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Supply, Demand, and Competitiveness OVERVIEW OF THE MINERALS AND METALS INDUSTRY This chapter identifies actions, policies, and technologies that may help maintain or improve the competitiveness of the domestic minerals industry and focuses attention on five metal subindustriesaluminum, copper, lead, zinc, and steelthat represent three distinctly different situations. The U.S. aluminum industry, for example, is oriented to the production of alloys and specialized products; it depends on foreign production of bauxite and, in- creasingly, alumina and even aluminum metal. The producers of copper, lead, and zinc, on the other hand, concentrate on the mining of ore and the production of metal for sale in commodity markets. The steel industry is more oriented toward the processing of iron ore and scrap into steel alloys but not to the degree of specialization found in the aluminum industry. Together, these three different situations can provide insights into the range of issues faced by the domestic minerals and metals industry as a whole. The basic stages of exploration, mining, and processing are similar for every metal product (see Box), but the particular form of these stages differs from metal to metal, and each subindustry has developed a structure that reflects the production and consumption of its products. (See Chapter 3 for further discussion of these technologies.) The world distribution of metal production and consumption reflects both the mineral endowments of the producer countries and the investment poli- cies of mining firms and national governments. Leading mine producers are the developing nations in Africa and South America and large developed 26

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SUPPLY, DEMAND, AND COMPETITIVENESS 27 OVERVIEW OF MINING AND METAL PRODUCTION PROCESSES The process of locating mineral deposits is termed exploration. In the past, exploration was accomplished almost entirely by examination of surface topographical features and by the taking of core samples. While these methods are still employed today, they have been augmented by remote (e.g., seismic) analysis of deeper subterranean features, by analysis of photographic and spectrographic data collected from aircraft and even satellites, by computer modeling techniques, and even by biochemical analysis of organic material on the surface. Mining is the process of removing ore from the ground, either by open pit or underground methods. The next phase, often termed beneficiation, involves the production of a form of the ore in which the mineral is more concentrated. This may be accomplished by physical means, in which the ore is reduced to smaller particles by mechanical crushing and grinding, followed by physical separation of the mineral values from the ore to produce a "concentrate"material containing a relatively high percentage of the metal of interest. In other cases, the mineral values are leached out of the ore by chemical means, a process known as hydrometallurgy. Heap leaching, using a chemical as the leaching agent to extract a mineral such as gold from a pile of ore or tailings (waste materials from earlier mining), is one such method. The products of physical separation and leaching are subjected to chemical separation using either low-temperature (hydrometallurgical) or high-tempera- ture (pyrometallurgical) means to yield a metal of suitable purity. Pyrometallurgical processing involves a combination of heat and chemical or electrolytic treat- ment of the concentrates in a process known as smelting. The resulting metal may then be further purified by chemical and electrolytic "refining" techniques. Depending on the nature of the ore and the metal, both smelting and refining may consist of several discrete steps. Hydrometal/urgical processing involves relatively newer techniques in which the mineral solutions resulting from leaching are subjected to either electrical or chemical treatment. With either method (gyro- or hydrometallurgical), the end product is a purified metal that is then melted and cast into any of several forms convenient for use and/or transportationingots, bars, slabs, etc. In some cases processing is extended into the production of "semifabricated parts" such as sheets, tubing, and wire, from which more complex shapes or products can be manufactured by the end user. The processing of many ores is complicated by the fact that they contain more than one metal of economic interest. This has major implications for the economics of the minerals and metals industry, since the "coproducts," while less plentiful in the ore, may in some cases be nearly as valuable as the primary mineral of interest. Copper mining produces substantial amounts of gold, silver, and molybdenum as coproducts; about 5 percent of all domestic gold production in 1988 was recovered through processing copper and other base metals.

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28 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY . Canada | ~ . l' Unfed States _. South&Central America I_~i eastern Bloc Europe __F Asia Bauxite Copper Iron Ore Lead Zinc ~1 ~ Africa Aluminum Copper Raw Steel . Lead Zinc Mine Production Metal Production L - Oceania FIGURE 2-1 World distribution of mine output, metal production, and consumption.

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SUPPLY, DEMAND, AND COMPETITIVENESS TABLE 2-1 Categories of Metals Base metals Copper Lead Zinc ~- 1ln Steel industry metals (iron and ferroalloys) Iron Manganese Nickel Chromium Cobalt Molybdenum Tungsten Vanadium Columbium Light metals Aluminum Lithium Magnesium Titanium Platinum group metals Platinum Palladium Rhodium Ruthenium Iridium Osmium Precious metals Gold Silver Electronic materials Silicon Cadmium Gallium Germanium Selenium Tellurium Tantalum Indium Rhenium 29 countries, principally Australia, the United States, and Canada. While ores may be treated and processed near the mine, refining of metals and produc- tion of commodity products or specialty alloys takes place predominantly in the developed nations. This is illustrated in Figure 2-1, which shows the distribution of production and consumption of the five subject metals for the United States and other regions of the world. Current global trade patterns are the product of a gradual evolution, as mineral resource bases, technologies, politics, and economics have slowly changed throughout the world. The subindustries are generally categorized according to type of metal, as shown in Table 2-1. The base metals copper, lead, and zinc have long comprised a substantial market. Iron ore, pig iron, and steel together comprise an enormous industry worldwide; they are usually considered as a single category, separate from the nonferrous metals. The steel industry metals, often referred to as ferroalloys- manganese, chromium, cobalt, mo- lybdenum, nickel, tungsten, vanadium, and columbium are those that are commonly combined with steel to make alloys having special properties as well as being used in their unalloyed metallic form. Another category consists of the light metals aluminum, lithium, mag-

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30 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY nesium, and titanium. These are metals that because of their high strength, low weight, and other special properties have replaced steel for some uses over the past century and particularly in recent decades. Aluminum is the second most widely used metal in the world. Magnesium and titanium, by contrast, are high-value materials with relatively small annual world pro- duction levels. Lithium is used in small amounts as an element in new aluminum alloys that have high strength-to-weight ratio, but these alloys are not yet in wide commercial use. The precious metals comprise a separate category. Although these met- als have important industrial uses, they are also traded for investment pur- poses The platinum metals are similar to precious metals in that they have an investment purpose, but they are also used as catalysts in chemical reactions and for pollution control purposes. The newest category of metals is termed electronic materials, a reference to the role they play in the computer and communications industries and other electronic applications such as batteries and switches. The category includes silicon, cadmium, gallium, germanium, selenium, tellurium, tanta- lum, indium, and rhenium. With the exception of silicon, the electronic minerals and metals are relatively scarce. They often occur in combination with other more common metals and are produced as by-products of the mining and refining of those metals. TRENDS IN MINERAL AND METAL PRODUCTION Aluminum Aluminum is produced in a two-stage process: the raw ore, bauxite, is converted into alumina, the principal oxide of aluminum, which is then smelted to produce aluminum metal. The two stages are independent and can therefore be located at different sites. Bauxite is mined in over a dozen countries, with much of the ore located in the equatorial latitudes. Bauxite is often processed into alumina near the deposit, reducing the amount of material to be shipped and allowing the host country to share in the value added by processing. Since the production of aluminum from alumina is a highly energy-intensive process, the availability and cost of electricity are major factors in the siting of smelting facilities. For many years sufficient electrical capacity was available only in the industrialized countries. This began to change in the 1970s. As petroleum prices rose, so did the cost of electricity, causing drastic changes in the economics of aluminum production. One result is that future smelters are likely to be located outside the United States, probably closer to the mine

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SUPPLY, DEMAND, AND COMPETITIVENESS 31 site. The U.S. aluminum industry previously had the competitive advantage of low-cost electric power, but now such countries as Brazil and Canada are capable of providing electricity at prices that are low relative to those charged in the United States. The U.S. aluminum industry will retain other advantages resulting from low-cost transportation on inland waterways and proximity to markets as well as a base of existing facilities. Because aluminum smelting is capital intensive, existing smelters can continue to compete with new smelters in other countries. Finally, the aluminum industry extends far downstream to include the production of specialty alloys in forms desired by the consumer. Firms in the aluminum industry compete not only on metal price and production costs but also on the ability to deliver desired products. After several decades of expansion, however, it appears that domestic production of aluminum has peaked. Due in large part to the high cost of electric power in the United States, it is unlikely that there will be significant investment in new domestic aluminum plants. As the cost of operating domestic smelters increases due to increases in domestic energy costs or other factors such as fitting pollution control systems to existing facilities, even the current level of domestic smelting capacity is likely to decline. The U.S. aluminum industry will likely remain strong because it is vertically integrated and can combine investment in overseas mines and processing facilities with domestic alloy production and production of semifabricated products. Steel The huge steel industry has evolved into two independent components. Once dominated by large integrated facilities, the industry is now segmented into "mini-mills," which rely on scrap steel for input and produce basic steel as an output, and large facilities that continue to produce raw steel, both for processing into semifabricated products and for further processing into specialty alloys. The industry's raw materials iron ore and scrap steel are commodities that can be obtained from a variety of sources. As a result the competitive basis for the steel industry depends less on the cost of raw materials and more on the costs of processing them into steel and steel products. To a greater degree than the base metals, steel has some specialized markets where a firm can compete based on the quality of the marketed product. Base Metals Base metals copper, lead, and zinc are commodity products. The bulk of production is processed into standard forms, such as wire, slab, ingot or

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32 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY billet, and sold either on contract or through commodity exchanges. These products are produced to meet consumer standards, and to the degree that the products meet those standards, price is the principal measure of compe- tition. Copper Over the past four decades the copper industry has evolved from one dominated by a small number of private firms to one in which much of the world's production is controlled by national governments. Decolonialization, nationalism, and Third World development programs have all contributed to the expansion of capacity in developing countries. The domestic copper industry operates with two distinct disadvantages: low ore grades and high labor costs. In addition, domestic mines operate under stringent environmental regulations that incur substantial costs that are not borne by mines in most other countries. Despite these disadvantages the domestic industry has been able to maintain a significant share of the world copper market. This is the result of two factors: the economics of surface mining and a large base of existing copper smelters and refineries. U.S. copper production is based to a large degree on low-grade copper porphyry deposits. Domestic deposits are made competitive through the use of large-scale open pit mines, combined with technology that can be used near the mine to concentrate the copper-bearing minerals into a concentrate averaging above 30 percent copper. This copper concentrate can be transported economically to smelters located farther from the mine and then to refiner- ies for purification and sale. Finally, the markets are nearby via efficient distribution systems. Increased energy costs during the 1970s raised the cost of smelting and refining copper. New environmental regulations also increased operating costs, particularly at the smelting stage. Over the decade from 1975 to 1985 these cost increases led to the decline of copper capacity in older plants, but this was partially offset by the introduction of solvent extraction/electrowinning (SX/EW) technology as an alternative to the smelting process (see Figure 2- 2) for suitable ores. This technology proved invaluable to the competitiveness of domestic copper producers. As a result of the closing of the most costly facilities and deposits and the introduction of new processing facilities based on SX/EW technology, the copper industry was restructured into one that could compete in the world market. Lead The domestic lead industry is the largest producer in the world, account- ing for 11 percent of the world's mine production. Lead is generally mined

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34 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY Solvent Extraction/Electrowinning Plant at San Manuel Mine, Arizona. (Courtesy Magma Copper Company.) using underground mining methods. Crushed ore from the mine is hauled to mills in preparation for smelting and refining. Lead coproducts include zinc, which is usually recovered during the milling stage, and silver and copper, both of which may be by-products of the refining process. The discovery and development of significant new lead deposits in Mis- souri strengthened the industry during the 1960s and 1970s. This region now accounts for over 90 percent of U.S. production. Although the Mis- souri ores are relatively low in lead content, they are easily amenable to mechanized mining, beneficiation, and smelting. As a result, energy and labor costs in the domestic lead industry can be as low per pound of lead as they are in other producing countries; the relative simplicity of mining, processing, and smelting provides an advantage to offset the higher grade but mineralogically more complex ores of foreign producers. Thus, the industry can compete with foreign producers, at least in the domestic market where foreign producers must also face shipping costs. Most foreign lead production is tightly integrated with the production of other metals. Thus, foreign lead production can be affected by changes in demand for other metals, particularly silver and zinc. Domestic producers, with less by-product production, are less sensitive to demand variations in other metals. At times this may work to the competitive advantage of the domestic industry, while at other times it may hurt profitability. The lead industry must comply with environmental and safety standards, both in the mining and processing of ore and in the disposal of tailings and waste products. Health and environmental regulations have been a burden to the lead industry, although less than to the copper industry, which required major investments in new smelters. Even so, regulation of the lead industry has added some costs, and when, as now, standards are set more strictly in

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SUPPLY, DEMAND, AND COMPETITIVENESS 35 the United States than in foreign locations, they reduce the competitiveness of the domestic industry relative to foreign producers. The industry must identify and apply cost-effective means of complying with these standards in order to avoid losing a competitive edge to other producing countries that do not apply such standards. At the same time, capital costs of new smelt- ing methods, coupled with problems in plants presently implementing these technologies, have deterred their introduction in the United States. zinc Zinc is produced both by itself and as a coproduct of lead production. Underground mining is used in all but a few foreign deposits using traditional mining technologies and various techniques for separating zinc minerals from gangue. Zinc metal is obtained from the concentrated ore by chemical or pyrometallurgical means, then refined and cast into slabs or processed into sheet, strip, or other forms for commercial sale. The domestic zinc industry has two disadvantages relative to foreign producers. The first is a low ore grade U.S. ores average less than half the zinc content of foreign ores. The second factor is the low content of by- and coproduct metals. In U.S. deposits zinc appears as the primary con- stituent, whereas in other countries it is often part of a complex ore containing significant amounts of lead and precious metals. Domestic zinc production has remained competitive due to high domestic labor productivity and capital facilities already in place. The competitiveness of domestic zinc production would be greatly enhanced by the exploitation of higher-grade deposits. Deposits with high contents of zinc and other metals, like the Red Dog deposit in Alaska, could significantly change the apparent competitive status of the domestic zinc mining industry, even though the concentrates may go to foreign smelters. TRENDS IN METALS DEMAND Current Status of Materials Demand Near-term projections of demand for metals can be derived from current demand patterns and from projections for growth of major metal-consuming industries. Such projections must be tempered by experience and a knowl- edge of underlying trends in substitution, changing intensity of use, and other relevant factors. Since it takes several years for major changes in these factors to permeate industry, this methodology can provide usable estimates for the 5- to 10-year time frame. In the longer term the demand for metals will also reflect changes in system design, availability of new materials and processes, and other factors that affect the intensity of use of

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36 9000 8000 - co O 7000 8000 UJ 3 I 5000 4000 - 3000 - 2000 1 000 O COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY 7 1 1 1 1 1 1 1 1 1 1 1 1 1 Copper Lead Zinc 1 1 1 1 1 1 1 1 1 1965 1970 1975 1980 1985 1990 YEAR FIGURE 2-3 Base metal consumption, 1965-1988 (world, excluding Eastern Euro- pean socialist countries). Source: Metallgesellschaft, A.G. Metal Statistics. metals in manufacturing. It will also reflect some of the profound political changes now sweeping the globe. Metal demand is driven by the requirements of the economy's manufac- turing sectors (e.g., automobiles, aviation, and construction). It is affected by substitution, both by alternative metals and alloys and by nonmetallic materials (e.g., plastics and composites). Demand is also affected by con- servation efforts, both intentional (as with recycling of scrap produced in the manufacturing process) and side effects (as in the use of near-net-shape forging and powder metallurgy). Figure 2-3 illustrates patterns in base metal consumption over the past 25 . The period of stagnation from the mid-1970s to the mid-1980s included two recessions, the end of the Vietnam War, two major increases in energy costs, and a gradual shift in the economies of developed countries from manufacturing to services. In the past few years, however, metals consumption has begun to increase more rapidly. This increased demand, combined with reduced capacity, has resulted in higher metal prices, which have returned the minerals and metals industry to profitability. . years for the Western industrialized countries Near-Term Trends in Materials Consumption Future demand for metals will be strongly affected by the growth of the economy as a whole. As shown in Figure 2-4, developing countries are

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SUPPLY, DEMAND, AND COMPETITIVENESS 17- 14 13 Bauxite Nickel Manganese Chromium Tungsten Cobalt Tin 45 53 o o o o o o l 1 1 1 1 . - r I T I T T I I l T I I I T T I T l 0 10 20 30 PERCENT 40 50 60 FIGURE 2-7 U.S. market share of world mine production, 1989. Source: Bureau of Mines. various minerals and metals in 1989. The change in net import reliance across several years for selected minerals and metals is shown in Table 2-4. Overall the decline in the value of the dollar and other factors have brought the minerals trade deficit down to a level of $10 billion in 1989, compared with $13 billion in 1987 and $15 billion in 1986. About half of the current deficit is attributable to net imports of iron and steel. The domestic indus- try is a net exporter of only five commodity metals: gold, magnesium, molybdenum, metal scrap, and recently aluminum. Competitiveness by Sector The U.S. metals industry (with one or two relatively minor exceptions) is no longer the dominant player in the world market. This is probably a

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46 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY MATERIALS COMPETITI1:)N lN THE MANUFACTURING SECTOR The design engineer in the manufacturing industries must consider a new material and its associated fabrication processin the context of replacing a material/process combination that is already in production for a given component. In some cases a totally new part is~designed or an existing part is extensively redesigned to take advantage of the high-performance properties of the new material and its process. In other cases several existing parts may be combined into a single integrated component that can be produced with greater reliability or at lower cost. The factors that affect materials selection decisions are key to understand- ing the potential for changes in the intensity of use of specific metals in the manufacturing industries. To make the discussion concrete, choices in the automotive sector are discussed. Similar processes are generally followed in other industries. As a new model of automobile is designed or as innovations are introduced, the designer may consider using a new material if it offers some benefit, such as . higher performance (e.g., improved fuel economy andlor reduced engine noise and vibration); lower cost (e.g., less costly materials, less costly processing, lower tool- ing costs, lower warranty costs, etch; weight savings; and styling (exterior and interior) flexibility. The designer must be assured that the new material will provide equal or better functional performance (e.g. strength, stiffness, crash durability) or reduced material or production cost relative to conventional materials and processes. This may be accomplished through prototype testing, computer simulation, or other means of evaluation. If the testing supports the potential benefits of the alternative material, further studies will be undertaken. While performance, shape and packaging feasibility issues are being re- solved, the designer also works with the manufacturing engineer to determine the manufacturing feasibility of the part. In the past, designers often handed off the component design to the manufacturing engineers at the completion of the design process. As a result, manufacturing issues were not resolved until late in the product development process. Today, however, designers work closely with manufacturing engineers to resolve manufacturing issues during the early design stage. Often the first manufacturing consideration is whether the part can be made utilizing the selected processing method. For example, high-strength steels generally cannot be stamped with the same die shape used for mild steel. Even with die modifications it may not be possible to form some complex shapes. These issues must be resolved in the prototype trials, or alternative fabrication processes must be selected. Once manufacturing feasiblity is established in the prototype stage, a decision has to be made as to whether the manufacturing system should be scaled up to the pilot stage. This is done to gain confidence that the parts can be made with very low variability at high production volumes. Since this is a critical step as well as an expensive one, only a few projects are selected for this stage. Pilot

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SUPPLY, DEMAND, AND COMPETITIVENESS demonstrations are necessary in order to identify problems that could arise in a full-scale production plant. While functional performance and manufacturing feasibility are being as- sessed, the costs associated with producing the new material/process combination are being evaluated. As confidence in manufacturing grows, the cost estimates become more accurate. It is important to note that the materials cost is only one factor to be consid- ered. One must also take into account all of the other costs involved in the component subsystem and ultimately in the total vehicle system. Even if the cost of an individual component made from an alternative mate- rial is higher than the part currently in use, it may be used under certain condi- tions: . if it contributes to a new product feature, so that it can be priced to retain or improve economic profit; if it improves reliability, contributing to a favorable warranty impact; if it is required to meet government regulations and the additional costs offset the costs elsewhere in the product; or if it is required to meet competition, and the increase in variable costs could be offset either in the same subsystem or elsewhere in the vehicle. Another important factor is the supplier infrastructure. Some industries pur- chase about 50 percent of the materials for use in their manufactured products either in the form of semifinished products or components and subsystems. Since the automobile manufacturer is virtually dependent on its suppliers for the ultimate quality of the products, it will prefer to use suppliers with an established record of producing high-quality materials and parts at high production volume. In introducing a new materials technology, it is quite possible that there is no current established supplier, either external or internal, willing to take the risk of investing in the new technology. Or a firm outside the traditional supplier industry may promise to supply the new technology but lack a track record of supplying high quality at high production volumes. There is a reluctance on the part of many purchasing organizations to make agreements with such firms. In other cases a start-up firm that has no established materials processing capability only a prototyping capability may be the potential supplier. This is the most difficult situation of all, since it entails the greatest combination of uncertainties. Based on the above analysis, the following conclusions are drawn regarding changes in materials use in the automobile industry: Radical changes in materials and manufacturing technology are unlikely due to the huge investment in existing materials and processes and the requirement that investment in new technology be profitable in the fairly near term. New materials will be introduced in incremental fashion, building on existing high-volume production processes that have either been developed internally, by current suppliers, or by other industries. Once a foothold has been established in one or two parts, diffusion oc- curs in a part-by-part manner, as the new infrastructure builds. While these conclusions are derived from the automobile industry, they are based on principles common to all manufacturing industries. As such, they provide a guide for evaluating the rate of change of metals use in the manufacturing sector as a whole. 47

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48 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY TABLE 2-3 United States and World Productiona of Selected Metals 1975-1989 (thousand metric tons, except as noted) 1975 1980 1983 1988 1989 Copper United States 1,282 1,181 1,038 1,420 1,500 Worldb 6,962 7,630 8,044 8,453 8,830 U.S. share of world production (%) Iron OreC United States Worldb U.S. share of world production (%) 9.0 Zinc 18.4 15.5 78.9 877.6 12.9 69.6 873.6 37.6 729.6 8.0 5.1 16.8 17.0 58.7 916.0 943.1 6.3 6.2 Lead United States 564 551 466 394 450 Worldb 3,438 3,520 3,367 3,420 3,450 U.S. share of world production (%) 16.4 15.7 13.8 11.5 13.0 United States Worldb U.S. share of world production (%) 426 5,562 317 5,745 275 6,246 256 6,977 345 7,040 7.7 5.5 4.4 3.7 4.9 aMine production. bInclusive of United States. CMillion long tons of ore. SOURCE: Bureau of Mines, Mineral Commodity Summaries (various years). permanent change of status. Most of the metals subindustries are still at- tracting investment to existing facilities, but they are finding fewer and fewer opportunities for new "greenfield" developments. The only clear exceptions appear to be gold and silver and, on a much smaller scale, the platinum group metals. The U.S. share of world gold production rose from 7 percent in 1986 to nearly 13 percent in 1988. The domestic share of world silver production (mostly from coproduct mines) increased from 8 percent to 12 percent in the same 3-year period. The domestic aluminum industry has adjusted to its changing economic circumstances sufficiently well that its competitive decline is now only gradual. Overall domestic capacity, which had declined steadily from 1983 to 1987, stabilized in 1988 when primary aluminum metal output rose by 17 percent, allowing exports to increase in 1989. The wrought aluminum sec- tor should remain quite competitive; a start has been made on diversifica- tion and exploration of new materials and products.

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SUPPLY, DEMAND, AND COMPETITIVENESS 49 Copper gained only moderately in comparison to other national indus- tries a 1 percent gain in market share during 1988, with no further gain in 1989. With low inventories, lower labor costs, and continued productivity improvements and restructuring, the U.S. copper industry is now somewhere in the middle of the competitiveness range internationally. The long-term outlook is for increasing materials substitution as well as increasingly strong competition from foreign producers, who are expanding aggressively and cutting costs. When demand turns downward, there may be a further shakeout of producers. Table 2-3 shows that the domestic lead industry lost substantial portions of its market share during the 1980s. Domestic lead is in a period of transition, with recycling of scrap (mostly from car batteries) edging out primary refining of mine output. At the same time, world mine production is increasing, and while domestic lead is produced from essentially mono- metallic mines, much of the world obtains lead as a coproduct. Environmental concerns also affect the lead industry. For both lead and zinc the outlook Manganese Bauxite and Alumina Platinum Group Metals Cobalt Chromium Tungsten Tin Nickel Zinc Cadmium Silicon Iron Ore Copper Lead Manganese Titanium Aluminum Molybdenum E indicates net export ~ Do 20 E 1 1 1 1 86 1 ~ 61 i 1 1 . 1 1 1 1 1 0 20 40 60 80 100 PERCENT FIGURE 2-8 Net import reliance for selected minerals and metals, 1989. Source: Bureau of Mines.

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so COMPETITIVENESS OF THE U.S. MINERALS.iND METALS INDUSTRY TABLE 2-4 Change in U.S. Net Import Reliance for Selected Minerals and Metals as a Percentage of Consumption, 1983-1989 1983 1984 1985 1986 1987 1988 1989 Aluminum 17 7 16 26 23 7 E Bauxite 96 96 96 96 96 97 97 Chromium 76 80 75 79 76 77 79 Cobalt 95 95 94 85 86 86 86 Copper 19 23 28 27 26 13 9 Iron ore 37 19 21 33 22 18 20 Iron and steel 16 23 22 21 19 17 13 Lead 20 20 12 20 17 13 8 Magnesium E E E E E E E Manganese 99 98 100 100 100 100 100 Molybdenum 7 E E E E E E Nickel 75 69 71 73 75 68 65 Platinum Group 89 89 92 90 94 95 94 Metals Silicon 31 18 25 36 33 29 23 Tin 73 74 72 74 74 78 73 Tungsten 52 70 68 70 79 76 73 Zinc 65 68 70 73 71 69 61 Notes: Net import reliance = imports - exports + adjustments for government and industry stock changes. Apparent consumption = U.S. primary and secondary production + net import reliance. E = net exporter. SOURCE: Bureau of Mines, Mineral Commodity Summaries, 1990. for future competitiveness is clouded by vulnerability to substitution by other materials and by higher-grade mixed deposits in other countries. Despite moderate increases in production and profits, there has been only slight expansion or even contraction of the existing capacity of the U.S iron and steel industry's large, highly integrated facilities. A positive de- velopment has appeared in the form of "mini-mills" or "market mills," which serve a selected geographic area by melting 100 percent scrap and continuously casting billets to be made into merchant shapes. They have captured a large share of the market for these less expensive materials from the integrated mills and now have plans to move into the more technologically demanding sheet market, an experiment that is being watched with interest Meanwhile foreign competitors could further erode the integrated mills' market share in the future. In 1986 the Congressional Research Service noted "a gradual deteriora- tion of competitiveness mineral-by-mineral." This does indeed appear to be taking place, with uneven patterns of decline and resiliency across the

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SUPPLY, DEMAND, AND COMPETITIVENESS 51 subindustries. Despite the recent revival in prices, production, and profits in many subindustries, U.S. competitiveness in the minerals and metals industry appears to be continuing the pattern of gradual decline that has held since World War II. Comparative Advantages and Disadvantages of the U.S. Industry Previous sections of this chapter have noted most of the reasons for the competitive status of the U.S. industry and its subindustries whether growing, holding steady, or declining. No single reason explains their current com- petitive situations, even for those that are declining. However, some factors are certainly more important and broader in their impact. Table 2-5 summarizes the factors responsible for the current state of the U.S. mining and metals industry. Factors are not listed strictly in order of importance, although in general the more significant ones do appear earlier. In all it is obvious that the list of disadvantages is far more extensive than the list of advantages enjoyed by the industry. The comparative disadvan- tages are both real and revealedthat is, some have a direct impact on production costs at the mine or refinery, while others "tilt the playing field" against the domestic producers. Of the advantages, the first three are real advantages, while the other three are a function of government policies at home and abroad. These factors have an immediate day-to-day impact on the competitive- ness of the U.S. mining and minerals industry, but the industry also faces a number of longer-term background problems that are undermining its health and overall ability to compete. One of the most significant of these is the lack of an adequate science base to support mining and processing technol- ogy development. It is not that the United States lags other nations in the relevant science and technology, but rather that the domestic industry must rely more heavily on technology to maintain its competitiveness. The prob- lem is one of insufficiently imaginative research, exacerbated by poor com- munication between academic researchers and the engineers who deal with the real technical problems in the industry. (See Chapter 4 for a further discussion of institutional roles in mining research and technology transfer.) Financial factors present another difficulty for the U.S. industry. Com- panies in sectors other than precious metals have difficulty finding capital. This difficulty derives from the industry's poor investment image coupled with the prevailing emphasis by investors on short-term earnings. Technology and U.S. Comparative Advantage Chapter 3 of this report addresses the role of science and technology in the competitiveness of the minerals and metals industry. Nevertheless, several points are relevant to this discussion of comparative advantages and

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52 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY TABLE 2-5 Factors Affecting the Competitiveness of the U.S. Minerals and Metals Industry The domestic minerals and metals industry has had to cope with a number of factors that work to its disadvantage relative to foreign producers and processors. Among these are: . Decline in ore grades in domestic deposits, relative to the high-quality ores being found in many developing countries. Increasing development of facilities for downstream processing by foreign producers, resulting in overcapacity and overproduction. Rapidity of international development and transfer of technology at moderate cost, minimizing the comparative advantage in technology traditionally enjoyed by U.S. producers. Comparative disadvantage in labor costs, relative to the lower wage rates prevailing in nearly all other producer countries. (Depending on the country, this differential has shrunk and even disappeared with the recent drop in the value of the dollar; indeed, the labor cost differential has shrunk steadily for decades.) Relative decline in the size of the U.S. domestic market in comparison to the world market. Fluctuations in exchange rates, which in the past have tended to favor imports rather than exports of U.S. minerals. Restricted access for some U.S. exports in some international markets. Ready availability of capital from international lending organizations for foreign mining and processing operations. (Lending institutions have tightened criteria for financing resource development projects, so this factor will be less important in the future.) Readiness of some foreign governments to continue production at levels not supported by the market in order to maintain jobs and income stream (i.e., production objectives not tied to price), whereas the U.S. government relies primarily on free markets. Presence of substantial coproducts (or by-products) in many foreign ore bodies, yielding multiple income streams. Shift toward incentives for short-term financial objectives and planning horizons of U.S. corporate management, along with injurious financial . . manlpu. .atlon. Rising cost of energy relative to that of many other countries (especially in the case of the aluminum industry). Cost burden of compliance with environmental, land use, and safety regula- tions that are more stringent than those borne by foreign producers. A more pronounced shift toward alternative materials and less metal- intensive products in the domestic economy than in other markets. Loss of public support and confidence (poor image). Changes in ownership of U.S. companies and erratic management perfor- mance, at least in the recent past. . . . . . .

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SUPPLY, DEMAND, AND COMPETITIVENESS 53 The following factors operate to the advantage of U.S. producers, relative to those of most foreign countries: High productivity of the domestic work force (better use of technology is a factor here, as are work rules that permit new flexibilities and multifunc- tional workers). Faster access to new technologies. Lower transportation costs in serving most of the large U.S. market. . Less interference by the government. Lower net tax burden (some foreign governments require substantial direct payments copper, lead, and zinc are industries in which the United States has a significantly smaller tax burden). Market-determined input prices (i.e., some foreign industries pay arbitrary prices for raw materials). disadvantages. Technology can contribute to a competitive advantage in three ways. The first is through exclusive access to a technology that increases the productivity of a mine or improves the quality of the product. Given the speed with which information travels between firms and countries, this advantage is temporary, but the first firm or country to implement a valuable technology may acquire a comparative advantage for several years before it spreads to others in the industry. New technologies have their greatest impact when they can be integrated into the design of a new facil- ity, however, and most new mines and processing plants are being built overseas. The second way in which technology can contribute to a comparative advantage is when it addresses conditions or circumstances unique to a firm or country. Factors that affect U.S. industry to a greater degree than other countries include high labor costs, low ore grades, and more stringent envi- ronmental regulation. These factors therefore provide targets of opportunity for research and development (R&D) that will provide a comparative ad- vantage for domestic operations. Technologies to concentrate metal from low-grade ores, to increase labor productivity, and to reduce the cost of meeting environmental standards all would contribute more extensively to U.S. firms than to foreign producers. Nevertheless, it may be somewhat simplistic to believe that more R&D alone is the solution to the difficulties of the domestic mining and minerals industry. The third way in which technology may affect competitiveness is by allowing metal producers to adapt to changing consumer demand by producing metals that meet new quality and performance needs. Competition between materials becomes most intense when systems undergo extensive redesign, but such opportunities are not frequent; the automotive design cycle is about

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54 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY 10 years in duration (component changes alone may take 3 or more years to implement), and in aviation the design cycle is at least that long, especially for commercial aircraft. Domestic metal producers may earn a comparative advantage relative to both foreign metal producers and producers of nonmetallic materials by collaborating with designers and fabricators in the development of the next generation of manufactured products. In aviation, for example, aluminum producers devote funds and personnel to efforts to develop alloys and metal processing techniques that meet the requirements of the next generation of aircraft. Data Analysis for Materials Planning Clearly, changes in technology will produce changes in the demand for raw materials and for intermediate products, including alloys, metal powders, and other metal products. Companies that wish to become or remain com- petitive will need to anticipate future demand changes in order to respond quickly when those changes occur. While there is no way for them to accurately predict the future, it is feasible to project the implications of technological changes on materials demand and to then base R&D, explora- tion, and investment decisions on assessments of the likelihood of those changes actually being implemented. This type of analysis is referred to as indicative planning. Data for indicative planning can be organized into input-output tables that expose overall patterns of demand for primary materials and how they change as consumer purchases of manufactured products go up and down. Input-output models can also be used to evaluate the impact of technologi- cal changes on demand for raw and semiprocessed materials. Such projec- tions would be of substantial importance for assessing the capability of the domestic economy to meet the requirements of public projects ranging from military and defense programs to rebuilding the domestic transportation infrastructure. The ability to conduct this type of analysis rests on the availability of current and reliable data about the manufacturing economy. Much of the relevant data are obtained by the Bureau of the Census through the Census of Manufacturers. Other relevant data have been generated by outside con- sulting firms, such as Battelle Columbus Laboratories and SRI International, and by university research projects and federal laboratories. The Bureau of Mines, working with the Bureau of the Census and with public and private research organizations, should evaluate the need for a consolidated, accessible data base for purposes of indicative planning. Government support for materials science should recognize that traditional metal alloys will remain contenders for use in the manufacturing and infra- structure sectors. Advances in materials science and engineering can con-

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SUPPLY, DEMAND, AND COMPETITIVENESS 55 tribute both to the performance and the competitiveness of metals and metal products. Support for basic research should not be cut in order to transfer funds to support research in alternative materials. Such research may be deserving of support on its own merits in addition to, but not in place of, support for minerals and metals research and the development of improved manufacturing technology.