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1 U.S. Minerals and Metals Industry in a Changing Global Context WORLD MINERALS AND METALS INDUSTRY Globalization of Production and Ownership Mineral exploration in the United States began in earnest in about 1850, leading to the discovery of some of the world's richest deposits of many major minerals. High-grade iron ore, copper, gold, and silver deposits were plentiful. Lead and zinc deposits were extensive, and their relatively low grades were offset by proximity to burgeoning markets. By the latter decades of the nineteenth century, however, growth in worldwide demand began to stimulate interest in global exploration. Gold was among the first targets, responding to concern that U.S. deposits could not fulfill the needs of the industrial economies of both North America and Europe. British and U.S. firms opened new gold mines in South Africa, Australia, and Latin America. By the turn of the century, base metals were being mined in Canada, Australia, and Mexico. By the beginning of World War I, several large copper projects were operating in Chile and central Africa, and rich lead, zinc, and silver ores were flowing from Peru. Most sectors of the U.S. industry were still growing vigorously during this period of internationalization. Producers compensated for declining ore tirades through economies of scale and technological advancements. By 1920 open pit mines served by steam shovels had become the rule in iron ore and copper, and electrically driven equipment was being introduced in the larger underground mines. The flotation process, invented in England 9

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10 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY and first exploited in Australia, was almost universally employed. Electroref~ning of zinc had been developed at Anaconda by 1913, and copper electrowinning, which originated in the United States, was being installed in Chile. All in all, these advances were building a U.S. lead in scale and technology that was not to be seriously challenged until after 1945. World War II greatly accelerated the depletion of higher-grade ore re- serves in the United States and Canada. The United States began a 20-year period of economic growth, consuming minerals and metals at rates that threatened to outstrip U.S. production and make the nation partly dependent on imports for major metal ores. Geologists and engineers, primarily from the United States but also from Europe and Canada, fanned out across the world to find new deposits and build new mines and plants. Much of the new foreign production was consumed by the recovery and rebuilding in Europe and Japan, so it did not challenge the traditional markets of the established U.S. minerals and metals companies. Because U.S. firms owned or controlled many of the foreign producers, moreover, there was a sense that, even if growth were to slow, U.S. interests would be protected. The international transformation that affected the U.S. minerals and metals industry occurred over a period of many decades. U.S. financial involvement focused initially on Canada and Mexico, but investors eventually became involved in the South African and Australian gold fields, the Chilean copper mines, and other areas. By the end of World War II, the U.S. companies had joined British and other European investors in the domination of world mineral production. While some companies emerged to exploit specific deposits or areas (e.g., Cyprus Mines in Cyprus and Cerro de Pasco Corporation in Peru), many entered the international field from a strong domestic base (Anaconda, ASARCO, Kennecott, and Newmont were typical). At the same time, however, many major companies such as Phelps Dodge, New Jersey Zinc, and St. Joe Minerals remained almost entirely domestic until the 1960s or later. When U.S. companies did become involved overseas, their style was ownership often total and almost always controlling. Many U.S.-owned facilities maintained large expatriate staffs, and their operations were usu- ally sheltered by very favorable taxation and profit repatriation rules. However, growing nationalism in developing countries, combined with an interest in a larger share of the benefits of their natural resources, led them to increase national control of their basic mineral resources. Most foreign-owned cop- per mines in the Third World had been expropriated by the early 1970s, either wholly or in part. Iron ore and bauxite followed a similar course, with output passing into the hands of government-controlled entities. Lead and zinc were less affected, mainly because the mines and smelters were concentrated in developed countries such as Canada, Australia, and the United States itself.

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 11 Changing Patterns of Supply and Demand By itself the wave of nationalizations would have had relatively little effect on the competitive positions of U.S. domestic producers, since most of the Third World output was already flowing to markets in the developed countries. However, these events roughly coincided with the energy crisis of 1973 and the recession that followed. Increased energy costs drove mining and processing costs upward. Metals and minerals prices increased at first but then declined as the demand for metals dropped with the onset of recession (see Figure 1-11. Burdened with debt and the need for foreign exchange, Third World producers struggled to maximize output despite lower demand. Commercial banks and multilateral lending agencies, eager to Aluminum 40 - an z 30 20 10 _ O - " " i ' I I I I ~ l,, I,,,, I,,, I- I,, 1950 1955 1960 1965 1970 1975 1980 1985 1990 YEAR Steel 1 500 use Z _ o 1 000 O. 500 it,' 1 C uJ Z 8 ~ if; 6- ~ 4 ~ O / _ 1 o" " 1' 1 1 1 1 " " 1 " " 1 " " 1 " " 1 " " 1 " " 1 1950 1955 1960 1965 1970 1975 1980 1985 1990 YEAR Zlnc ~ ITI T ITrlr' rat I | ~~ I rT I rr~f rr~Tl r I I rl l I rat 1950 1955 1960 1965 1970 1975 1980 1985 1990 YEAR Copper c,, 15_ '_ 10 5 ~ o- [lllllllllllllllllllllllllllllllllllllll 1950 1955 1960 1965 1970 1975 1980 1985 1990 YEAR ci, 5 4- a 3 ~ 2 0 1 O - ""1" "1""1 ""1" "1""1 ""1"" 1950 1955 1960 1965 1970 1975 1980 1985 1990 YEAR Projected Actual FIGURE 1-1 Actual and projected growth of consumption of various metals: Western world, 1950-1988.

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2 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY recycle petrodollars, continued to lend for new projects. At about the same time, U.S. mining and metals companies, believing that reduced demand was a temporary condition of the recession, continued to invest heavily in new expensive efforts to exploit marginal resources adding still more sup- ply toward the higher ends of the cost curves. Petroleum companies, seek- ing expansion opportunities for the increased income generated by rising oil prices, bought major minerals and metals companies and supported their expansion plans. Meanwhile, demand for metals remained depressed after the recession in 1975, even when the world economy recovered. One factor was the end of the Vietnam War, but another important reason for stagnant demand was a declining intensity of use for these materials (Table 1-1~. Intensity of use (I/U) is defined as the amount of a given mineral or metal consumed in producing a unit of the gross national product (GNP). That is, after the mid-1970s the use of primary metals in the developed nations began to drop sharply Trough a combination of downsizing (e.g., of automobiles), conservation (e.g., recycling of aluminum cans), and substitution by other materials (e.g., plastics in everything from telephones to trucks). TABLE 1-1 Average Annual Change in Western World Metals Consumption, Gross Domestic Product, and Intensity of Use, 1960-1973 and 1973-1986 Average Annual Change (%) Metal and Metal Period Consumption Gross Domestic Intensity Product of Use Aluminum 1960-1973 9.9 5.2 4.5 1973-1986 1.3 2.7 -1.4 Copper 1960-1973 4.6 5.2 ~.6 1973-1986 0.8 2.7 -1.8 Steel 1960-1973 5.6 5.2 0.4 1973-1986 -1.1 2.7 -3.7 i. Alec 1960-1973 5.4 5.2 0.1 1973-1986 0.0 2.7 -2.7 SOURCES: Metal consumption data are from Metallgesellschaft (an- nual) and International Iron and Steel Institute; GDP data are from the World Bank.

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 13 Metal demand was recovering in the late 1970s until the oil market was again shaken by the actions in the Middle East and the Organization of Petroleum Exporting Countries (OPEC) in 1979. The threat of rising energy costs further depressed demand. Third World metal producers, faced with pressing economic demands and limited sources of capital, again tried to increase production despite stagnating demand. This policy kept prices low, which in turn increased their financial burdens, leading to further overproduction. Overproduction and excess capacity caused a major shift in the economics of metals and minerals. Industry pleas for government intervention could not be heeded without raising consumer prices and risk- ing a banking crisis or worse in some countries. While some help was givenmost notably to steel via trigger pricing and voluntary restraint agreementsthe U.S. government generally took a hands-off approach. It was only by the second half of the 1980s that growth of demand and declining investment into new capacity brought the market in balance at higher metal prices. The United States, traditionally the dominant market for minerals and metals in absolute terms, had also been a leader in the increasing intensity of their use during the first half of the century. This began to change markedly after World War II. Even Europe and Japan, with their postwar reconstruction completed, have seen their intensity of metals use decline. It has come to be accepted that, as a developed society's standard of living rises, its per capita demand for minerals and metals drops (Malenbaum, 1978~. In developing nations, on the other hand, demand increases as they build housing, factories, schools, and infrastructure, which are already in place in developed nations. In some cases developing nations are able to develop indigenous sources of supply, but in many cases they must import minerals and metals they lack or cannot produce efficiently. This growth in demand in the Third World may eventually provide a large market for minerals and metals but not for many years to come. First, even strong growth from a low base can take a long time to reach a significant level in global terms. For example, a 10 percent increase in Brazilian copper consumption would be required to offset a 1.1 percent decline in U.S. copper use (World Bureau of Metal Statistics, 1989~. Second, devel- oping countries frequently lack the foreign exchange needed to purchase the metals and minerals they need. While the developing countries may eventually become major consumers, industrialized nations, in short, will remain the major end-use markets for the foreseeable future. Changing Corporate Structure of the Industry At mid-century the United States was a dominant producer as well as a major market for minerals; three or four American companies, with their

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4 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY British and European counterparts, virtually controlled price and supply in most mineral sectors. These large companies specialized in one mineral and its coproducts (where different minerals occurred in a single ore body). They also tended to be vertically integrated, mining and processing the ores into metal and in some cases (particularly in the aluminum industry) con- tinuing their operations even further downstream into the fabrication of consumer items. The corporate structure of the world minerals and metals industry has changed enormously over the past quarter-century. There are now many more players in many more countries throughout the world. Full vertical integration is now much less common, particularly in the base metal indus- tries: the former giants have in many cases shrunk, disappeared, or divested their interests to concentrate on one phase of activity (mining, processing, _ _ or fabrication). In addition, those companies have spread their risks by diversifying into different metals, nonmetallic materials, and even energy and other types of products. Most of the largest companies today are mul- tinational, multimetal holding companies comprised of independent subsid- . . Lanes. TRENDS IN THE U.S. INDUSTRY A recent study by the Congressional Research Service (CRS) reported that "the United States is no longer the world's leading producer of most metals. It now functions within the framework of the total world market rather than in isolation or as a dominant force" (CRS, 1986, p. 51. Management and technical superiority once gave U.S. companies strong advantages over their competitors. As ore grades have diminished, however, it has become increasingly difficult to maintain a strong position in the market based solely on management and incremental technical advances. Foreign industries have learned our management techniques, and technology now crosses bor- ders more fluidly than ever before. Many factors external to the activities of mining, processing, and fabricating metals have also worked to the disad- vantage of the U.S. industry. For example, the cost of complying with federal environmental regulations is about 6 cents per pound of lead and between 9 and 15 cents per pound of copper about 20 percent of the price of each metal in 1986, though rising metal prices have reduced this fraction to more like 10 percent today; the added cost for many other nations with less stringent environmental restrictions is far lower. The condition of the domestic industry in 1984 was bleak, prompting a Business Week cover story entitled "The death of mining" (Houston et al., 1984~. The industry had failed to rebound from the recession that ended in 1982: prices remained low in the face of foreign overproduction, and profitability continued to decline despite the general recovery felt in other sectors of the economy. Labor costs were among the highest in the world, and the strong

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 15 dollar made imported metals more attractive than domestic products. Dur- ing the late 1970s and early 1980s, major oil companies had bought up mining companies but were then (for the most part) unable to operate them profitably. Buyouts, layoffs, and plant closings became commonplace as the industry retrenched. Figure 1-2 shows this retrenchment graphically in the form of falling market shares. Aluminum* 60 z 40 c' ~ LL m_ __ O- LL C' 20 llJ 10 _ O ~ 80. LL 40 IL al 1960 1970 1980 1985 1 988 YEAR Copper ~ _ ~ ~ 9~ , T 970 _._ _ A 1 _ ~ _ 1980 1 1985 1 1988 YEAR 40 30 Z U] c' 20 IL rid 10 O Lead 60 - ~ 30- _ z 20 j,] ~ ~ 20- 1960 1970 1980 1985 1988 YEAR 40 O There is virtually no domestic production of bauxite, so there is no column for mine production of aluminum. Mine Output 3 Metal Production Consumption Iron/Steel ~ 1,:- 1960 1970 1980 1985 1988 YEAR Zinc 1 t. ~ ~ 1960 1 1970 1 19, 1 198 , 1 1988 YEAR FIGURE 1-2 U.S. mine output, metal production, and consumption of selected metals as a percentage of Western world.

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6 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY By 1985 the domestic nonferrous metals industry had recorded four con- secutive years of heavy losses. Prices (in constant dollar terms) of several major metals had reached their lowest level since the Great Depression (Figure 1-31. Copper, which was then the largest of the domestic nonferrous minerals industries in terms of employment and total earnings, was especially hard hit. Domestic copper mines were satisfying less than 60 percent of total domestic demand, and domestic smelting and refining operations fared even less well. In 1983, with the price of copper falling below 70 cents per pound, no integrated U.S. copper operation was able to break even on its operating costs (CRS, 1986, p. 15~. Even aluminum producers, who had traditionally been more profitable than other sectors of the metals industry, experienced losses of 30 cents per pound in 1982 and 19 cents per pound in 1984 (CRS, 1986, p. 1061. The iron ore mining industry, which contributes about the same amount to the U.S. GNP as does the copper mining industry, also experienced se- vere contraction during the 1981-1982 recession. Capacity utilization in 1982 was around 40 percent, less than half the 1979 peak. Due to pro- nounced integration of the domestic iron and steel industry, however, domestic iron ore prices remained more stable than other ore prices. For example, in the 1979-1983 period, real domestic prices of lead, copper, and zinc declined by 68 percent, 37 percent, and 15 percent, respectively, compared to 10 percent or less for iron ore pellets (CRS, 1986, p. 731. The U.S. molybdenum industry is the world's largest, with approximately half of the world's known resources. Because it is a high-value product, the value of U.S. molybdenum mine production in most years is twice that of 120 100 80 60 40 20 o _ + 1 Jun 84 Dec84 Jun 85 Dec 85 Jun 86 Dec 86 Jun 87 Dec87 FIGURE 1-3 Metals price index. Source: Bureau of Mines, the Mineral Position of the United States 1988.

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 17 the lead and zinc output, ranking third in total value behind copper and iron ore. Along with gold, it is one of only two metallic minerals that the United States still exports in large amounts. Nevertheless, due to sustained world- wide overproduction and low prices, the domestic primary molybdenum industry also experienced large losses, layoffs, and plant closings throughout the 1980s. By-product molybdenum, on the other hand, has thrived along with copper. Lead is the fourth-largest domestic metal industry, based on mine pro- duction. The U.S. lead industry is the world's largest producer. Although domestic ore grades are low compared to foreign deposits, domestic producer costs are fairly low and output is efficient. The U.S. lead industry, restructured after the recession of the early 1980s, performed well in the late 1980s. U.S. lead production is unusual in that, for over 90 percent of the mines, lead is the dominant product; elsewhere, lead ordinarily occurs as a secondary co- product with zinc and other metals. Fifth in terms of its market value is the zinc mining industry. Due to low ore grades, a relative absence of coproducts in U.S. zinc deposits, and low world zinc prices, the health of the domestic zinc industry has declined sharply since the 1960s more so than in the copper, lead, or iron ore industries. The decline has been seen across the board, at mines, smelters, and refineries. Smelting and refining capacity was cut nearly in half be- tween 1975 and 1985. By 1986 domestic mine output of zinc was the lowest in 80 years and metal production was the lowest in 50 years (Bureau of Mines, 1987, p. 281. Owing to its poor reserve base, domestic zinc is unlikely to mount a strong recovery. For steel, aluminum, and the base metals, the second half of the 1980s marked a general improvement over the first. Other domestic mining and metals industries have had different experiences in recent years. Titanium, for example, increased steadily in both production and consumption throughout the 1980s, in part because of the U.S. defense buildup but largely because its highest-volume use is as titanium dioxide in paint pigment. Employment has held steady and prices have trended slightly upward. Even exports have been steady, at about 13 percent of production (Bureau of Mines, 1989,p. 1721. But in the high-value sponge metal, domestic production has dropped while imports have risen. U.S. production of titanium sponge fell 25 per- cent in 1986 alone and was at about 55 percent of capacity by the end of that year (Bureau of Mines, 1987,p.291. By contrast, the precious-metals industries have remained strong domes- tically as gold and silver have generally held their price or risen in value. New gold mines opened at a rapid rate: over 40 in 1986, 37 in 1987, and 36 in 1988. Domestic mine production of gold increased by about 172 percent between 1985 and 1988 (Bureau of Mines, 1987, p. 641. Soon there will be more silver produced as a coproduct of gold mining than by direct silver mining in the United States. The economics of gold and silver are much

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8 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY simpler than those of other metals: although profitability is keyed to price, price in turn is largely keyed to factors other than supply. REVIVAL OF THE MINERALS AND METALS INDUSTRY At the end of 1985 the situation for most of the domestic mining and minerals industry was grim, but in 1986 demand increased and prices for metals soon rose, sometimes dramatically. Losses eased, turning into profits for many companies. As this improvement continued into 1987 and 1988, the turnaround became obvious (see Table 1-2~. In 1988 the overall value TABLE 1-2 U.S. Production of Selected Metals, 1983-1989 (million metric tons, except as noted) 1983 1984 1985 1986 1987 1988 1989 FERROUS METALS Iron ore 38.2 52.1 49.5 39.5 47.6 57.5 58.7 Iron and steel, 106 short ton Pig iron 48.8 52.0 50.0 44.3 48.3 55.7 53.8 Steel and cast iron 84.6 92.5 88.3 81.6 89.2 99.9 96.7 NONFERROUS METALS Aluminum Primary 3.4 4.1 3.5 3.0 3.3 3.9 4.0 Secondary 0.8 0.8 0.9 0.8 0.9 1.0 1.1 Copper Mine 1.0 1.1 1.1 1.1 1.3 1.4 1.5 Refinerya 1.6 1.5 1.4 1.5 1.6 1.9 2.0 Copper from old scrap 0.4 0.5 0.5 0.5 0.5 0.5 0.5 Gold, 106 troy ounce Mine 2.0 2.1 2.4 3.7 5.0 6.6 7.8 Refinerya 7.1 5.4 5.2 5.6 7.0 8.6 10.4 Lead Mine Refinerya Titanium, 103 metric tons Metal Titanium dioxide ~- ~lnc 0.5 0.4 1.0 1.0 12.7 22.1 21.1 691 758 783 0.4 0.4 1.1 0.9 0.3 0.4 1.0 1.1 16.8 17.8 844 879 0.5 1.1 22.2 926 1007 24.0 Mine 0.2 0.2 0.2 0.2 0.2 0.2 0.3 aPrimary and secondary. SOURCE: Bureau of Mines, Mineral Commodity Summaries 1989.

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 8 l 19 6 4 o O -6 -8 -10 1 1 r 1 1981 1 982 Iron and Steel 1~3 Nonferrous Metals 1983 1984 YEAR 1 985 1 986 1987 All Manufactunng Average FIGURE 1-4 Profit and loss trends in the domestic metals industries, 1981-1987. Source: Bureau of Mines. of raw minerals production in the United States had nearly doubled com- pared to 1986, from $5.8 billion to $10.4 billion. Figure 1-4 depicts the strongly improved profitability of the industry as a whole in 1987. Profits have continued to improve, gaining an average of 73 percent in the first quarter of 1989 (Atchison et al., 1989) but easing in the fourth quarter. Factors Leading to the Recovery Several factors, some internal to the industry and others external, con- verged to create the revival in minerals and metals. One factor was the range of adjustments that the industries had made internally in response to stringent economic conditions. Plant closings led to capacity reductions, while rationalization of mining operations reduced costs. Further cost reductions were achieved by reducing labor costs through both layoffs and wage reductions and by broadening the scope of many union jobs to increase flexibility and reduce personnel requirements. From 1981 to 1989, North American metals mining companies cut employment in half, helping to raise their productiv- ity by as much as sixfold (Atchison et al., 1989~. Restructuring and changes in mine and plant ownership reduced management costs and brought in fresh capital. Negotiations with utility authorities led in many cases to reduced energy costs, while greater energy efficiency was also sought. In the aluminum industry, for example, overall efficiency of energy use in- creased by 22 percent between 1976 and 1986 (Bureau of Mines, 1987, p.

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20 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY 1 50 us ~ 125 ~ IIJ He I x 100 LL 75 - / \ 1980 1982 1984 YEAR 1986 1 988 FIGURE US Exchange value of the dollar, 1980-1987. Source: Federal Reserve Board. 10~. Productivity and profitability were improved not only by restructuring but also through greater use of lower-cost, more efficient technologies such as solvent extraction and electrowinning in copper from suitable ores. By such means several copper companies stemmed their losses even before . . . prices began to rise. Second, demand for most metals grew sharply in 1986, largely in re- sponse to a continued economic recovery that by then had spread beyond the United States. At the same time, worldwide supply constraints began to be felt in copper, aluminum, lead, and zinc (Bureau of Mines, 1987, p. 28~. Reduced levels of investment in new projects throughout the world, combined with higher demand, resulted in a better balance between capacity and expected future demand. Third, the dollar weakened against most other major currencies, reducing relative domestic costs of production and making domestic products more attractive to domestic and many foreign consumers alike (see Figure 1-51. This also benefited foreign producers of nonfuel minerals- Canada, Austra- lia, and the Third World as the lower prices in other currencies encour- aged increased consumption. Overall the weak collar helped with some metals, such as copper, gaining more than others.

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INDUSTRY IN A CHANGING GLOBAL CONTEXT Effects of the Recovery 21 In the first half of the decade capacity utilization in the minerals and metals industry had generally fallen, followed by cuts in capacity via closures and rationalization. Once the recovery got under way, capacity utilization quickly rose to optimum levels in most cases. The recovery has aided several of the individual metal industries, prob- ably none more so than copper. Essentially, the U.S. copper industry had the best resource base and took the most drastic measures during the early 1980s to cut costs and increase productivity. Due to cost-cutting measures and new technologies, and to a lesser extent the decline of the dollar, costs for U.S. producers have fallen sharply relative to costs for many foreign producers (see Figure 1-6~. The average cost of copper production fell from 79 cents per pound in 198~ to 54 cents per pound in 1986. With consumption rising and copper inventories at a 12-year low in mid-1986, copper prices began trending upward from a base of 60 cents to 64 cents per pound (OTA, 1988~. By late 1987 the average price was well over 80 cents per pound, and U.S. copper producers were profitable again. The U.S. lead industry came back almost as strongly as copper. During 1987 and 1988 lead mine and metal production both increased, reversing the trend of the previous years, although production remained below the levels of 1979. The average world lead price rose 62 percent between April 1 1 1 1 Chile U.S. Canada Zaire Zambia Mexico Austrailia Ph il lipines I,,,,,,,~~ ~~ __ ~ ~~,! ~ l ~~,~ _ - . ~ . ~,,,^~- - - -~:~ 'at ,,,,,,,,, _ _ _ S. Africa - ~,,~,,,,,,,,,,,,~,,,-~ ._ PNG & Indo - ....... ~ ~ ~ ~ ~ ' ~ 1 0 20 40 60 80 100 (cents/pound) Mining 1~1 Milling _ Net costs G Byproduct credits ~ Smelting/refining FIGURE 1-6 Copper production costsUnited States versus rest of Western world.

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22 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY and July 1987 alone. The U.S. lead industry has not enjoyed unequivocal improvement, however; demand for lead has been falling because of envi- ronmental regulations and reduced lead content in gasoline. The U.S. in- dustry has seen sharp reductions in primary capacity in recent years. De- spite these reductions, primary refinery capacity utilization of the domestic lead industry was still only 60 percent in 1987, the lowest rate since 1968, St. Joe Lead Mines, Missouri lead operations, circa 1870. (Courtesy N. Arbiter.) The Viburnum Lead Mine in Southeast Missouri, 1989. (Courtesy The Doe Run Company.)

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 23 while the utilization rate in the secondary sector has risen to almost 90 percent, the highest ever recorded (Bureau of Mines, 1988, p. 30~. In 1986 St. Joe Lead Company merged with the lead operations of Homestake Mining Company to form the Doe Run Company, representing two-thirds of the U.S. lead mining capacity and over one-half of its primary refined lead capacity (Bureau of Mines, 1987, p. 28~. Reduced and rationalized capacity, along with a weaker dollar, has helped bring the lead industry back to modest profitability. Zinc consumption worldwide set two successive records in 1986 and 1987 before falling off slightly in 1988. Mine and metal production also reached record highs in 1987. Reflecting the high demand, prices for zinc also rose sharply after April 1987 (Porter, 1988~. Domestic mine and metal output also increased in 1987 and 1988, with new mine openings and two reopenings. With the fall in the dollar, domestic producer prices made a stronger advance than those on the London Metal Exchange. Nevertheless, the domestic zinc industry continued to contract. The aluminum industry has evolved differently than the base metal in- dustries. Both capacity and production of primary aluminum in the United States declined steadily through the mid-1980s. Conditions began to im- prove in early 1987, as prices rose sharply along with export orders, and some previously closed plants were reopened on a temporary basis. The price for primary aluminum increased by well over 50 percent during 1987. In response, primary aluminum production grew by about 5 percent in 1987, and capacity utilization rose from 72 to 90 percent (Bureau of Mines, 1988, p. 30~. However, overall domestic capacity did not increase. A major problem was the cost of energy relative to energy costs in the rest of the world. In the long term the Bureau of Mines estimates that domestic aluminum pro- duction will probably account for only about 63 percent of U.S. demand for primary metal and 43 percent of U.S. industrial demand by the year 2000 (Bureau of Mines, 1987, p. 301. The steel industry also participated in the recovery. World raw steel output in 1987 was the highest in 8 years, with stainless steel production increasing 9.3 percent over 1986 (Butler and Dopson, 1988~. World steel production then increased again by some 7 percent in 1988 (Bureau of Mines, 1989, p. 83~. Prices for steel products rose dramatically during 1987, but in 1988 they slipped back to the 1986 level. Overall, conditions for the domestic steel industry improved due to lower imports, strong de- mand, and the falling value of the dollar. U.S. raw steel output rose nearly 14 percent in 1988 due to both the competitive prices of domestic producers and the voluntary restraint agreements then in place. Demand for domestic steel grew, so that plants operated at well over 85 percent of capacity in 1988, a strong improvement over the 55 to 70 percent utilization rates of 1986. Most domestic steel producers reported profits, but plant closures

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24 COMPETITIVENESS OF THE U.S. MINERALS AND METALS INDUSTRY and industry restructuring continued. However, the iron ore industry lagged behind the general improvement: 1986 was the second-worst year for U.S. iron ore production since 1939, although production increased by 25 percent from 1987 to 1988 as prices held steady. This occurred because much of the early improvement in steel came from scrap-based electric furnaces or "mini-mills." Outlook for the Industry Given the revival just described, the crucial question is whether the U.S. mining and minerals industry is out of danger. The prudent answer to that question must be no. Although recent economic trends have prevented ex- treme difficulties and turbulence in many sectors, not one of the domestic industries described above can be considered securely profitable. They have enjoyed a brief run of profitability after several years of debilitating losses, but there is no guarantee that this run will continue. For example, many of the recent gains could be reversed rapidly by an increase in U.S. interest rates followed by a strengthening of the dollar. Another major recession combined with high world production could drop the price of copper, for example, by almost 50 percent. For most of these minerals and metals there are few remaining opportunities to cut costs. More fundamentally, the restructuring of the U.S. industry has left it unable to maintain a long-term dominance in any subindustry except perhaps mo- lybdenum. U.S. producers are seeking opportunities for new investments, but they find it difficult to generate sufficient optimism to support real expansion. A range of environmental, financial, and management constraints, discussed in the following chapter, pose formidable disincentives. The prospect is not for the "death" of the U.S. mining and minerals industry but rather for continued instability and vulnerability to world eco- nomic factors. The relatively sudden revival of prices and profitability during the latter half of the decade poses the danger of false hope. There is also a risk that the industry and the nation will be lulled into believing that the current situation signals a permanent return to prosperity for mining and minerals. In reality it is a welcome but temporary upward turn for an industry that in all likelihood will continue to face challenges to its place in the world market. REFERENCES Atchison, S. D., C. Hawkins, C. Schroeder, and R. W. King. 1989. The mining industry climbs out of the pits. Business Week, June 19, pp. 61-63. Butler, T., and J. Dopson. 1988. Steel. In Mining Annual Review, p. 57. Bureau of Mines. 1987. The Mineral Position of the United States: Annual Report

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INDUSTRY IN A CHANGING GLOBAL CONTEXT 25 of the Secretary of the Interior Under the Mining and Minerals Policy Act of 1970. Washington, D.C.: U.S. Government Printing Office. Bureau of Mines. 1988. The Mineral Position of the United States. Washington, D.C.: U.S. Government Printing Office. Bureau of Mines. 1989. Mineral Commodity Summaries. Washington, D.C.: U.S. Government Printing Office. Congressional Research Service (CRS). 1986. The Competitiveness of American Metal Mining and Processing. Report prepared for the U.S. House of Represen- tatives, Committee on Energy and Commerce, Subcommittee on Oversight and Investigations. Committee Print 99-FF. Washington, D.C.: U.S. Government Printing Office. Houston, P., Z. Schiller, S. D. Atchison, M. Crawford, J. R. Norman, R. James, and J. Ryser. 1984. The death of mining. Business Week, December 17, pp. 64-70. Malenbaum, W. 1978. World Demand for Raw Materials in 1985 and 2000. New York: McGraw-Hill. Office of Technology Assessment. 1988. Copper: Technology & Competitiveness. OTA-E-368. Washington, D.C.: U.S. Government Printing Office, p. 19. Porter, F. C. 1988. Zinc. In Mining Annual Review, p. 35. World Metal Statistics Yearbook. 1989. Ware, Hertshire, England. World Bureau of Metal Statistics.