The Economics of the Sulphur Industry

Jared E. Hazleton

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138955769
• eBook ISBN: 9781317353928
• Edition: 1
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

Between the 1950's and 1970's, the Sulphur industry continued to grow despite occasional shortages and excesses. In this study originally published in 1970, Hazleton focuses on the Frasch sulphur industry to explore issues such as competing sources of sulphur, the possibilities of sulphur being obtained as a result of pollution-abating policies and the conditions under which future supplies are likely to become available. This title will be of interest to students of Environmental Studies.

Chapter 1
Introduction

Sulphur is one of the most plentiful of the elements, but twice within the postwar era it has been in tight supply both within the United States and abroad. Sulphur is also one of the most important industrial raw materials, yet it is one of our least known mineral resources.

This study is an economic analysis of the sulphur industry. Its goal is to describe, interpret, and evaluate from the standpoint of public welfare the market structure, behavior, and performance of the domestic sulphur industry. At the same time, economic analysis of the industry should reveal much about the nature of the sulphur resource. In this regard, the study seeks to answer two questions. Does the past pattern of periodic shortage and abundance indicate recurring periods of scarcity in the future? Can the future sulphur requirements of the world be met without significant increases in unit costs?

Description of the Industry

Sulphur is widely distributed in nature, both alone and in combination with other minerals. Although 0.06 per cent of the weight of the earth’s crust is believed to consist of sulphur, only an exceedingly small portion of the sulphur occurs in sufficiently concentrated amounts to justify mining. When considered as an industrial raw material, sulphur may be classified into two types. Where not in molecular combination with any other element, sulphur is called “elemental” and, in its natural state, is often termed “brimstone.” Sulphur is also classified as elemental where, prior to its use as a raw material, it is separated in pure form from compounds. Sulphur is classified as “nonelemental” where, in molecular combination with some other element, it is used as a raw material without prior separation.

Elemental sulphur is supplied from several sources. Frasch sulphur, which derives its name from the developer of the process by which it is mined, is produced from brimstone deposits found in the salt domes of the United States and Mexican Gulf Coasts. The Frasch process is also used to produce elemental sulphur from non-salt dome deposits in West Texas. In addition, a small quantity of elemental sulphur is mined by conventional methods from sedimentary deposits and surface deposits, and separated from the metal in metallic sulphides. Recovered sulphur is produced from the hydrogen sulphide contained in sour natural or refinery gases.

Nonelemental sulphur is supplied principally as by-product acid from copper and zinc smelters, from gypsum and anhydrite deposits, and from pyrites (metal sulphides), which are burned to produce sulphur dioxide and by-product metallic oxides. A small amount of nonelemental sulphur is produced in the form of hydrogen sulphide by oil refineries and in the form of sulphur dioxide by smelters.

As shown in table 1, domestic production of sulphur in all forms totaled over 9.1 million tons in 1967.¹ Frasch-produced sulphur accounted for 7 million tons, or 75 per cent of total domestic production. Recovered sulphur output of nearly 1.3 million tons accounted for 14 per cent of domestic sulphur production, and various other sources accounted for the remaining 11 per cent. The total value of domestic sulphur shipments in 1967 amounted to about $292.8 million.

Table 1. U.S. Sulphur Production, All Forms, 1967

Source	Net sulphur content
Elemental sulphur:	long tons
Frasch process mines	7,014,164
Other mines	284
Recovered	1,267,955
Total elemental sulphur	8,282,403
Nonelemental sulphur:
Pyrites (including coal brasses)	355,033
By-product	498,675
Total nonelemental sulphur	853,708
Total U.S. sulphur production	9,136,111

SOURCE: U.S. Department of the Interior, Bureau of Mines, Minerals Yearbook, 1967.

The Approach

Industry studies by economists have generally been directed toward the analysis of imperfections in the competitive economy, primarily toward the analysis of oligopolistic markets where a few sellers possess varying degrees of market power. Market power exists where at least one firm is of sufficient size relative to the market to influence by its own actions the level of market price and output. The existence of market power results in a situation in which the equilibrium price and output in the industry are indeterminate. Thus, the task of an economic study seeking to analyze an industry of few sellers is to explain why the pattern of price and output behavior observed in the market emerged from the oligopoly being studied, and to provide a full critique of the impact of this behavior on the public welfare.

The sulphur industry is a typical oligopoly in which a few firms have consistently controlled a large share of the market. This study of the sulphur industry is organized along the lines of a number of similar studies of oligopolistic industries. It focuses on the industry’s market structure, behavior, and performance.

This approach postulates that definable factors of market structure interact to produce a pattern of market behavior on the part of firms in an industry. This pattern of market behavior in turn provides a basis for evaluating the performance of the industry. The purpose of appraising the performance of the industry is to establish the extent to which firms have used their market power to achieve noncompetitive results. The explanation of market behavior in terms of the market structure of the industry is designed not only to describe how the pattern of market behavior emerged from the industry, but also to identify alternative market structures, obtainable through public policy, which might yield a better pattern of performance for the industry.

The market structure-behavior-performance approach attempts to solve the problem of oligopolistic indeterminacy by introducing additional factors of market structure into the analysis. Thus, structure is defined to include all factors taken into account by the firm in determining its business policies and practices. While the number and relative sizes of the sellers and buyers are an important element in this regard, they represent only one of several aspects of market structure.

Other factors that can be identified as exerting an influence on the firm’s behavior include: (1) the geographical distribution of supply and demand; (2) the nature of demand, including the elasticity of demand with respect to both prices and income in the short run as well as in the long run; (3) the organization of the firm, in particular, the marketing and distribution channels used; (4) the nature of costs, including the proportion of fixed costs in the short run, and the ease of exit from the industry; (5) the conditions affecting entry into the industry; (6) the technological environment, i.e., the limitations imposed on the firm’s actions by the current state of technology; and (7) the legal setting, including the impact of the patent system, taxation, and other governmental policies and regulations which affect the firm’s behavior.² While this list is not exhaustive, it summarizes the more important features that lend themselves to empirical analysis.

The oligopolist, operating within an environment defined in terms of these factors of market structure, adopts certain policies in the market where it sells its product. Market behavior is formed by these policies of business firms in determining such factors as prices, outputs, product characteristics, selling expenses, and research expenditures. The importance of market behavior lies in its function as the link between an industry’s structure and its performance.

In an oligopolistic industry, market behavior reflects the firm’s policies not only toward its product market but also toward the actions taken by its rivals in that market. It is this interreaction of firms in the market that gives oligopolistic industries their unique indeterminateness and makes them an attractive subject for economic analysis. One important set of market behavioral patterns centers on determining oligopolistic prices, i.e., the ways in which firms set their prices and change them in response to others. A second set of policies concerns the product of the oligopolist. Product policies include product differentiation, the level of selling costs, and product quality. The final set includes policies that seek to change the factors of market structure. Coercive practices, for example, seek to drive out weaker rivals, or to reduce the threat of entry. Fear of antitrust litigation may have the opposite effect and result in policies aimed at maintaining the market share of the smaller firms in the industry.

The third element of industry analysis, market performance, is closely related to market behavior.³ Behavior provides a basis for an evaluation of industry performance in terms of certain economic criteria. These criteria include: (1) cost-price relationships: the extent to which reductions in cost are passed on promptly in the form of price reductions; (2) capacity-output relationships: the efficiency of resource use as indicated by the scale and utilization of facilities and the location of production; (3) progressiveness: the extent to which the firms in the industry actively and effectively engage in product and process innovation; and (4) the level of profits: the extent to which profits of firms in the industry (rate of return after taxes on invested capital) exceed or fall short of profits earned by firms in industries exhibiting similar trends in such factors as sales, costs, and innovations.⁴

The purpose of appraising industry performance is to indicate the impact of market power on the public welfare. This impact is usually described in terms of the effectiveness or workability of competition. Economists are in general agreement that perfect competition constitutes neither a normative ideal nor a satisfactory basis for appraising actual market conditions. Therefore, they have sought to derive a “workability criterion,” a set of conditions that would be both necessary and sufficient to ensure that market power is used in the public interest.

Unfortunately, it is easier to recognize the need for such normative standards than to provide broadly applicable criteria. At best, the appraisal of the workability of competition in an industry remains a “subjective judgment by a given economist concerning the extent to which he thinks that absence of one or another of the conditions of perfect competition will not prove unduly harmful to economic welfare.”⁵

An appraisal of workability may lead to one of three conclusions. First, it may be determined that market power is present but has not been used to secure noncompetitive results, and the industry is judged workably competitive. Second, market power may be shown to have produced imperfectly competitive performance which is considered nonetheless workably competitive in light of possible remedial actions available through public policy. Third, market power may be shown to have produced noncompetitive performance that is considered unsatisfactory, and that can be improved through use of public policy. In the latter instance, the industry is considered nonworkably competitive. The key elements in any evaluation of the workability of competition in an industry are, therefore, the degree to which actual performance deviates from desired performance, and the possibility of remedial public action.

Application to a Resource Industry

The considerations involved in an industry study described above are particularly suited to an analysis of a resource-based industry such as sulphur. Like other minerals, sulphur is characterized by fixed location, exhaustion of reserves, changing patterns of supply, competition between primary and by-product production, and continuously changing technology. Like other minerals, sulphur has periodically been the subject of public concern because of high prices and inadequate supply.

Harold J. Barnett and Chandler Morse have considered extensively the problem of increasing natural resource scarcity and diminishing returns as reflected in the trend of unit costs of extractive products. They conclude that to a significant degree, the prospect of increasing resource scarcity often generates its own solution in the form of sociotechnical change which results in increasing as opposed to diminishing returns.⁶ There is a marked similarity between the argument as advanced by Barnett and Morse and the earlier theory of “creative destruction” developed by Joseph Schumpeter.⁷ Both emphasize the dynamic nature of the capitalist economy. Both stress that economic change is embodied in sociological and technological change.

But what is the process through which sociotechnical change occurs? What determines the speed with which advances in technology act to alleviate problems of resource scarcity? How automatic is the process? The fundamental element in the process is, of course, the market, which both signals the need for change and provides the reward which motivates change. New s...

Table of contents

• Cover
• Title
• Copyright
• Original Title
• Original Copyright
• Foreword
• Acknowledgments
• Table of Contents
• List of Tables
• List of Illustrations
• Chapter 1 Introduction
• Part 1 Market Structure of the Sulphur Industry
• Part II Market Behavior in the Sulphur Industry
• Part III Performance in the Sulphur Industry
• Appendix A Statistics on Production, Trade, Consumption, and Prices
• Appendix B Financial Data for Frasch Sulphur Producers
• Bibliography