Mineral Economics and Policy

John E. Tilton, Juan Ignacio Guzmán

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317558767
• Edition: 1
• Topic: Tecnologia e ingegneria
• Subtopic: Ingegneria mineraria

This textbook provides an introduction to the field of mineral economics and its use in understanding the behaviour of mineral commodity markets and in assessing both public andcorporate policies in this important economic sector. The focus is on metal and non-metallic commodities rather than oil, coal, and other energy commodities.

Thework draws on John Tilton's teaching experience over the last 30 years at the Colorado School of Mines and the Catholic University of Chile, as well as short courses for RioTinto and other mining companies. This is combined with the professional consulting and academic research of Juan Ignacio Guzmán over the past decade, in order to demonstrate the industry application of the economic principles described in the earlier chapters.

The book should be an ideal text for graduate and undergraduate students in the fields of mining engineering and natural resource economics and policy. It should also be of interest to professionals and investors in mining and commodity markets, and those undertaking continuing education in the mineral sector.

1 Introduction

The men and women who extract mineral resources from the earth’s crust and process them into a variety of different metals and other mineral commodities make life as we know it possible. It has not always been so. For millennia our distant ancestors lived off the land, the surface of the land, first from hunting and gathering, and then from raising their own crops and animals. Only about 40,000 years ago did this change when humans began on a significant scale extracting flint and useful minerals from within the earth. The subsequent division of history into the Stone Age, Bronze Age, and Iron Age highlights the importance of mining from that time onward.

Moreover, over the past several centuries the impact of mineral commodities on society has exploded. This period has witnessed the discovery and commercialization of many new materials, including aluminum, steel, chromium, lithium, and the rare earth minerals. Even taking into account the materials widely used as far back as the Roman era—copper, tin, lead, stones, and clays, for example—it is hard to think of a single mineral commodity whose consumption over the past 50 years does not exceed by a wide margin the quantities used throughout all previous history. These resources from the earth are needed to build homes, roads, bridges, offices, schools, and hospitals. They are found in computers, food and beverage containers, automobiles, airplanes, modern windmills, and the lowly 50-watt light bulb. Without them, modern industry, agriculture, communications, transportation, science, and medicine would simply not exist.

Mineral Economics and Policy

This book—Mineral Economics and Policy—provides an overview of how mineral markets and industries operate and why they behave as they do. The two of us together have devoted more than half a century to teaching, researching, and consulting on economic and policy issues associated with mining and with the production and use of mineral commodities. Mineral Economics and Policy draws on this work, synthesizing, updating, distilling, and extending it. It is written for both the specialist and the interested layperson and requires only an introductory understanding of supply, demand, and other basic economic principles. While far from comprehensive in the sense of treating all interesting economic and policy issues associated with the mineral industries and markets, the book does provide a conceptual framework that many of our students and we have found helpful. It then applies this framework to examine some of the interesting policy issues arising from the mining, processing, and use of mineral commodities.

The focus is on the metals and to a somewhat lesser extent the non-metallics. Among the metals some will detect a bias in favor of copper. This simply reflects our own interests over the years and the fact that both of us teach in the Mining Engineering Department at the Catholic University of Chile. Copper is tremendously important in Chile, accounting in recent years for nearly half of the country’s export earnings and a large share of its government revenues as well. Nevertheless, much of the analysis applies as well to mineral commodities more generally, including diamonds, phosphate rock, and even petroleum. In this respect, Mineral Economics and Policy provides an introduction to the field of mineral economics.

Defined broadly, as is usually the case in North America, mineral economics covers three classes of commodities—energy, non-metallics, and metals. The energy minerals include coal, petroleum, natural gas, and uranium, and are by far the most important of the three groups in terms of sales. They are also the most studied. Many good economic analyses of energy markets exist, including several textbooks on energy economics.¹ By comparison, the metals and the non-metallic mineral commodities have received far less attention.²

Among the metals, iron and steel, aluminum, copper, gold, nickel, lead, zinc, and tin are the most important, at least in terms of sales (see Table 1.1). Many others also exist, whose importance should not be underestimated. Modern electronics, for example, is hard to imagine without semiconductors made of silicon or without liquid crystal displays and other flat-panel devices made with indium.

The non-metallics include construction materials (such as sand and gravel, stone and marble), fertilizers (such as potash and phosphate rock), and all the other mineral commodities that are neither metals nor energy resources (see Table 1.1). Their production when measured by volume or tonnage exceeds that of the metals. Nevertheless, the non-metallics have received even less attention from policy analysts and others than the metals. Just why this is so is not entirely clear. Part of the explanation may lie in the fact that they are for the most part large-volume, low-cost products often sold in regional or local markets. They enter international trade on a much smaller scale, and typically require less sophisticated technologies to extract and process. This, though, is far from a satisfactory explanation, and in any case numerous non-metallic products do not fit this simple generalization, as phosphate rock and diamonds so amply illustrate.

The mineral industries, it is important to highlight, produce a vast array of quite different substances and products. Some mineral commodities are extracted from large, open pits; others are hoisted out of underground mines; still others are pumped from deep wells; and a few are processed from seawater. Production can be simple and cheap, though often it is technically complicated and costly. Some mineral commodities are recovered as by-products or co-products in the course of extracting other commodities. Some are obtained from recycling old and new scrap. Some are found in only a few locations and are traded worldwide. Others are produced in many locations and consumed close to their terrestrial source. Some are traded on competitive exchanges where prices fluctuate daily. Others are produced by only a few firms and are offered at stable producer prices.

Mineral Economics and Policy does examine non-metallic mineral commodities, though it too is to some extent guilty of paying insufficient attention to the non-metallics, perpetuating an injustice to an important group of mineral commodities. The reason is simply that our own interests, as noted, have over the years largely focused on the metals. Fortunately, much of the conceptual framework and many of the policy issues explored in Mineral Economics and Policy are just as relevant and useful for the non-metallics as the metals.

This rich diversity makes mineral commodities and the field of mineral economics fascinating to study, but it also means no general model or economic analysis is applicable to all mineral commodities or even all the metals. Rather, each must be considered individually, thereby allowing the analysis to take account of its particular features.

As a result, a single book cannot begin to cover all the metals, let alone all mineral commodities, and no attempt is made to do so here. Instead, Mineral Economics and Policy concentrates on illustrating the usefulness of relatively simple economic principles, particularly those associated with supply and demand, in understanding the behavior of commodity markets.

A good mineral economist must possess a strong understanding of the technological and institutional conditions that shape and constrain the behavior of mineral commodity markets. What are the stages in the production of steel? How does mining law vary around the world and how, in turn, does it affect exploration? How capital intensive is the production of aluminum? How are the creation and diffusion of new technologies, such as the solvent extraction electrowinning process, altering the production and price of copper and other mineral products? How are they changing the associated environmental pollution?

For this reason, we believe mineral economics is more than just a specialty within economics. It is an interdisciplinary field that draws as well on geology, mining engineering, environmental science, metallurgy, and other associated technical fields.

There is one particularly important conclusion that the pages that follow highlight time and time again. The simple tools of economics can provide powerful insights into the nature and behavior of the mineral markets, but only if the analyst applying these tools has a firm understanding of the important technological and institutional relationships governing the market he or she is examining, and so can tailor the analysis to take these relationships explicitly into account.

The Road Ahead

Mineral Economics and Policy is divided into two parts. Part I develops the conceptual framework. Specifically, it assesses mineral commodity demand, supply, markets, and prices. In the process, it explores the nature of material substitution, recycling, and secondary production, along with by-product and co-product output. It analyzes the important forces shaping demand in both the past and the future. It examines the relationships between production costs, technological change, and supply. It describes how mineral commodity markets have evolved over the past half century and investigates the volatility of their prices in the short run and their secular trends over the long run.

Part II explores policy issues associated with mining, mineral processing, and use that are of particular interest to governments and other entities concerned with the welfare of society in general. In particular, it considers:

• How mining and metal production produces economic rents and the role of taxation and other policies in the distribution of this wealth.

• The reasons why certain countries enjoy a comparative advantage or competitiveness in the production and export of iron ore or other mineral commodities, while other countries rely on imports for all or most of their needs.

• The nature of market power and the evolution of antitrust or competitiveness policies in the mineral sector over time.

• The troubling relationship between mineral wealth and economic development, including the nature of the Dutch Disease and the arguments both for and against the ...