commodities fluctuate more compared to consumption of the metal, thus pointing out inefficiencies in the market. The debate focused mainly on whether or not the market could be deemed efficient. The final say in the debate was the disproval of efficiency by Sephton and Cochrane (1990). Although debating whether or not a market could be deemed efficient was a frequently debated topic at the time, proving or disproving a specific markets efficiency may be considered an antiquated discussion today. However, these discussions revolved around a proposed paradigm shift in pricing systems, and need to be read from that perspective. This thesis does not focus on the nature of the Efficient Market Hypothesis per se, but acknowledges that more information and transparency both lead to a more efficient market and reduced price volatility. I conclude that the results from these early studies carry little validity in todays markets where global news have a much more instantaneous effect of markets, nor does their topic of discussion add much to current academic debate. In the following chapter a method is selected to determine how markets react to availability of information, which may differ depending on the efficiency of the market.
F. Sderqvist
17
! ! = ! +
! !!
! !!! + !
where ! is a 1-vector of the variables that are to be studied; is a constant 1-vector; ! is the time-invariant - matrix where the main diagonal terms are set to 1. ! is the 1 error term, which satisfies the assumptions E ! = 0, or every error term has mean zero; E ! ! = , or the contemporaneous matrix of error terms is (a positive-semidefinite matrix); and E ! !!! = 0 , meaning for every non-zero , there is no correlation across time, or more specifically, no serial correlation in individual terms across time. A SVAR model imposes restrictions on the response of underlying Vector Autoregressive (VAR)-variables, meaning one can include assumed inter- variable causality, from which impulse response functions can be calculated using OLS estimation. More information on derivation and assumptions of the VAR and SVAR models are found in the Appendix. ! For ! = ! ! ! , we can incorporates the causality assumptions for each model ! into the ! ! -matrix. The optimal number of lags (p) is then determined using the Akaike Information Criterion (AIC). In the Yu et al model, ! = (! , ! , ! , ! , ! , ! ), where the lagged variables ! represents euro-to-dollar exchange rate, ! and ! the price of natural gas and oil, ! real economic activity, and ! and ! represents contract- and spot prices of PVSF, all expressed in logs. I use the same assumptions as Yu, Song, and Bao, which can be read in Section 3.1.2 in their article. These assumptions are translated into the equation below, where the diagonal !! = !! = = !! = 1 by construction.
F. Sderqvist
18
0 0 0 0 !!
!"# ! !"# ! !"# !
!"! ! !" !
0 0 0 !! !"
This thesis attempts to develop this model further by placing greater emphasis on variable selection. The above Yu et al (2012)- variables are selected to best capture macroeconomic impacts on the market. As PVSF is a critical component of a rival technology, the Yu et al- variables and restrictions should work just as well for the Te market. However, I believe market specific shocks may better capture fluctuations on a specific market via market spillover effects (Morales, 2008). To do this, inter-variable causality in the SVAR-model has to be explicitly ! stated, and then translated into the (! ! )-causality assumption matrix as is done above. The error term matrix () is estimated separately and indicates if the error term assumptions are fulfilled. 7 This thesis only considers short-term causality shocks to the Te and Mo prices, which means that Te and Mo spot price will not have an effect on other market variables in the short run.8 From the SVAR model, structural impulse response functions and Cholesky accumulated response functions are then calculated. The structural impulse response function gives an indication of how a response variable reacts to a one standard deviation shock from an impulse variable. The Cholesky function is a measure of how an accumulated one standard deviation shock to an impulse variable affects the mean square error of a response variable, expressed as a fraction of the response variables total mean square error. This gives a measure of how much a shock of the impulse variable affects a response variables deviation from its mean, or more explicitly: its volatility. This thesis is a continuation of the discussion called for by Yu et al regarding variable selection, as they did not achieve significant results in their paper. In some sense, it is also an attempt to validate the appropriateness of using a SVAR- model to assess how different variables impact critical minor materials. Apart from applying the Yu et al macroeconomic variables to the Te spot price, this thesis investigates which variables more specific to the Te and Mo markets are appropriate, which is established using quantitative analysis methodology described in the next section.
Selecting reliable market-specific variables presents some difficulties to a layman not familiar with a market. In order to determine which factors and actors may be deemed most important in a market, a content analysis is carried 7 All models and estimations are done using STATA 12. The causality ! assumptions of the ! ! -matrix is input as the A-matrix, and the standard assumptions for the -matrix is input as the B-matrix. 8 Estimating long-run impulse response functions could capture these causalities. I have chosen not to include such estimations in this thesis.
F. Sderqvist
19
out on a set of articles published in the Metal Bulletin. The coding scheme is designed with reliability, validity, accuracy, and precision in mind, using method established in Neuendorf (2002). The methodological inspiration partly comes from Tetlock (2007), which uses a simple quantitative analysis on a popular Wall Street Journal column to study how the media and stock prices interact, and Tetlock et al (2008), that looks at how linguistic qualities in firm-specific news reporting may predict a firms accounting earnings and stock returns; or more specifically, how the market has a tendency to underreact to the usage of words that may reveal negative sentiments on returns and earnings. My approach is different to these studies, and focuses more on determining if and how a news innovation is expected to cause a price change, and who is the catalyst of the event. The selection of SVAR-model variables takes frequency of actor- and factor- mentions, market mechanisms, and other insights from the quantitative analysis into account. Actors and factors can either have an effect on supply, such as stocks of mining companies, or demand, such as stocks of consumers of the metals. If possible, effects of actors and factors are quantified using their respective stock prices, and relevant factor indices. The articles are collected from the Metal Bulletin news archive by searching for the terms tellurium MB NON-FERROUS PRICE CHANGE and molybdenum MB NON-FERROUS PRICE CHANGE. The MB NON-FERROUS-term excludes so- called price-update articles, which are not proper news articles, but listings of daily price changes. All articles from February 20 2010 until February 28 2013 are pasted into word documents and imported into excel-spread sheets where the coding scheme is inserted at the top of each sheet. The decoding of the articles is done in six steps. The first step determines whether the news article is price-pertinent; or can the described event in the article theoretically change the price of the metal? Examples of non-pertinent articles are those that do not directly deal with the supply or demand of Te or Mo, such as those dealing with Te as an impurity in steel scrap. Examples of pertinent topics include business reports of increased production, changes in market conditions, opening of new mines, or reporting on changes in trade barriers. Articles may also be deemed pertinent if the content is deemed relevant to the research question of my thesis. If the article is deemed pertinent, the next step is to determine the general topic of the article, which is best described as a one-sentence description of the articles effect on a metal price. This is done with the purpose of improving referencing ability, so the description does not need to be consistent with how previous topics are coded. Next the coding aims to determine whom the main catalyst of the news event is. It is possible that more than one actor is deemed the catalyst, or that there may be no specific catalyst at all. An almost identical topic or catalyst, which has already been covered in a previous Metal Bulletin article is still coded as pertinent, as reporting intensity may be indicative of perceived event importance.
F. Sderqvist
20
Market impact is then assessed, which is done from a supply and demand- perspective. The goal is to assess if the article is describing a perceived increase or decrease in supply or demand. If an article reports increased steel bar prices which contains Te, this is assessed as a sign of positive demand. When the article describes a supply shortage, or tight supply, this is interpreted as a sign of positive demand, as predicted market supply is surpassed by expected demand. The exception to this is when the article describes a true supply shock event, such as natural disasters. The final coding attempts to anticipate how a positive or negative effect on supply and demand can be translated into a price change. Positive demand means expected higher prices, and thus Possible price impact is coded +. Positive supply means expected lower prices, and the article would then be coded as . The opposite is applied for negative supply and demand. Articles covering prices stabilising or adjusting are seen as price changes too. Previous articles then need to be considered; if the price is adjusting after a positive rally, demand is coded as , and the article is coded as +if it concerns a stabilisation after a price drop. The above principles are also applied to the Mo Metal Bulletin articles. As the market for Mo is much larger, and the level of market maturity can be considered higher, some special precautions need to be taken when decoding these articles. Articles covering price changes in products where Mo is a component (such as steel) is not deemed pertinent, unless the article explicitly states that this has in turn affected the Mo price, such as when an article states increased demand for steel. In order to assert the reliability and validity of the quantitative analysis, a random sample of 25 articles for each metal is reread and recoded a few weeks after the initial quantitative analysis. The results of these readings are compared with the results of the original quantitative analysis. If the results differ to a large degree, the quantitative analysis will have to be respecified in order to ascertain replicability and then reapplied to the entire dataset. The robustness of a quantitative analysis can always be questioned for its reliability and replicability. My readings are done with the intent of figuring out what effect a news article may have on a typical market actor, and how this theoretical person would assess the market situation. The decoding can thus only be considered a best guess of what a typical trader thinks, and is thus biased by my personal opinions of what constitutes a typical market actor. Another limitation of the study is it is only conducted on Metal Bulletin articles. This means that the sample only contains news events deemed most relevant by that particular newspapers journalists and editors. A future study could include a quantitative analysis of other journals, papers and websites. The quantitative analysis is used to legitimise variable selection for the SVAR model. Quantifying which actors are mentioned most may give some numerical support for choosing a particular actor. A catalyst actor selected from the quantitative analysis is referred to as a market proxy, meaning the articles it is
F. Sderqvist
21
mentioned in are pieces of information market actors use to assess the overall picture of the market. This raises a question of causality, as the most mentioned companies may also be reliant on the price of the commodity in question. Frequent mentioning as catalysts in a news article may be seen as indication of perceived market importance, which in turn suggests that the proxys causality on the metal price is significant from an innovation perspective. Selecting an appropriate proxy means that I implicitly make the assumption that a companys stock price (or perceived company value) is a good measure of its profitability. This is a bold assumption, but necessary in order to make quantification possible. The most important element of using this method is that it involves reading and digesting a large sample of market-specific news in chronological order, giving the reader an insight into a market they previously did not have. This overall impression may give qualitative insights that further help in variable selection. Once the main actors, factors, or other quantifiable instances have been established through the content analysis, these are fitted into a SVAR(p)-model, where ! is composed of a time series vector of these variables, along with assumed short term causality assumptions translated into their respective ! - matrix.
F. Sderqvist
22
Here, data covering spot prices and indices from February 1, 2004 to February 28, 2013 are presented. For the quantitative analysis, the shorter timespan of February 20, 2010 to February 28, 2013 is used.
To represent Te spot prices, I have chosen to use a weekly price listing based on Freight On Board (FOB) USA 99.95% Te USD/kg, for which I have available data from February 1, 2004 until to June 22, 2012. After this date I have chosen to use Metal Bulletins Tellurium Metal MB free market minimum 99.9% USD/kg. Metal Bulletin posts a bi-weekly high and low price on Wednesdays and Fridays. I calculate the Friday spot price as the average of the average high and low price of the Wednesday and Friday price. A change in price in the USA FOB-listing is more gradual than the Metal Bulletin-price listing, which is why I have chosen to use this index as much as possible, as it captures small price changes better than the Metal Bulletin listings, while its data is collected in a similar manner as the Metal Bulletin index. The returns of Te are displayed in Figure 6 with its statistical properties in Table 1.
Table
1
indicates
that
volatility,
expressed
as
standard
deviation,
is
quite
high.
The
positive
skewness
shows
a
condensed
distribution
of
negative
returns
and
a
more
scattered
distribution
of
positive
returns,
while
the
relatively
high
kurtosis
indicates
that
the
tails
are
quite
fat,
meaning
returns
are
often
not
distributed
close
to
the
mean.
Te
Returns
Mean
return
0,003954205
St
Dev
0,03561644
Skewness
1,406308088
Kurtosis
6,051458108
F. Sderqvist
23
Determining which Mo spot price to use requires some thought. There is no official LME spot- or cash price available until June 2010, and these are quoted in monthly average prices per metric tonne. In order to capture the price of the metal in earlier time periods, a couple of price indices need to be considered: Molybdenum Fe65 (FeMo65 or FeMo) Cost, Insurance, in Freight (CIF), North Western Europe (NEW) USD/kg, and Molybdenum Mo3 CIF NWE USD/LB, which have been sampled from Thompson Reuters Datastream. The prices of these indices are displayed in Figure 7, including the official LME cash price for Mo, which is normally expressed in USD/metric tonne, but is here converted to USD/kg.
Figure 7: Price development of the three Mo metal cash- and spot prices that are considered to represent Mo spot price.
Both indices are Mo-products, but may be used in slightly different applications (Oakdene Hollins, 2012). A comparison of the returns of these two commodities in Figure 8 shows that the returns follow a similar pattern, however Mo3 seems more volatile than FeMo65, which is apparent from the statistical aspects of their returns, presented in Table 2. As both metals display similar means and standard deviations, the skewness and kurtosis shows that the Mo3-price has fatter tails, and is thus more volatile. On the consumption side, Molybdenum oxide grades made up approximately 29% of the total world-Mo market in 2011, whereas Ferro-molybdenum products made up approximately 14% (USGS, 2012b). From a technical perspective, Fe65 contains approximately 60-65% Mo, which is similar to the 57,4-63% grade of concentrate used by the LME (USGS, 2012b, LME, 2012). From this information I have chosen to use the returns of FeMo65, as this Mo-product is most similar to the Mo product traded on the LME.
F. Sderqvist
24
Figure 8: Returns of FeMo and Mo3 from February 2004 to February 2013.
FeMo65 MoO3
Mean
Std Dev
Skewness
Kurtosis
As
the
institutions
associated
with
the
Mo
market
changed
drastically
with
the
LME
introduction
in
February
2010,
comparing
how
market
volatility
differs
between
these
two
time
periods
is
important.
Table
3
shows
that
both
return
means
and
standard
deviations
are
lower
after
the
LME
introduction.
The
negative
skewness
after
the
introduction
indicates
that
positive
returns
are
more
likely,
and
the
decreased
kurtosis
indicates
that
the
tails
are
less
fat,
and
thus
the
expected
returns
are
much
closer
to
the
mean
than
before.
Comparing
return
data
that
excludes
the
financial
crisis
of
2008
still
indicates
that
the
market
was
less
volatile
before
the
LME
introduction,
lending
support
to
the
claim
that
an
LME
introduction
reduces
market
volatility.
FeMo65
Pre-LME
Pre-Crisis
LME
Pre-LME
Pre-Crisis
LME
Mean
0,0042
0,0072
-0,0015
0,0044
0,0073
-0,0016
Std
Dev
0,0683
0,0652
0,0231
0,0696
0,0640
0,0299
Skewness
2,0119
2,0124
-0,2852
2,6530
5,0656
-2,1049
Kurtosis
19,2141
25,4012
4,5714
34,4931
50,3788
9,6714
MoO3
Table 3: Comparison of statistical aspects of the two Mo metals weekly returns, pre- financial crisis (February 26 2004 to October 10 2008), and pre- (February 26 2005 to February 19 2010) and post LME launch (February 19 2010 to February 22 2013).
The time period selection for the quantitative analysis of Te and Mo was partially based on the fact that there are few articles that deal directly with Te until shortly before the pre-2011 bubble. Also, the period before February 20, 2010,
F. Sderqvist
25
Mo had not yet been introduced to the LME, and is thus not of interest to this study, as I only wish to study the transparent Mo market. Extending the time period would shed little light on selecting variables for the Te market, yet would require much time downloading and decoding Mo articles. In order to ascertain the reliability and validity of my quantitative analysis, a random selection of 25 Te and 25 Mo news articles were reread and recoded on May 24, 2013 with almost identical results to the original decoding, asserting the replicability of my method. The Te- related articles that exist before February 2010 deal mainly with Te- consumption before the PV market increased demand in the late 00s. One such article is Who needs Tellurium?9, that deals with the smallness, irrelevance and price opacity of the market. For the selected time period there exists a total of 119 articles, where 81 of them were deemed pertinent; these are displayed over time in Figure 9. Out of these 81 pertinent articles, 61 were deemed to be price innovations that alter either the supply or demand of the market.
Figure 9: Total number and number of pertinent Te articles from February 1 2010 to February 28 2013.
The main catalysts to these events are captured in Table 4, which shows that CdTe PV solar cell producer and market-leader First Solar Inc. is mentioned most in price innovation articles. When these are further broken down into demand- and supply shocks, we see that First Solar dominates the demand shocks with regards to number of pertinent articles. Supply shocks seem to be dominated by mining companies, who add or subtract supply to the market. The second most mentioned company is 5N Plus Inc., which is exclusively mentioned in articles that can be read as demand innovations. Considering that 5N Plus refines Te into CdTe10, this suggests that the company is a better indicator of the state of supply 9 Metal Bulletin, July 10 2000. 10 5N Plus corporate website: http://www.5nplus.com/index.php/en/selsComposes.html (accessed on May 3, 2013).
F. Sderqvist
26
in
the
market.
Vital,
which
is
mentioned
four
times,
is
another
refiner
of
Te
that
could
be
considered
a
supply
proxy.
This
will
be
discussed
more
in
section
4.3.2.
Catalysts
FIRST
SOLAR
BOLIDEN
5N
PLUS
VITAL
MCP
NYRSTAR
II-VI
RETORTE
8
5
5
4
3
3
2
2
Demand
shocks
FIRST
SOLAR
8
5N
PLUS
5
MCP
2
Supply
shocks
BOLIDEN
5
VITAL
3
NYRSTAR
RETORTE
3
2
Table 4: Number of pertinent Te articles where the actor or factor was deemed to be the catalyst. Only companies with more than one pertinent, price-changing article are presented.
In summary, the Te market goes from low levels of reporting activity in 2010, to a much higher levels in 2011-2012. 2013 has so far offered very little reporting, which most likely indicates low activity on the market rather than a loss of journalistic interest. For the Mo market, a total of 1022 articles were studies, where 581 were deemed pertinent. Their distribution over time is displayed in Figure 10.
Figure 10: Total number and number of pertinent Mo articles from February 1 2010 to February 28 2013.
Out of these, 561 were deemed to be price innovations, out of which 328 were deemed to have an identifiable catalyst. In Table 5, actors and factors with more than three articles are split up according to catalysts for demand- or supply shocks.
F. Sderqvist
27
24
17
15
12
10
9
6
6
5
5
4
4
3
3
3
3
3
3
3
41
32
24
17
16
13
12
10
9
6
6
5
5
5
4
3
3
3
3
3
3
3
3
3
3
Table 5: Number of pertinent Mo articles where the actor or factor was deemed to be the catalyst. Only companies with more than two pertinent, price-changing articles are presented in this table
The most common catalyst is the MACRO variable, which is most common in form of demand shocks, and mainly concerns exogenous international price shocks. The second most mentioned is SEASON, which may also be considered a demand shock. It is a variant of the MACRO catalyst, but is used to decode articles covering price changes when production is expected to be low, such as summer vacation periods in the north-western hemisphere, or Chinese holidays like the Chinese New Year and the semi-annual Golden Week. Out of all the 288 demand shocks, 155 were deemed to affect demand negatively and 133 positively. The supply shock side is dominated by mining companies, and usually involves reporting of possible and real supply changes from these actors. Examples of supply shocks are news reports on mining projects gaining key local government support, strikes at mines or production facilities, or possible mining projects being cancelled. Out of 273 supply shocks 94 were deemed to affect supply negatively and 179 positively. A flaw in my coding scheme is that it only captures a catalyst of an event; it does not say much about the day-to-day structure of the market. Although mainly macro- and seasonal catalysts seem to affect demand, this tells little of who is demanding Mo. From reading the articles, it is clear that buyers are agents for steel mills around the world, which are captured as a catalyst in three instances, but are in reality major price setting players in the market. Another flaw with my methodology is that it fails to capture the intensity of a specific news article. A
F. Sderqvist
28
single article about a specific innovation may have had a large impact on the market, but cannot be captured properly by my quantitative analysis. As there may be several articles reporting on the same event, the quantitative analysis proves to be a rather blunt instrument in determining which actors or factors to pick. A typical example of this in the Mo market are supply shocks caused by mining companies reporting on new production activities, which are reported on several times as the project progresses from prospecting and feasibility studies, to becoming a fully functioning and producing mine. However, several reports on a single, drawn out events like mining projects may be an indication on the importance journalists place on a particular project, which in turn could affect market sentiments. Sometimes the catalyst is coded as N/A due to there being uncertainty over whom a market buyer is. I assume these are mainly consumers of Mo, such as steel mills, or price speculators, such as hedge funds. During the readings I noticed that China and Chinese demand is often mentioned in the articles. Having China as a catalyst would be an awkward variable, but in order to get an impression of Chinese frequency in the articles, I searched all the articles for the term China, which was mentioned at least once in 311 articles, out of which 188 were deemed pertinent. China appeared over 902 times in all the articles, and 485 times in articles deemed pertinent.
4.3
Incorporating
appropriate
actors
and
factors
into
the
SVAR
model
My
accumulated
qualitative
knowledge
of
both
markets,
along
with
the
numerical
indications
given
by
the
quantitative
analysis,
are
now
to
be
quantified
and
inserted
into
SVAR
models.
4.3.1
The
Yu
et
al
(2012)
model
on
applied
on
tellurium
First,
a
SVAR
model
for
Te
is
run
using
the
same
aggregate
structural
indicators
as
Yu,
Song,
and
Bao
(2012)
to
explain
price
fluctuations.
The
FOB
USA
99.95%
Te
USD/kg
price
is
used
to
represent
the
Te
spot
price.
These
and
all
the
below
indicators
expressed
in
USD
are
deflated
using
US
CPI
collected
from
the
US
Bureau
of
Labor
Statistics.
I
assume
US
CPI
is
used
throughout
the
Yu,
Song,
and
Bao-
article,
as
this
is
not
explicitly
stated.
All
data
are
collected
on
a
monthly
basis
and
prices
are
adjusted
to
February
2004-levels.
This
means
I
use
the
last
available
price
listing
of
each
indicator
each
month,
which
for
Te-listings
means
the
last
Friday
of
each
month.
The
explaining
variables
in
the
SVAR
model
are:
a
CPI
adjusted
euro-to-dollar
exchange
rate;
CPI
adjusted
WTI
natural
gas
prices;
CPI
adjusted
Henry
Hub
crude
oil
prices;
Industrial
Price
Index
(IPI),
which
is
the
US
IPI,
sourced
from
the
Board
of
Governors
of
the
Federal
Reserve
System,
the
Euro-area
IPI
sourced
from
Eurostat,
and
Japanese
IPI,
sourced
from
the
Japanese
Ministry
of
Economy,
Trade
and
Industry
and
Eurostat,
weighted
by
their
regional
quarterly
GDP
from
F. Sderqvist
29
Eurostat.11 As there is no data on Te contract pricing, this is excluded from the model. All SVAR models use monthly price listings and are displayed in Figure 11.
Figure 11: The LOG-expression of CPI adjusted variables as selected used by Yu et al. IPI LOG x 10 has been included to better visualise the industrial production index and is not used in the SVAR model.
Using
the
Yu
et
al-
variables
on
a
structural
response
SVAR
model
for
the
Te
market
presented
some
difficulties.
First,
as
my
replication
does
not
have
the
same
number
of
variables
as
Yu,
Song
and
Bao,
so
a
new
optimal
set
of
lags
is
recalculated
using
AIC,
which
is
2
for
this
dataset.
Second,
the
model
does
not
achieve
convergence.
Studying
the
error
terms
of
the
-matrix
in
Table
6,
which
should
be
close
to
0,
there
is
reason
to
believe
assumption
3
of
the
SVAR
model
is
not
fulfilled
for
oil
or
gas
prices,
which
may
indicate
either
cointegration
or
serial
correlation
between
the
variables.
Regressing
the
two
variables,
then
running
an
Augmented
Dick-Fuller
test
for
unit
roots
of
the
residual
error
terms
rejects
the
null
hypothesis
that
they
are
cointegrated,
which
is
also
confirmed
by
a
Johansen
test
for
cointegration.
A
Lagrange
multiplier
test
confirms
that
there
is
indeed
serial
correlation
between
lagged
variables,
and
thus
a
major
assumption
of
the
SVAR
model
is
unfulfilled.
I
suspect
that
Yu
et
al.s
data
also
had
this
problem
with
serial
correlation,
which
would
most
likely
affect
their
results.
EURUSDLOG
EURUSDLOG
GASLOG
OILLOG
IPILOG
TELOG
0,01284311
0
0
0
0
3122,4177
0
0
0
126,22352
0
0
0,00475299
0
0,03325936
GASLOG
OILLOG
IPILOG
TELOG
Table 6: The output -matrix from the structural impulse response function, may indicate that Gas and Oil prices are biased estimates, as their expected error term is not close to 0.
11 As there are yet any estimates of first quarter 2013 GDP, I have assumed them to be the same as fourth quarter 2012.
F. Sderqvist
30
Another
problem
I
encountered
when
replicating
the
study
is
I
have
not
been
able
to
recreate
the
two
variables
specific
policy
shocks
or
other
specific
demand
shocks
used
in
their
Cholesky
accumulated
response
function.
It
is
unclear
which
variables
were
used
or
how
the
authors
quantified
different
national
policies
or
industry
specific
shocks.
The
issue
with
serial
correlation
was
dealt
with
by
first
running
the
impulse
response
function
without
gas,
then
without
oil.
No
convergence
error
occurred
either
time,
and
the
error
terms
were
in
both
cases
unbiased.
From
this
information
I
choose
to
drop
oil
as
a
variable
based
on
the
fact
that
it
is
not
normally
used
in
power
generation.
The
issue
of
using
policy-
and
industry
specific
shocks
was
simply
dealt
with
by
excluding
them
from
the
SVAR
model.
Figure
12
displays
the
results
of
the
altered
version
of
the
Yu
et
al
structural
impulse
response
function
model
on
Te
with
error
terms
presented
in
Table
6.
The
rightmost
column
is
of
most
interest,
as
it
displays
how
impulse
variable
functions
may
affect
the
Te
price
over
24
time
periods.
Further,
Figure
13
displays
a
cumulative
response
to
a
one
standard
deviation
structural
innovation.
EURUSDLOG
GASLOG
IPILOG
TELOG
EURUSDLOG
0,01375093
GASLOG
0
0,06825692
IPILOG
TELOG
0 0
0 0
0,0065813 0 0,03663012
Table
7:
The
-matrix
of
the
altered
model
indicates
an
unbiased
impulse
response
function.
Response to structural one S.D. innovation 2 S.E.
Te3, EURUSDLOG, EURUSDLOG
.015 .01 .005 0 .03 .02 .01 0 -.01 0 -.002
10
20
30
step 95% CI
Graphs by irfname, impulse variable, and response variable
structural irf
Figure 12: Responses to structural one S.D. innovation. EURUSDLOG is EUR to USD exchange rate, GASLOG is gas price, IPI is the US, Eurozone, Japan Industrial Price Index, OILLOG are oil prices, and TELOG is the Price of Te. All are expressed as logarithms. The rightmost column captures the effect of an impulse on the Te price.
F. Sderqvist
31
Accumulated response to Cholesky one S.D. innovation 2 S.E.
Te3, EURUSDLOG, EURUSDLOG
1.5 1 .5 0 .2 .1 0 -.1 0 -.05
10
20
30
Figure 13: Cholesky accumulated response to structural one S.D. innovation 2 S.E with the same variables as in Figure 12.
Comparing my own findings with Yu et als I notice that there is but one significant impulse response functions at any given time period. Looking at Figures 11 and 12 in Yu et al, and Figures 12 and 13 above, we can see that the tails of the impulse response functions are quite fat. The only variable that causes a significant effect on Te prices is the Euro to USD exchange rate, which according Yu et al partially captures the effects of the Euro crisis. In my model, the price of Te is affected negatively by an exchange rate shock. The effect is significant, meaning it is non-zero on a 95%-level for the first 10 time periods. Further, the Cholesky accumulated response function in Figure 13 of exchange rate shows a large fraction of the Te mean square errors are explained by exchange rate shocks. I believe that the lack of significance in the above and Yu et als may be the result of omitted variable bias, or simply using the wrong variables. Although my study uses a slightly different time period and a different but in many regards similar spot price, our results are only similar with regards to the lack of significance. The Yu et al selection of variables seems to stem mainly from reasoning around general macroeconomic theory and not from real market observations. I argue that each market has its own, specific pricing mechanisms, and these need to be considered when studying the PVSF and Te markets. The only conclusion I draw from the application of the Yu et al paper on Te is that it shows how little different macroeconomic variables affect the price of a metal. Further, their paper does not shed much light on which policies to pursue one of the purposes of their paper nor what actually explains longer-term fluctuations in the market.
F. Sderqvist
32
4.3.2 A market- specific tellurium model I now run a market specific-model for Te based on the findings from the quantitative analysis. This is done to illustrate that market-specific variables better explain variation than the Yu et al variables. The first variable I select for the model is the Industrial Production Index (IPI). Although I only have one price changing innovation coded as a macroeconomic in the quantitative analysis, it may be important to include some index for worldwide industrial demand as this captures conjectural cycles and shocks. Not including a variable for world demand would be an implicit assumption that the Te market is immune to business cycles, which it most likely is not. To capture aggregate world demand I use an IPI variable slightly different from the Yu et al- model. The IPI-value used by Yu et al is based on US, Eurozone, and Japanese industrial production indices, weighted by each countrys nominal GDP. It omits China, a major actor in the PV industry, and the worlds second economy in GDP terms. For the Te SVAR model I have thus used an IPI which also includes Chinese IPI, sourced from the OECD. From 2006 there are no January values given; this is dealt with by using February IPI for this time period. Adding China also means that GDP- weighting needs to be recalculated, for which I use different nominal GDP data for all the countries as there seems to exist little detailed Chinese GDP-data, except from the International Monetary Fund. They provide the most up-to-date statistics on GDP, including an estimate for 2013. The difference between the two IPIs is illustrated in Figure 14.
Figure 14: The difference in IPI when the index includes (IPINEW, using yearly GDP weights) and excludes (IPI Yu et al, using quarterly GDP weights) China.
The most mentioned actor in the quantitative analysis is First Solar Inc12. First Solar is a world-leading producer of PV, both technologically with regards to generation and cost efficiency, and total solar output measured in megawatts. 12 First Solar website: http://www.firstsolar.com/en/About-First-Solar (accessed on May 3, 2013).
F. Sderqvist
33
Their primary generation technology is CdTe PV. First solar was listed on NASDAQ on November 17 2006; meaning prices from February 28 2004 are not available. These are listed as blanks which does not pose any problems for the SVAR-model. First Solar is my first example of a market proxy. This includes the assumption that First Solar has causality on the Te price, and the Te price only has causality on First Solar in a longer-run perspective. In order to capture supply on the market, I have chosen to include the stock of the Canadian chemical refining company 5N Plus Inc. Other mining companies that produce, or are about to add supply of Te to the market could be used, but Te production usually makes up a small fraction of these businesses, thus making their stock prices poor proxies for Te supply. 5N Plus is a good candidate in this aspect, as it specialises in refining chemicals specific to this market; one of them being production of CdTe.13 My variable includes their stock price from 28 December 2007. Another company I considered as a choice of proxy, mainly due to its frequent mentioning in the Metal Bulletin, is Vital Chemicals. This is not possible as the company is not listed on any bourse or stock exchange. There are other mining companies mentioned as well, such as Boliden AB, but their stock price should be poor indicator, as Te mining makes up a small proportion of their business compared to other minerals. All the time series are treated in a similar manner as in Yu et al. The stock values are price adjusted using the same CPI, which is set to be 1 on February 27, 2004. Each index is then expressed as a 10-based logarithm, as can be seen in Figure 15.
Figure 15: The Te-model variables. IPI LOG x 10 has been included to better visualise the industrial production index and is not used in the SVAR model.
F. Sderqvist
34
The
underlying
assumptions
for
the
Te
model
are:
IPI
is
assumed
not
to
be
affected
by
either
of
the
two
companies,
nor
the
Te
spot
price.
The
profitability,
and
thus
the
stock
of
First
Solar,
is
expected
to
be
affected
by
IPI.
Although
the
long-term
profitability
of
the
company
may
be
threatened
from
very
high
Te
prices,
this
is
not
true
for
the
short
run.
5N
Plus,
who
is
a
major
supplier
to
the
CdTe
PV-industry,
is
expected
to
be
affected
by
IPI,
as
well
as
the
First
Solar
stock,
as
First
Solar
purchases
CdTe
from
5N
Plus.
5N
Plus
is
not
expected
to
be
affected
by
Te
prices
in
the
short
run
for
the
same
reasons
as
First
Solar.
I
expect
the
Te
spot
price
to
be
affected
by
all
the
above
variables;
IPI
should
affect
the
CdTe-market
as
a
whole,
and
thus
Te;
the
First
Solar
stock
acts
as
a
proxy
for
CdTe
industry
demand;
the
5N
Plus
as
a
proxy
for
industry
supply.
!"! !"! ! ! !,! 0 0 0 !"#$ !"#$ ! ! !,! !,! 0 0 !" ! =
!! !! !,! !,! !,! 0 ! ! !" !"#$ !,! !,! !,! !,! !" !"#$ ! !
The
optimal
number
of
lags
for
this
model
is
determined
to
be
2
by
the
AIC.
The
structural
impulse
response-
and
Cholesky
accumulated
response
functions
are
presented
in
Figures
16
and
17.
Response to structural on S.D. innovation 2 S.E.
TeSVAR, FIVENLOG, TELOG
.04 .04
.02
.02
-.02
-.02
-.02 0 10 20 30
-.05 0 10 20 30
step 95% CI
Graphs by irfname, impulse variable, and response variable
structural irf
Figure 16: Te response to structural one S.D. innovation. FIVENLOG is 5N Plus stock, FSLRLOG is the First Solar Inc. stock price, IPILOG is the new Industrial Production Index, including China, and TELOG is the Te price. All variables are expressed as logarithms. The complete structural response- and Cholesky accumulated response diagrams are presented in the appendix.
F. Sderqvist
35
TeSVAR, FSLRLOG, TELOG
.2 .5 0
-.2 0 10 20 30
0 0 10 20 30
Figure 17: Te accumulated response to Cholesky one S.D. innovation. The same variables are used as in Figure 16
A 5N Plus shock affects the Te price positively in the first two time periods on a 95% level, at the 90% in the third period, after which it is zero. The Cholesky response function is not significant at a 90%-level. This is evidence that although the 5N Plus stock may cause ripples in the Te price, it does not affect Te volatility. The stock of First Solar does not directly affect the price of Te, but after five time periods we see a positive increase in price, which continues to rise until period 13. This then ebbs off until period 20, when the response function reaches 0. First Solar has a large, significant impact on the Te spot price, which supports the findings of the quantitative analysis that the profitability of this company has a large effect on Te prices. The five period lag of the effect is most likely due to the sluggish response of Te prices to contract changes associated with decreased output of the company. If First Solar experiences problems, they most likely let their contracts run out without renewing them. This means that high-priced contracts that have yet to run out are still present in warehouses, bringing up the average price. The First Solar contracts are estimated together with lower priced contracts negotiated more recently, which have prices closer to the real market price. The accumulated Cholesky response function supports the lagged variable statement; only after 19(!) periods do the results become significant at a below- 90% level. The stock price then explains 25% of the Te mean square errors. This may be due to the long time period the Te price took to adjust to the reduced earnings of First Solar in 2011-2012. A structural shock from the IPI variable seems to immediately cause a positive response in the Te market. The Te response variable increases at a 90% significance level until period 5 (at which point the response function is at 95% significance level), and reaches 0 at period 10. This may be indicative that the Te market may be affected by short-term reactions in the global conjuncture. Studying the accumulated Cholesky response, we do not see that the mean
F. Sderqvist
36
square errors of Te are affected by a structural innovation shift in IPI, meaning IPI does not increase volatility on the Te market. 4.3.3 A market-specific molybdenum model The quantitative analysis indicates that most of the demand for Mo comes from steel mills. Instead of picking individual companies as proxies for demand in the steel market, as I did in the Te example, the most common steel grade prices containing Mo would be a better measure of aggregate Mo demand. In 2011, approximately 39% of world consumption of Mo was in low alloy steels, 15 % in stainless alloy steels, and 8% in superalloys (USGS, 2012b). A different study, Outlook for Molybdenum 2008 (2008) states that the market is composed of 41% of stainless steel and 29% low alloy steels. This either indicates a shift in market structure from stainless to low-alloy steels, which is highly plausible as the world output dropped in the wake of the financial crisis. It may also be because the reports use slightly different definitions of what constitutes a stainless steel. Out of all the stainless steel grades, most pre-crisis demand was for the Society of Automotive Engineers (SAE) International Standard 300-series of steel. The second most popular in this series is SAE Type 316, which contains approximately 2% Mo oxide. Data on Mo-alloy usage is difficult to estimate, as only the US gather and publish data on this, but picking Type 316 seems to capture a large portion of Mo consumption, and thus demand. However, as I have not been able to access a price index for SAE 316 steel, the LME offers a steel billet futures index, which includes a wide array of different steel types; two which contain Mo. This index reaches back to April 28 2008, which is a sufficient timespan for the SVAR model. The data is expressed in USD and is deflated using the same CPI-index as earlier. From a transparency perspective, an LME Mo future price captures market expectations of future supply and demand well. Future demand may be difficult to anticipate apart from expected seasonal deviations whereas future supply scenarios are not. The quantitative analysis indicates that much of the regular reporting in the Metal Bulletin regards future supply scenarios. If an actor on the market can anticipate when new supply is added to the market, he or she can speculate on what the price of Mo will be 3 or 15 months in the future. This means that reporting on new mining projects that add supply to the market may not change the spot price as much as the future prices. Figure 18 illustrates that the 3- and 15-month prices fluctuate in similar patterns, but are not identical. The quantitative analysis indicates that most of the future supply- reporting concerns projects that will produce output after a period longer than one year, so the SVAR model uses the LME 15 month future price index.
F. Sderqvist
37
Figure 18: CPI-adjusted, 3- and 15 month LME Mo prices, expressed in logarithmic form.
Similar to Te, the Mo quantitative analysis indicates that some actors on the market are more frequently reported on than others. Picking a particular stock for a variable is difficult, as company profitability, and thus its stock price, may be the result of a large number of variables not relevant to Mo spot prices. However, the quantitative analysis shows that the US company General Moly Inc. is the second most reported company between 2010 and early 2013. This may be because it, like 5N Plus in the Te market, could be considered a good market proxy for the overall supply climate on the Mo market. General Moly is a relatively small mining company engaged in exploration, development and mining of Mo in the United States. 14 Compared to many of the other top- mentioned companies in the quantitative analysis, it is relatively small, and does not seem to be involved in the mining of other metals, meaning its stock price could be a good indicator for Mo supply. Using this variable again raises the issue of causality; it is very likely the profitability of General Moly, and thus its stock price, is affected by the Mo spot price. However, the heavy reporting on the company indicates that opposite causality is perhaps more true. The Mo price should not have an effect as immediate on General Moly profitability as General Moly-innovations have on the Mo price, since the company only reports profitability on a quarterly basis. A possible problem in stock price for General Moly is that the stock lies steadily at 0,1 cents (0,001 USD) until June 9 2004, when it jumps up to 2 cents (0,02 USD) (which can be observed in Figure 19). However, as this price is listed on their official website, I have chosen to use the data as it is. Considering the most reported company, Freeport McMoRan Inc, which is a large mining company with gold, copper and Mo operations, its stock price is coupled with three other metal markets. For this reason I have chosen not to include their stock price as a variable. I have omitted Thompson Creek, Codelco, and Antofagasta for the same reason; they are all major suppliers of Mo, but have a 14 Yahoo Finance fact page for General Moly: http://finance.yahoo.com/q/pr?s=GMO (accessed on May 3, 2013).
F. Sderqvist
38
much broader metal portfolio than General Moly, and their stock prices should thus be worse at explaining Mo prices. The quantitative analysis points that much of the world demand for Mo seems to be from Chinese steel mills, which is why the new IPI established in the Te section is used. The underlying causality assumptions for the SVAR model are as following: IPI is not thought to be directly affected by any of the explaining variables. Steel price is affected by aggregate international demand from businesses. General Moly is affected by a number of factors, but due to my beliefs of its stock playing a role of a market proxy, it is only affected by global demand and steel demand. The 15- month price should be affected by market expectations of future demand and supply of Mo, but not the spot price, which captures the immediate demand for physical quantities of Mo at a given moment. The log of CPI adjusted stock prices are presented in Figure 19.
Figure 19: The CPI adjusted LOG prices of stocks used for the Mo SVAR model. IPI LOG is the new Industrial Production Index, MOXV is the LME 15 month Mo price, FEMOLOG is the FeMo 65 price, STEELLOG is the LME 3 month Steel price, and GENMOLOG is the General Molybdenum Inc. stock price.
!" ! =
The optimal number of lags is 4 as determined by the AIC. The estimated matrix indicates no biased estimates, and thus no issues of convergence or serial correlation, which a Lagrange-multiplier test confirms at a 92% level. With this I also note that the expected similar movements of the FeMo- and the LME 15
!"! !
0 0 0 !,! !,!
0 0 0 0 !,!
F. Sderqvist
39
month
Mo
time
series
are
not
statistically
identical.
The
structural
response-
and
accumulated
Cholesky
responses
are
presented
in
Figures
20
and
21.
Response to structural one S.D. innovation 2 S.E.
MoSVAR, FEMOLOG, FEMOLOG
.02
.01
-.02 -.03 0 10 20 30
-.01
-.02
10
20
30
step 95% CI
Graphs by irfname, impulse variable, and response variable
structural irf
Figure
20:
FeMo65
response
to
structural
one
S.D.
innovation.
FEMOLOG
is
FeMo65
spot
price,
GENMOLOG
is
General
Moly
stock
price,
IPILOG
is
the
new
Industrial
Production
Index,
including
China,
MOVXLOG
is
the
LME
15
month
Mo
futures
price,
and
STEELLOG
is
the
LME
3
month
futures
Steel
price.
All
variables
are
expressed
as
logarithms.
The
complete
structural
response-
and
Cholesky
accumulated
response
diagrams
are
presented
in
the
appendix.
Accumulated response to Cholesky one S.D. innovation 2 S.E.
MoSVAR, FEMOLOG, FEMOLOG
.15 .1 .05 0 -.05 .6 .4 .2 .2 0 0 -.2 -.2 0 10 20 30
.5
.5
-.5 0 10 20 30
-.5 0 10 20 30
Figure 21: FeMo65 accumulated response to Cholesky one S.D. innovation. The same variables are used as in Figure 20.
F. Sderqvist
40
A shock from the General Moly stock price affects the FeMo price positively in an increasing, oscillating manner, and the increase is significant at the 95% level for the first three periods, then 90% significant in the fourth, after which it cannot be statistically different from zero. The Cholesky function indicates that General Moly has a big impact on FeMo volatility. At the 90% level we see that a shock explains 25% of the FeMo mean squared errors in the first seven time periods. A conjectural shock from the industrial production index does not indicate any significant changes in results until the ninth time period, when the response is then slightly negative at a 95% level until period eleven. This is counter-intuitive to expectations, yet the Cholesky function does not give indication that Mo mean square errors are affected at significant levels. I interpret this as IPI being a poor indicator of Mo demand, and a better index would perhaps be a more disaggregated index of a relevant sector. As expected, a shock to the LME 15 month Mo index affects the Mo price to a very high degree. The structural impulse response function is affected positively, and results are significant at the 90% and 95% levels intermittently until the 23rd time period. The Cholesky function is also significant at the 90% and 95% levels for all time periods, and explains 77% of the Mo mean square errors. This is not surprising as they are indices of the same metal, but it is a good sign that investors look to this transparent future price mechanism when determining the spot price. The issue of causality is not a problem, as a futures product is fundamentally different from a spot price, despite them being the same commodity; a product now is fundamentally different from a promise of a product in the future. Finally, a shock to the LME 3 month aggregate steel market price affects the Mo price in the second time period positively at the 95% level, then decreases to no effect (with intermittent 90%-95% significance) in the 15th time period. The Cholesky function is never significant at the 90% or 95% levels, but comes close between the third and twelfth time periods, when close to 20% of the mean square errors can be explained by the steel price shock at an 88-89% level. The price of steel is thus a good indicator of Mo prices as a whole, and could perhaps be the more disaggregated, sector-specific index mentioned in the IPI shock analysis above. When comparing the Mo and the Te impulse response functions, the Mo ones seem to have much more of an oscillating character, whereas the Te functions have a smoother character. I suspect this may be caused by the differing number of lags, as determined by the AIC.
F. Sderqvist
41
of reporting done on market events. There are 10 times as many articles written about Mo than Te during the sample period, which is natural when comparing the physical sizes of markets. However, the number of Te articles increased as market volumes and interest for the metal increased in 2011. If Te continues to be a highly demanded metal the number of actors interested in reporting should increase, which in turn may lead to more reporting on the subject, and thus more transparency. A second aspect is related to the foci of the news reporting itself. Although the Mo reporting seems quite comprehensive, and the Te reporting increases as demand for the metal increases, the limitations and methodology used by news reporters is highly influential on what is considered an innovation. In a market like Mo, where registered stock companies are bound by accounting rules, quarterly reporting and financial statements, it is cheap, convenient and easy for a news reporter to write a story about these stock companies earnings and production changes. On the Te market, however, there are a few dominant actors, where some are not even publically listed, meaning less easily accessible public information for journalists to access and report on. Further, the quantitative analysis contained many Mo market reports in the form of interviews from the LME-ring, where the newspaper interviews traders and market insiders about how they perceive market supply and demand. These articles have been considered with caution as there is no way to assert the extent, truth or intent behind these often-speculative statements. The importance of such statements are crucial in establishing market perception of supply and demand, and such signalling market mechanisms can be seen as natural aspects of a mature market. These types of speculative statements may be planted with the reporter for signalling purposes, and the importance of the news article may thus be exaggerated, as it merely constitutes an easy story for a journalist eager to fill the daily news hole. There are fewer of these types of signalling articles in the Te sample, which can partially be explained by the smaller market size and by the fact that there are few or no traders to interview. The sources to these statements in the Te market are often anonymous warehouse officials, whose business models rely on confidentiality and security, and this is perhaps why these statements are so few and less precise. On May 19 2011, the Metal Bulletin published the article UK government advised to investigate speculation in critical metals, which was included in the Te quantitative analysis but not in the Mo version. Although Te is not mentioned in the article, it was included as it is being traded on an off-exchange minor metal market, which has been speculated in heavily by private hedge funds. This article refers to a UK House of Commons Science and Technology Committee (2011) hearing that took place on May 17 2011. Apart from discussing national solutions to possible future supply problems, such as stockpiling as a safeguard against market failures, the hearing focused on the increased importance of metals in financial markets, and how financial markets have had an increased impact on metal prices.
F. Sderqvist
42
The perception of scarcity of certain minerals and metals may lead to increased speculation and volatility in price and supply. There is a need for accurate and reliable information on scarcity of metals. This concern underlines the recommendation we have made, that the Government should establish and regularly update a shared database to provide such information. We are also concerned by reports of hedge funds buying up significant quantities of strategic metals. We recommend that the Government investigate whether there are increasing levels of speculation in the metals markets and, if there are, their contribution to price volatility and whether markets that allow high levels of speculation, with associated price volatility, are an acceptable way to deliver strategic commodities to end users.
The committee thus recommends that the UK government needs to actively encourage supply reporting and transparency. The second recommendation, that the government should investigate the possibility of limiting speculative trading, is not about improving transparency in the market, but rather an attempt to limit whom gets to trade what in the market. The example presented to the committee to illustrate the negative effects of speculation was recent purchases of copper made by UK hedge funds. Although this may have been briefly disruptive to the copper market, it by no means made it collapse. This may in large part be due to copper market transparency, meaning the purely speculative purchase was easy to detect, and actors in the market could quickly adjust to the new supply and demand situation, albeit at a cost. The above hearings brought another regulation to my attention, which deals in minor metals in another aspect. The much-debated EU regulation of hazardous materials handling, REACH (Registration, Evaluation, Authorisation, and Restriction of Chemicals), imposes regulations and restrictions on producers and consumers dealing in materials that are considered toxic.15 REACH requires producers and consumers to register usage of registered materials within an industry- or sectorial- specific Substance Information Exchange Forum (SIEF)16, which is handled by the European Chemicals Agency (ECHA). The purpose of the system is to make information sharing of toxic substances more efficient, harmonise labelling of products with toxic contents, and help make markets more efficient with regards to limiting animal testing. This means that actors in the market can request toxicity testing data from the ECHA for a particular material, eliminating unnecessary testing of toxins on vertebrate animals.17 The REACH regulation has been met with industry criticism for being disruptive of trade, while placing much of the costs of implementation on producers and 15 MMTA REACH information page http://www.mmta.co.uk/reach (accessed on May 6, 2013). 16 EU SIEF information page: http://echa.europa.eu/web/guest/regulations/reach/substance- registration/substance-information-exchange-fora (accessed on May 6, 2013). 17 ECHA website section on data sharing: http://echa.europa.eu/regulations/reach/substance-registration/data-sharing (accessed on May 6, 2013).
F. Sderqvist
43
consumers.
Many
producers
are
sceptical
of
the
data
sharing,
which
they
say
risk
exposing
corporate
secrets.18
As
illustrated
in
Table
9
many
of
the
minor
metals
covered
by
the
REACH
regulation
have
also
been
assessed
for
criticality,
or
have
been
deemed
critical
by
the
European
Commission.
This
means
that
the
ECHA
should
have
high- resolution
data
of
minor
metal
production
and
consumption
for
many
actors
trading
within,
and
exporting
to
the
EU.
EU
minor
metals
assessed
for
their
criticality
Antimony
Beryllium
Chromium
Cobalt
Gallium
Germanium
Indium
Lithium
Magnesium
Manganese
Molybdenum
Rare
earths
Rhenium
Silica
sand
Tantalum
Tellurium
Titanium
Tungsten
Vanadium
Requires
REACH
registration
in
some
form
X
X
X
X
X
X
X
X
X
X
X
Table 8: List of minor metals assessed for their criticality by the European Commission (2010) and minor metals and REACH-registration status as defined by the MMTA.
As the REACH database is used to share information with the purpose of bringing market efficiency in the form of harm reduction to vertebrate animals, my question is: could it be used to bring greater transparency to minor metal markets, improving efficiency and reducing opacity-induced market volatility?
18 EU chemicals bill under fire from US-led coalition, EU observer website: http://euobserver.com/economic/21813 (accessed on May 6, 2013).
F. Sderqvist
44
5. Conclusions
The application of my methodology to the Te and Mo markets illustrates that market-specific variables can amply explain variation in a minor metal market. The types of variables used in the Mo market are more transparent and carry a better degree of explanation compared to the Te market. The Mo future- and steel price, along with a long list of possible market proxy-companies, help Mo actors assess the market on day-to-day basis, which is a clear indication that Mo is traded on a transparent and relatively efficient market. The Te market is wholly different, with no transparent indicators, few actors to use as market- proxies, and little reporting on supplied quantities. These opaque market conditions, coupled with the increased demand for Te, are the major causes of the high Te price volatility, which poses a threat to the future supply of this critical material. Although previous opacity may have been caused by the low news reporting on Te, the increased number of articles in 2011 may be an indication that increased journalism attention to the market does not improve transparency to a degree where speculation becomes less harmful. The quantitative analysis highlights the important role journalists play in a free market as deliverers of price innovations. The Metal Bulletin reporting seems be rather western-centric in its reporting, attributing European and American supply and demand changes to specific companies, whereas Chinese counterparts are often only addressed as just Chinese. This makes my study slightly western-biased from a market perspective. I have chosen not to address the biases, discourses, and language specific restrictions of journalists, but this could be done in future studies. In order to address the problems caused by opacity-driven market volatility, policy makers need to consider different remedies. The introduction of a futures price, such as has been done for the PVSF described in Yu et al (2011), does not solve the problem of high volatility. Although the Mo spot price has managed to achieve reduced volatility by being introduced to the LME, this can mostly be attributed to the new transparent pricing and quantity-reporting regimes associated with LME introduction. I believe that if there existed a transparent system of quantitative reporting for the Te market, the speculative bubble of 2011 may not have been so severe as producers, consumers and speculators in the market would have noticed that the artificially high prices of the metal were the result of speculative buying, based on over-optimistic demand estimates and supply limitation, and not physical consumer demand. The UK committee hearings recommended that the government should set up a database to provide better information on market available quantities of metals. I suggest they do this on the EU-level, which means extending the limited data- sharing regime that already exists within the EU REACH scheme. This database ought to contain high-resolution data of all toxic minor metals traded within the EU. If this data is made available in a responsible and easily accessible way, it may be a cheap remedy to reduce opacity-induced volatility in small minor metal markets. It is unlikely that any of these low-volume metals will be introduced to
F. Sderqvist
45
the LME or a bourse similar to it, as this seems to require large markets in order to reach profitability. Although price speculation in all commodities markets may cause efficiency losses, I do not see any efficient means of limiting such behaviour. This would involve identifying buyer intent at each transaction, as well as creating a system of enforcing rules to limit this behaviour. Speculation has long been seen as the major disadvantage albeit a natural part of a free exchange system. This thesis is an attempt to illustrate that a free exchange system can only be efficient if the market is transparent. If the Te market remains volatile, fewer suppliers will invest in mining projects, as the market price poses a potential risk to their operations. Further research is needed to better understand commodity market volatility and what possible roles market actors and policy makers ought to play in order to reduce unnecessary risks to companies dependent on minor, critical materials.
F. Sderqvist
46
References
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Appendix
List
of
abbreviations
Au
Gold
BGS
British
Geological
Survey
CdTe
Cadmium
Telluride
CIF
Cost,
Insurance,
in
Freight
CPI
Consumer
Price
Index
ECHA
-
European
Chemicals
Agency
FeMo65
and
FeMo
Ferro
Molybdenum
(65)
FOB
Freight
On
Board
IPI
Industrial
Production
Index
LME
London
Metal
Exchange
Mo
Molybdenum
NWE
North
Western
Europe
Pt
Platinum
PV
Photovoltaic(s)
PVSF
Photovoltaic
Silicon
Feedstock
REACH
-
Registration,
Evaluation,
Authorisation,
and
Restriction
of
Chemicals
SIEF
-
Substance
Information
Exchange
Forum
STDA
Selenium
Tellurium
Development
Association
SVAR(p)
Structural
vector
autoregression
model
with
p
lags.
Te
-
Tellurium
USGS
United
States
Geological
Survey
F. Sderqvist
51
! = +
! !!
! !!! + !
where
!
is
the
1 -vector
of
the
variables
that
are
to
be
studied;
is
a
constant
1 -vector;
!
is
the
time-invariant
-
matrix
where
the
main
diagonal
terms
are
set
to
1;
and
!
is
the
1
error
term,
which
satisfies
the
assumptions:
1. E ! = 0,
or
every
error
term
has
mean
zero;
2. E ! ! = ,
or
the
contemporaneous
matrix
of
error
terms
is
(a
positive-semidefinite
matrix)
3. E(! !!! ),
meaning
for
every
non-zero
,
there
is
no
correlation
across
time,
or
more
specifically
no
serial
correlation
in
individual
terms
across
time.
A
SVAR
model
of
p
lags
is
similar,
but
imposes
a
set
of
initial
intra-variable
causality
assumptions
at
time
0
(!
on
the
left
hand
side),
using
the
same
error-
term
assumptions
as
above,
and
is
expressed
as:
!
! ! = ! +
! !!
! !!! + !
For simplicity, assume a 2 structural SVAR model with 1 lag. This is expressed as: !,! !,! 1 !;!,! !,! !;!,! !;!,! !,!!! = + + !,! !,! !,! !;!,! 1 !;!,! !;!,! !,!!! where ! 0 ! = E ! ! = ! ! 0 ! Writing out the equation explicitly and moving !,! to the right hand side: !,! = !;! !;!,! !,! + !;!,! !,!!! + !;!,! !,!!! + !,! we see that variable !,! can have an effect on variable !,! if !;!,! is non-zero. This differs from the VAR, where !,! can only affect !,! in periods + 1 and 19 Derivations and formulas are sourced from the Journal of Statistical Software paper VAR, SVAR, and SVEC models http://www.jstatsoft.org/v27/i04/paper, a Boston College lecture note on VAR, SVAR and impulse response functions: https://www2.bc.edu/~iacoviel/teach/0809/EC751_files/var.pdf, and Wikipedia http://en.wikipedia.org/wiki/Vector_autoregression (both accessed on May 20 2013).
F. Sderqvist
52
forward,
but
not
directly
in
time
t.
Attempting
to
estimate
OLS
estimations
of
!,!
will
at
this
point
prove
futile,
as
it
will
yield
inconsistent
results.
However,
expressing
the
SVAR-function
in
reduced
form
enables
us
to
solve
for
! .
First,
pre-multiply
the
SVAR
within
the
inverse
of
! ,
! !! !! !! !! ! = ! ! ! + ! ! ! !! + ! ! ! !! + + ! ! ! !! + ! !
then
denoting
! !! !! ! ! ! = ,
! ! ! !! = !
for
= 1, , ,
and
! ! = !
the
SVAR
can
be
expressed
in
reduced
form
as
!
! = +
! !!
! + !
! !! meaning all causality assumptions can be inserted into ! ! of the ! ! = ! - matrix, as is done in the methodology. To preform a structural impulse- or Cholesky accumulated response function, a one standard deviation shock besets the model at time 0, meaning for ! ! = ! ! ! the initial ! is set to !,! = 1 = 0 ! = !,! !,! = 0 meaning the variable vector at time t may can be expressed as !,! 1 !,! !,! !,! !,! !,! 1 !,! !,! !! ! = = = ! ! !,! !,! !,! !,! 1 ! where !,! in the ! ! -matrix contains causality assumptions for time 0. The impulse response function for periods (with > 0) can thus be expressed as ! ! = ! ! ! !!! From this, an OLS estimation is computed for each reduced-form equation. This can be calculated using most quality econometric or statistical computer software. However, the algorithms involved in solving these the response functions are quite complicated and will not be presented here.
F. Sderqvist
53
Figure 22: Screenshot of a typical, pertinent Te article with filled-in coding scheme on top.
Figure 23: Screenshot of a typical, non-pertinent Mo article, with filled-in coding scheme on top.
F. Sderqvist
54
10
20
30
step 95% CI
Graphs by irfname, impulse variable, and response variable
structural irf
Accumulated response to Cholesky one S.D. innovation 2 S.E.
TeSVAR, FIVENLOG, FIVENLOG
1 .5 0 0 -.2 .4 .2
10
20
30
Figure 25: The complete accumulated Cholesky response function of the Te model.
F. Sderqvist
55
Response to structural one S.D. innovation 2 S.E.
MoSVAR, FEMOLOG, FEMOLOG
.02 .01 0 -.01
-.001
-.01
10
20
30
10
20
30
10
20
30
step 95% CI
Graphs by irfname, impulse variable, and response variable
structural irf
Accumulated response to Cholesky one S.D. innovation 2 S.E.
MoSVAR, FEMOLOG, FEMOLOG
.15 .1 .05 0 -.05 .3 .2 .1 0
10
20
30
10
20
30
Figure 27: The complete accumulated Cholesky response function of the Mo model.