The cobweb theorem and delays in adjusting supply in metals' markets

In: System dynamics review: the journal of the System Dynamics Society, Volume 32, Issue 3-4, p. 279-308

Abstract

AbstractGlobal industrial metal markets have experienced a drastic price decline over the past years. In this paper we link the dynamics of raw material markets and commodity price fluctuations to a delayed adjustment of supply. Drawing on the classical cobweb theorem we show how the implementation of this theorem using system dynamics may yield a valuable explanation, not only for the recent price decline, but also for possible future price movements. Starting from a simple cobweb model of general industrial markets, we couple the price‐adjusting mechanics to the global copper market and demonstrate how a simple market model can be merged with a physical material flow model. This model captures both market dynamics and technical aspects of raw material processing, recycling and substitution and adds an explanation for the widely accepted fact that the cost structure of the copper industry cannot explain current price levels. Finally, we compare the system dynamics forecasting model with a traditional econometric forecasting method and found the system dynamics model to be more intuitive and better suited to capture and convey the structural market fundamentals. Copyright © 2017 System Dynamics Society