The media has been awash over the last 12 months with headlines about the commodities super cycle being dead, and indeed, metals prices have been so lackluster over the last six months that it would be hard to argue otherwise.

However, McKinsey’s 44-page report entitled Resource Revolution: Tracking global commodities markets argues that a number of drivers support the notion that prices have little or no latitude to fall further and in the medium to longer term, can only go higher.

China has generally been cited as the cause of the commodities super cycle and while demand from China and other emerging markets has created the demand-side pressure, supply-side issues have also contributed, McKinsey says, with two factors having been most at play.

Firstly, resources represent a substantial proportion of the input costs of other resources; for example, energy accounts for up to 40% of the cost of steel and up to 50% of aluminum. Secondly, technology is enabling substitution of one resource by another, rapidly changing the dynamics; for example, the rise of bio-fuels put unintended pressure on corn prices.

Yet, the report observes, with the notable exception of shale gas, long-term supply-side costs continue to increase, putting a floor under commodity prices.

Energy Costs Push Prices of Copper, Steel

During the last century, metal prices rose on average by 2.2% in nominal terms, but since 2000 they rose by 176% on average, the equivalent of 8% annually. Copper and steel prices (in nominal terms) have increased by 344% and 167%, respectively, since the turn of the century, even taking into account recent price falls.

Many observers of these price increases have pointed to demand from emerging markets such as China as the main driver. However, McKinsey’s Basic Materials Institute finds that while demand from such emerging markets has played an important role, the changing cost of supply, driven by a combination of geological issues and input cost inflation (particularly energy), have been crucial cost drivers.

According to the Telegraph, quoting McKinsey’s projections, China’s primary energy demand can be expected to grow by more than 2% per year, which equates to 40% of incremental global demand up to 2030, creating relentless pressure on oil supply. Rising energy costs, continued urbanization driving metals demand, falling ore grades and rising environmental costs will all contribute to supporting metal prices.

Today’s prices may be the new normal, but in McKinsey’s view, we will look back on 2013 as the low point for many – if not all – metal prices.