Assessing cycles of mine production and prices of industrial metals

When it comes to metal production, four factors are deemed most important (Wagner, Sullivan, and Sznopek 2003): geology, technology (i.e., mining, treatment, refinement), economics (i.e., cost and selling price), and politics. These factors operate in an integrated system, which also includes social constraints, environmental issues, and the structure of the mining industry. In this article, we emphasize the economics factor by offering new evidence on concordance of business cycles of real price and mine production of six industrial metals—bauxite, copper, lead, nickel, tin, and zinc—for the period of January 1995-December 2017.

The ultimate aim of this article is to assess the speed and magnitude with which production adjusts to upturns and downturns of mineral prices. Our approach differs from the extant literature as this has focused mostly on cycles of real commodity prices. In addition, most studies have concentrated on modeling demand for mineral commodities. The empirical findings for the mineral commodities under analysis show that the amplitude (percentage variation) per quarter of real prices during expansions and contractions considerably exceeded that of world mine production. Indeed, the estimation suggests that the implied price elasticity of supply was relatively small and ranged from 0.23 and 0.50 during expansions and from 0.05 to 0.44 during contractions. Moreover, mine production and price cycles for each metal exhibited limited or no synchronicity. Real prices, on the other hand, were highly correlated among them during boom and slump phases, while cycle concordance of mine production across metals was limited to some specific pairs, such as lead/zinc (85%) and nickel/zinc (72%). Lagged investment on existent mine sites and the timeframe involved in exploration activity may offer some insights to these empirical findings (e.g., Karl and Wilburn 2017.) The data is provided from The World Bureau of Metal Statistics (WBMS) and is not publicly available.

References

Karl, N., and D. Wilburn (2017). “Global nonfuel mineral exploration trends 2001-2015.” Mining Engineering 69, 30-37.

Wagner, L., D, Sullivan, and J. Sznopek (2003). “Economic drivers of mineral supply.” USGS Open File Report 02-335. https://pubs.usgs.gov/of/2002/of02-335/