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OCR for page 9
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
OCR for page 10
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.
OCR for page 11
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.
OCR for page 12
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.
OCR for page 13
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
given—most notably to steel via trigger pricing and voluntary restraint
agreements—the 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
OCR for page 14
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
OCR for page 15
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.
OCR for page 16
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.
OCR for page 17
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
OCR for page 18
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.
OCR for page 19
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.
OCR for page 20
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.
OCR for page 21
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 costs—United States versus rest of Western world.
OCR for page 22
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.)
OCR for page 23
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
OCR for page 24
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
OCR for page 25
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.
Representative terms from entire chapter:
iron ore
