ECONOMIC IMPACT OF
ENVIRONMENTAL REGULATIONS ON THE
UNITED STATES COPPER INDUSTRY
submitted to
UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
UNDER CONTRACT NUMBER 68-O1-2842
JANUARY, 1978
Arthur D Little, Inc
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ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS
ON THE UNITED STATES COPPER INDUSTRY
submitted to
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
Under Contract No. 68-01-2842
January, 1978
Arthur D Little Inc
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This report was furnished to the
United States Environmental Protection
Agency by Arthur D. Little, Inc.,
Cambridge, Massachusetts, under
Contract No. 68-01-2842. Its contents
are reproduced herein as received from
the Contractor. The opinions,
findings and conclusions expressed are
those of the Contractor and not
necessarily those of the United States
Environmental Protection Agency
Arthur D Little Inc.
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FOREWORD
This study could not have been performed without the assistance and
active support of many individuals, in many firms, organizations or
government agencies, with whom we have had considerable interaction
in the course of the entire project. We are indebted to all of them
for their help.
During an extensive process of intra-agency and inter-agency review,
an earlier, draft version of this report was reviewed by and received
extensive comments from different parts of the United States
Environmental Protection Agency (EPA), as well as from various other
federal government agencies (e.g., Department of Commerce, Federal
Trade Commission, Council on Wage and Price Stability, Council of
Economic Advisors). The United States Bureau of Mines provided data
on copper reserves and new resource developments.
We would like to acknowledge the cooperation extended by the copper
industry in the performance of this study. This was particularly
evident in meetings with the Industry Advisory Committee, organized
during earlier phases of the project under the chairmanship of
Mr. Stein I. Soelberg, then with Goldman, Sachs and Company.
Further, representatives of the copper industry, through the
American Mining Congress and also on an individual basis, have
provided company and plant-specific information on pollution control
technology and costs. We are grateful to them for their assistance.
We would, in addition, like to note with appreciation the many
constructive comments and criticisms received on our draft report
from many individuals in the industry, including those expressed in
two separate industry review meetings held in New York and Washington.
Two individuals should be singled out for special acknowledgement for
their unique role in this study.
Mr. Donald A. Fink, as Technical Project Monitor, guided the study
during its earlier, formative, stages and gave the study its compre-
hensive scope and overall methodological thrust. His personal
enthusiasm and support throughout the project, both during and after
his tenure as Technical Project Monitor, is very much appreciated.
Dr. Douglas Hale took over as Technical Project Monitor after
Mr. Fink moved to the Federal Energy Administration (now incorporated
into the new Department of Energy). The econometric simulation model
of the copper industry developed and used in this study benefited
from his analytical and theoretical insights. Also, we owe Dr. Hale
special thanks for his ideas, comments and quests for clarity in
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both logic and language, during various stages of the study and
report preparation, all offered or delivered with uncommon patience
and understanding. All parts of this report have been the beneficiary
of Dr. Kale's incisive thinking and comments. He must be held
blameless, however, of the many imperfections that may still remain,
regrettably, in the final version of the report presented in this
volume.
Ill
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PARTICIPANTS IN THIS STUDY
The principal participants in this study were as follows:
Dr. Ravindra M. Nadkarni Dr. Kirkor Bozdogan
Senior Metallurgical Engineer Senior Economist
Project Director Associate Project Director
Dr. Nadkarni and Dr. Bozdogan, jointly responsible for all aspects
of the study, are the principal authors of this report.
Dr. Bozdogan and Dr. Raymond S. Hartman were responsible for the
development of the econometric simulation model of the copper industry
used in this study. Dr. Hartman, working directly with and under
the supervision of Dr. Bozdogan, had day-to-day responsibility for
model design, econometric estimation and related aspects of the overall
team effort. Providing technical support were, in particular,
Hark HoiIyer (economic research), Brian W. Smith (computer programming),
and Gerald Larocque (mathematics). Dr. Glenn DeSouza provided further
assistance in econometrics and computer-related work.
Donald H. Korn, assisted by Ifigenia A. Boulogiane, was responsible
for financial analysis and for parts of this report devoted to the
financial performance of the copper industry and individual firms.
Christopher W. Krebs assisted with research on industry structure and
on environmental regulations. Dr. Krishna Parameswaran provided
technical metallurgical engineering support. Lucy Tevekelian performed
library research.
Virginia Hamilton, along with Elaine Coyne, provided support and
secretarial services and performed all typing associated with various
stages and versions of this report.
Professor Raymond F. Mikesell, W. E. Miner Professor of Economics
at the University of Oregon (Eugene, Oregon) and consultant to
Arthur D. Little, Inc., gave guidance particularly on the international
aspects of the overall study. Mr. Charles Licht, consultant to
Arthur D. Little, Inc., assisted the team on aspects of the study
concerning the organization and dynamics of the secondary copper
industry.
Stanley V. Margolin, senior staff member at Arthur D. Little, Inc.,
served as overall project reviewer.
IV
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LIST OF ABBREVIATIONS
BACT Best Available Control Technology
BAT Best Available Technology Economically Achievable
BPT Best Practicable Technology Currently Available
CAA Clean Air Act
CIPEC Conseil Intergouvernemental des Pays
Exportateurs de Cuivre (CIPEC), also known
as the Council of Copper Exporting Countries
COMEX New York Commodity Exchange
DA Double Absorption (sulfuric acid plant)
EPA United States Environmental Protection Agency
IBA International Bauxite Association
LAER Lowest Achievable Emissions Rate
LME London Metal Exchange
MESA Mining Enforcement and Safety Administration
NAAQS National Ambient Air Quality Standards
NSO Nonferrous Smelter Order
NSPS New Source Performance Standards
OECD Organisation for Economic Co-operation and
Development
OPEC Organization of Petroleum Exporting Countries
OSHA United States Occupational Safety and Health
Administration
PSD Prevention of Significant Deterioration
RACT Reasonably Available Control Technology
SA Single Absorption (sulfuric acid plant)
SCS Supplementary Control System
SIP State Implementation Plan
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TABLE OF CONTENTS
Page
List of Tables x
List of Figures xv**
I. SUMMARY 1-01
A. Purpose and Scope 1-01
B. Approach 1-02
C. Environmental Regulations 1-05
D. Findings 1-08
E. Overview of the Copper Industry 1-19
II. PRODUCTION AND POLLUTION CONTROL TECHNOLOGY 11-01
A. Introduction 11-01
B. Production Technology 11-02
C. Forms of Copper 11-10
D. The Secondary Industry 11-10
E. Pollution Control Technology 11-12
F. New Process Technology 11-18
III. THE STRUCTURE OF THE UNITED STATES COPPER INDUSTRY 111-01
A. Introduction 111-01
B. Industry Definition 111-03
C. An Overview of Copper Supply Channels and
Consumption in the United States 111-05
D. The Structure of Domestic Copper Markets 111-08
E. Concentration, Integration, Entry Conditions
and Structural Changes 111-20
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TABLE OF CONTENTS
(Continued)
Page
IV. FINANCIAL CHARACTERISTICS OF THE UNITED STATES
COPPER INDUSTRY AND THE PRINCIPAL COMPANIES IV-01
A. Introduction IV-01
B. Financial Performance IV-03
C. Domestic Versus Foreign Sales and Earnings
of Nonferrous Metals Companies IV-15
D. Industry Financing—Capital Needs and Capital
Sources IV-17
E. Description of the Business of the Major
Copper Producers IV-36
V. RELATIONSHIP TO THE WORLD INDUSTRY V-01
A. Introduction V-01
B. Comparative United States and World Trends in
Copper Consumption, Production, Capacity and
Ore Reserves V-02
C. United States and World Trade Patterns in Copper V-17
D. Changes in the Structure of the World Copper
Industry V-27
VI. SUPPLY VI-01
A. Introduction VI-01
B. Sources of Copper Supply and Long-Run Supply
Behavior in the United States Copper Industry VI-02
C. Capacity Growth Trends VI-11
D. Trends in Costs of Production VI-22
E. The Quantitative Analysis of Supply Behavior in
the Copper Industry VI-30
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TABLE OF CONTENTS
(Continued)
Page
VII. DEMAND VII-01
A. Introduction VII-01
B. Patterns of Copper Consumption VI1-02
C. Demand for Copper: Theoretical Considerations VII-15
D. Econometric Analyses of Demand for Copper:
Some Results VII-27
VIII. PRICES VIII-01
A. Introduction VIII-01
B. Copper Pricing Mechanism VIII-05
C. Copper Prices Since World War II VIII-14
D. The Two-Price System and Pricing Behavior of
the Primary Producers VIII-21
E. Explanations for the Two-Price System VIII-25
IX. ENVIRONMENTAL REGULATIONS IX-01
A. Introduction IX-01
B. Air Pollution IX-01
C. Water Pollution IX-19
D. Other Regulations Not Considered in the Study IX-25
X. PRODUCTION COST AND CAPACITY IMPLICATIONS OF
ENVIRONMENTAL REGULATIONS X-01
A. Introduction X-01
B. Air and Water Pollution Control Cost Estimates X-03
C. Maintenance and Expansion of Capacity X-ll
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TABLE OF CONTENTS
(Continued)
Page
XI. METHODOLOGY FOR IMPACT ANALYSIS XI-01
A. Introduction XI-01
B. A Nontechnical Overview of the Model XI-04
C. Technical Summary of the Model XI-27
XII. ECONOMIC IMPACT ANALYSIS XII-01
A. Introduction XII-01
B. Baseline Conditions and Forecasts XII-03
C. Alternative Environmental and Industry Capacity
Growth Scenarios for Economic Impact Analysis XII-08
D. Discussion of Economic Impacts under
"Constrained Capacity" and "Reduced Capacity"
Scenarios XII-10
E. Broader Implications of Environmental Regulations
and Related Issues XII-27
APPENDICES:
Appendix A: Description of .the Business of the Major
United States Copper Producers A-l
Appendix B: Long-Run Substitution for Copper B-l
Appendix C: Interindustry Relationships of Primary
Copper, Copper Rolling and Drawing,
United States, 1967 C-l
Appendix D: Model Forecasts (1974-1987) D-l
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LIST OF TABLES
Table
Number Page
I.I Estimates of Pollution Abatement and Control
Expenditures by the United States Copper
Industry, 1974-1987 1-10
1.2 Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry, 1974-1987:
Summary of Selected Results 1-13
II.1 Emissions from Conventional Smelting 11-14
III.l United States Copper Industry: General Statistics,
1954, 1963 and 1972 111-06
III.2 Production of Refined Copper in the United States,
by Source, 1974-1976 111-09
III.3 Mine Production of Recoverable Copper in the
United States, 1973 and 1974 111-13
III.4 Copper Smelters in the United States at the
End of 1975 111-15
III.5 United States Copper Refinery Capacity at Year-
End 1974, 1975 and 1976 111-16
III.6 Mine Production of Recoverable Copper in the
United States, by Producing States, 1974-1976 111-17
III.7 Estimated Secondary Refined Copper Produced by
Primary Producers and Secondary Producers,
1960-1974 111-21
III.8 Refined Copper Production in the United States,
by Primary and Secondary Producers, 1950-1974 111-22
III.9 Production of Secondary Copper in the United
States, Refined and Unrefined, Recovered from
Purchased Scrap, 1974-1976 111-23
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LIST OF TABLES
(Continued)
Table
Number
IV.1 Financial Statistics—Primary Nonferrous Metals
Corporations, 1969-1974
IV.2 Selected Financial Statistics for Principal
United States Copper Producers—1974 Base
IV.3 Summary of Salient Financial Aspects of United
States Companies
IV.4 Overall Rate of Return: Net Income as Percent
of Net Worth
IV.5 Rates of Return on Stockholders' Equity
IV.6 Trends in Operating Profit Margin
IV. 7 Principal United States Copper Smelting and
Refining—1974
IV. 8 1974 Domestic Sales and Earnings from Nonferrous
Metal Operations and Foreign Sales and Earnings—
As Compared to Total Earnings
IV. 9 Indicators of the Need for Capital Funds
IV. 10 The Pattern of Capital Expenditures and
Depreciation Charges
IV. 11 Estimated Capital Expenditures for the Domestic
Primary Copper Industry
IV. 12 Total Debt of Primary Copper, Lead and Zinc
Products
IV. 13 Total Debt of Primary Copper, Lead and Zinc
Producers by Period of Maturity and Interest
Rate (Percent)
IV. 14 Debt Allocated by Primary Copper, Lead and Zinc
Producers for Pollution Control Purposes, Including
Certain Lease Obligations
IV. 15 Long-Term Debt of Twelve Copper, Lead, Zinc
Producers
Page
IV-04
IV-05
IV-07
IV-09
IV-10
IV-11
IV-12
IV-18
IV-23
IV-24
IV-25
IV-28
IV-30
IV-32
IV-35
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LIST OF TABLES
(Continued)
Table
Number Page
IV.16 Long-Term Debt, Shareholders' Equity, and
Indicators of Ability to Attract Additional
Capital IV-37
V.I United States and World Comparative Trends in
Refined Copper Consumption, 1963-1974 V-04
V.2 Refined Copper Consumption and Mine Production
of Copper, by Fifteen Largest Consuming
Countries, 1974 V-05
V.3 World Production of Copper, 1974 V-07
V.4 United States and World Comparative Trends in
Copper Production: 1963-1974 V-08
V.5 World Copper Mine Productive Capacity, by Area
and Country, 1974 and 1975 V-09
V.6 World Mine Production of Copper: Fifteen Largest
Producing Countries, 1964 and 1974 V-10
V.7 World Copper Capacity and Production, 1973 V-12
V.8 World Smelter Production of Copper: Fifteen
Largest Producing Countries, 1964 and 1974 V-13
V.9 World Production of Refined Copper: Fifteen
Largest Producing Countries, 1964 and 1974 V-14
V.10 World Copper Reserves-Resources V-16
V.ll World Bureau of Metal Statistics: World Flow of
Unwrought Copper—1974—Mine Production V-18
V.12 World Bureau of Metal Statistics: World Flow of
Unwrought Copper—1974—Smelter Production V-19
V.13 World Bureau of Metal Statistics: World Flow of
Unwrought Copper—1974—Refined Production V-20
V.14 Trends in United States Copper Consumption and
Trade, 1950-1975 V-24
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LIST OF TABLES
(Continued)
Table
Number Page
V.15 United States Imports of Copper, by Type,
1971-1975 V-25
V.16 United States Exports of Copper, by Type,
1971-1975 V-26
VI.1 Estimated Reserves of Major United States Copper
Producers VI-06
VI.2 Growth of United States Copper Smelting
Capacity, 1950-1975 VI-13
VI.3 Growth of Lake Copper Smelting Capacity in the
United States, 1950-1975 VI-16
VI.4 Copper Refinery Expansion in the United States,
1958-1975 VI-18
VI.5 Index of Output per Man-Hour Series for
Production or Nonsupervisory Workers, SIC 1021
(Copper Mining and Milling), 1963-1975 VI-23
VI.6 Wholesale Price Index Series for Major Components
of Operating and Maintenance Costs, United States
Copper Industry (SIC 1021-Copper Ores and SIC
3331-Primary Copper), 1963-1975 VI-27
VII.1 United States and World Comparative Trends in
Refined Copper Consumption, 1963-1974 VII-03
VII.2 Consumption of Copper in the United States,
1950-1974 VII-05
VII.3 Consumption of Copper Products by Domestic
Semifabricators, 1974 VII-08
VII.4 Production of Semifabricated Copper Products,
1966, 1970, 1974 VII-09
VII.5 United States Copper Consumption by Broad
End-Use Categories, 1960-1974 VII-11
VII.6 United States Semifabricators Demand for Refined
Copper and Scrap, 1954-1974 VII-14
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LIST OF TABLES
(Continued)
Table
Number Page
VII.7 Price and Activity Elasticity Estimates
from Various Studies VII-28
VIII.1 Prices of Refined Copper, Copper Scrap and
Refined Aluminum in the United States,
1947-1976 VIII-16
X.I Estimated Historical Pollution Control Costs X-05
X.2 Operating and Maintenance (O&M) Costs for
Fugitives Control X-09
X.3 Operating and Maintenance (O&M) Costs for a
DA Acid Plant on Converter Gas X-10
X.4 Estimates of Pollution Abatement and Control
Expenditures by the United States Copper
Industry, 1974-1987 X-12
XI.1A Final Form of the Estimated Equations of the Market
Clearing Module, Linear Version XI-32
XI.IB Final Form of the Estimated Equations of the
Market Clearing Module, Nonlinear Version XI-33
XI.1C Final Specifications for the Investment Module XI-34
XII.1 Tabulation of Baseline Forecasts for the United
States Copper Industry for Selected Variables,
1974-1987 XII-07
XII.2 Estimates of Pollution Abatement and Control
Expenditures by the United States Copper
Industry, 1974-1987 XII-11
XII.3 Translation of Estimated Pollution Abatement
and Control Capital Expenditures by the United
States Copper Industry into Annualized Fixed
Costs, 1970-1987, "Constrained Capacity" Scenario XII-14
XII.4 Translation of Estimated Pollution Abatement
and Control Capital Expenditures by the United
States Copper Industry into Annualized Fixed
Costs, 1970-1987, "Reduced Capacity" Scenario XII-15
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LIST OF TABLES
(Continued)
Table
Number Page
XII.5 Annualized Fixed and Variable (Operating and
Maintenance) Costs due to Pollution Abatement
and Control, the United States Copper Industry,
1974-1987, "Constrained Capacity" Scenario XII-17
.XII.6 Annualized Fixed and Variable (Operating and
Maintenance) Costs due to Pollution Abatement
and Control, the United States Copper Industry,
1974-1987, "Reduced Capacity" Scenario XII-18
XII.7 Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry, 1974-1987:
Summary of Selected Results XII-19
XII.8 Domestic Primary Smelting/Refining Capacity
Growth and Capacity Utilization under
Alternative Scenarios, 1974-1987 XII-24
XII.9 Summary of Impacts on Secondary Copper Prices
and Production, 1974-1987 XII-25
XII.10A Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry 1974-1987
Summary of Sensitivity Analysis Results on the
Primary Refined Copper Production XII-28
XII.10B Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry, 1974-1987:
Summary of Sensitivity Analysis Results on Primary
Refined Copper Prices XII-29
XII.IOC Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry, 1974-1987:
Summary of Sensitivity Analysis Results on
Copper Consumption XII-30
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LIST OF TABLES
(Continued)
Table
Number Page
XII.10D Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry, 1974-1987:
Summary of Sensitivity Analysis Results on
Net Imports XII-31
XII.10E Economic Impacts under Alternative Environmental
Scenarios and Corresponding Compliance Costs on
the United States Copper Industry, 1974-1987:
Summary of Sensitivity Analysis Results on
Employment ' XII-32
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LIST OF FIGURES
Figure
Number Page
1-1 Simplified Flow Diagram of the Econometric
Simulation Model of the United States Copper
Industry 1-04
1-2 Copper Production System in the United States,
1974 1-21
1-3 Location of Primary Copper Smelters and Refineries 1-22
II-l Generalized Flowsheet for Copper Extraction from
Sulfide Ores 11-03
II-2 Sources of Emissions in Conventional Copper
Smelting and Refining 11-13
III-l Copper Production System in the United States, 1974 111-07
IV-1 Behavior of Common Stock Prices IV-26
IV-2 Term Structure of Debt for Primary Nonferrous Metals
Companies, Including Allowance for Sinking Fund
Payments, Capitalized Leases IV-31
VI-1 A Schematic Flow Diagram of Major Sources of Copper
Supply in the United States VI-04
VII-1 Copper Consumption in the United States, 1974 VII-06
VII-2 General Demand Schedule for Copper VII-16
VII-3 The Short-Run and Long-Run Adjustment Process in
Demand for Copper VII-24
VIII-1 Trends in United States Producers' Prices and LME
Prices, 1947-1976 VIII-17
XI-1 Simplified Flow Diagram of the Econometric
Simulation Model of the United States Copper Industry XI-04
XI-2A Effects of Pollution Control Capital (Fixed) Costs on
Industry Cost Schedules XI-18
XI-2B Effects of Pollution Control Operating (Variable)
Costs on Industry Cost Schedules XI-21
XI-2C Effects of Pollution Control Capital and Operating
Costs on Industry Cost Schedules XI-22
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LIST OF FIGURES
Figure
Number Page
XI-3A Effects of Pollution Control Capital and Operating
Costs on Industry Cost Schedules, with Capacity
Expansion and Shift in Demand XI-23
XI-3B Effects of Pollution Control Capital and Operating
Costs on Industry Cost Schedules, with Constrained
Capacity and Shift in Demand XI-24
XI-3C Effects of Pollution Control Capital and Operating
Costs on Industry Cost Schedules, with Reduced
Capacity and Shift in Demand XI-25
XI-4 Simplified Diagram of the Interaction Between the
Market Clearing Module and the Investment Module:
A Static View XI-28
XI-5 Simplified Diagram of the Interaction Between the
Market Clearing Module and the Investment Module:
A Dynamic View XI-30
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I. SUMMARY
A. PURPOSE AND SCOPE
This study is one of a series commissioned by the United States
Environmental Protection Agency to examine in detail the combined
economic impact of environmental regulations on major industries .
Accordingly, the objective of this study is to assess the economic
impact of federal environmental regulations on the domestic copper
industry. The domestic copper industry is defined here to encompass
the supply of primary refined copper and secondary copper, refined
or unrefined, obtained from scrap. The supply of primary refined
copper includes firms engaged in the production of copper from ore
deposits, involving the mining, milling, smelting and refining stages
of production. Downstream semifabricating and fabricating operations
are not covered in this study.
This study addresses the economic impact of regulations which implement
the following federal air and water pollution abatement and control
legislation :
• The Clean Air Act Amendments of 1970 and 1977; and
• Federal Water Pollution Control Act Amendments of 1972.
The following legislation or regulations have not been considered in
this study because they are either still being written or because
their language currently provides a wide latitude for interpretation
by the various administrative agencies or the courts. The degree of
uncertainty associated with these potential regulations is such that
estimates of compliance costs cover an extremely wide range and
suggest impacts varying from negligible to extremely high. These
regulations are:
• EPA*s new ambient or emission standards for elements such as
lead and arsenic;
• Revised effluent limitation guidelines for toxic or priority
pollutants;
• Limitations on non-point sources of aqueous effluents resulting,
for example, from the Safe Drinking Water Act;
• The Resource Conservation and Recovery Act;
• Auxiliary regulations or administrative interpretations governing
sampling methods for sulfur dioxide, lead, etc.;
• Federal and State land management and withdrawal regulations; and
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• Mining Enforcement and Safety Administration (MESA) standards.
B. APPROACH
The objective of economic impact analysis of the type reported here
is to identify and assess the effects of environmental regulations on
such key economic variables as prices, output, employment and inter-
national trade, among others. It is also important to consider
impacts on the industry's structure and on its international competitive
position. Finally, it is necessary to identify potential plant
closures and assess the resulting regional or community impacts.
Environmental regulations can affect an industry and generate economic
impacts in a variety of ways. Compliance with the regulations typically
requires the installation of pollution abatement and control equipment
and associated process changes. The resulting compliance costs, by
causing an upward shift in production costs, may ultimately lead to
higher prices, reduced growth in output, substitution of other materials
for copper and cause related economic impact.. In addition, compliance
costs may influence capacity expansion, for a number of reasons (e.g.,
reduced profitability, slower rate of growth in output, higher Imports).
Further, the regulations may directly affect capacity growth by circum-
scribing in technical or legal detail the conditions under which existing
capacity may or may not be modified (expanded) or the conditions under
which new (greenfield) capacity may be built. Alternatively, the
regulations, by virtue of their evolving nature, may increase the lead
times and the costs associated with new projects and, cumulatively,
create increased uncertainty. The resulting increase in the riskiness
of new investments may slow down capacity expansion, either simply by
discouraging new investment in the industry or by raising the minimum
expected rate of return oft invested capital.
Consequently, economic impacts may result not only because of compliance
costs but also because of direct or indirect effects on capacity
expansion. In the case of the domestic copper industry, the economic
impacts result from a combination (confounding) of both compliance
costs and capacity effects.
Economic impacts are typically measured as deviations from a set of
baseline forecasts. Baseline forecasts are estimates of the values
that all pertinent variables would take, over a period of time, in the
absence of environmental regulations (or at least in substantial
absence of environmental regulations). Under the assumption that the
regulations are implemented, the same variables would take new values,
over the same time period, because of increased costs of production
due to compliance and because of the direct and indirect effects of
the regulations on capacity growth. The differences between the two
sets of results are attributed to the environmental regulations and
define the economic impacts.
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For impact analysis in this study, a computerized econometric simulation
model of the United States copper industry has been developed and used.
Figure 1-1 presents a simplified flow diagram of the structure of this
model. The model is designed, estimated and programmed to simulate
the industry's growth and evolution annually through 1987 under base-
line conditions as well as under alternative policy scenarios. The
model considers, within an interdependent framework, such variables
as demand (paying attention to substitution from other materials such
as aluminum), costs of production facing the producers, prices, invest-
ment and international trade. Costs of production are directly factored
into the model through engineering cost functions so that technological
developments as well as environmental factors affecting the industry
can be readily assessed. Although the overall model specifically deals
with both the primary producers and with the secondary copper industry
(and the interaction between the two sectors), its major focus is on
the primary producers. The model provides a unified analytical
framework capturing quantitatively the pertinent interrelationships,
to deal effectively with the measurement of impacts since environmental
regulations set into motion an essentially simultaneous (interdependent)
adjustment process in supply (costs), demand, prices and other variables.
The model's output includes, among others, the following major variables
which are jointly determined:
• total consumption of refined copper and its equivalent;
• changes in inventory stocks (additions, reductions) of primary
producers, semifabricators, and secondary refiners;
• net international trade (net exports, net imports);
• production of primary refined copper by the domestic primary
producers;
• production of secondary refined copper from scrap;
• production of scrap copper which is used directly;
• price of primary refined copper (domestic producers' price);
• price of secondary refined copper;
• price of copper scrap.
The model was used to develop annual forecasts over the period 1974-
1987, which defines the impact analysis period, under baseline
conditions as well as under alternative environmental scenarios.
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FIGURE 1-1
SIMPLIFIED FLOW DIAGRAM OF THE ECONOMETRIC SIMULATION MODEL
OF THE UNITED STATES COPPER INDUSTRY
- Filmy fmv» Pro
• CMolOpM
• MnpvvMliQMnalvmducilaii
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C. ENVIRONMENTAL REGULATIONS
1. Sources of Pollution
All four stages of primary copper production (mining, milling, smelting,
and refining) are affected by Federal environmental regulations. Mining
and milling are affected mainly by water and solid waste regulations,
smelting by air regulations, and refining by water regulations. Of
these, the air pollution control regulations for copper smelters are
currently the most significant.
The conventional smelting of copper sulfide concentrates typically
involves three steps: roasting, smelting and converting. Of these,
the roasting step is optional. Roasted concentrates (calcines) or
concentrates as received can be smelted in reverberatory furnaces
(reverbs). The smelting process generates gas streams containing
a large amount of sulfur dioxide at each process unit (i.e., roaster,
reverb, or converter). In addition, the converting operation generates
a small amount of sulfur dioxide which is very dilute and difficult
to capture ("fugitives").
The distribution of sulfur among the gas streams emitted by these
sources, expressed as percent of total sulfur contained in the concen-
trates entering the smelter, and the characteristics of these gas
streams, are as follows:
Source
Emission Stream
Characteristics
Sulfur distribution
(% of sulfur contained in
concentrates entering the smelter)
Roaster
Reverb
Converter
Fugitives
strong -continuous
3
weak -continuous
strong -intermittent
very weak -intermittent
Calcine
Smelting
20
25
50
: 5
Concentrate
Smelting
-
40
55
5
The predominant technique used to control emissions at a smelter is
through the construction of sulfuric acid plants, whereby the
sulfur dioxide (802) is converted to sulfuric acid.
Sulfuric acid plants can utilize only the strong sulfur dioxide streams.
Thus, the use of this conventional technique can capture about 50-70
percent of the sulfur in the smelter feed materials. The weak S02
stream from the reverb and the roasters, after suitable treatment for
the removal of particulate matter, are emitted to the atmosphere using
tall stacks. The fugitives are emitted close to the ground.
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2. Air Pollution Control Regulations
The Clean Air Act Amendments of 1970 and 1977 establish four principles
that are particularly relevant to air pollution control in copper
smelting. They are the following:
• The Amendments require that National Ambient Air Quality Standards
(NAAQS) be met at all times by the use of permanent emissions
reduction technology. Intermittent control systems based on
dispersion by any means, most notably by the use of tall
smoke stacks, and production curtailment to reduce emissions under
adverse meteorological conditions (i.e., Supplementary Control
Systems or SCS) are not acceptable means of achieving ambient air
quality standards. These requirements lead to the establishment
of an "ultimate emissions limit", discussed .below, which must
be achieved no later than January 1, 1988.
• All new sources must use Best Available Control Technology (BACT)
for permanent reduction of emissions. This requirement results
in New Source Performance Standards (NSPS) for new sources or for
reconstructed and modified existing sources.
• The Amendments require that smelting activity cannot lead to signifi-
cant deterioration of' existing air quality in regions which are
cleaner than the ambient standards. For a particular location,
these requirements define the extent to which new smelting activity
can increase ambient concentrations of pollutants.
• In areas which have not attained ambient standards, the Amendments
require that reasonable progress be made towards the achievement
of National Ambient Air Quality Standards. This
results in a series of preconditions which must be met before
modifying an existing emissions source. Basically, total emissions
after modification have to be lower than prior emissions (i.e.,
"emissions offsets") by using emission control technology capable
of the "Lowest Achievable Emissions Rate" (LAER). Typically,
existing smelters would be designated to be in nonattainment areas
because they will not be achieving the ultimate emissions limit.
Any modification of an existing smelter would therefore be subject
to the requirements noted above and would have to be consistent
with the attainment of the ultimate emissions limit by 1988.
As a result, copper smelters are potentially subject to several types
of limitations on the emission of sulfur dioxide (SC^) into the
atmosphere. These emissions limitations differ in terms of their
degree of stringency, method of calculation and applicability (i.e.,
whether they apply to the smelter as a whole or to individual pieces
of equipment). They are the ultimate emissions limit, Lowest
Achievable Emissions Rate (LAER), Best Available Control Technology
(BACT) and Reasonably Available Control Technology (RACT). In addition,
New Source Performance Standards (NSPS) apply to major pieces of
process equipment.
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For each smelter an ultimate emissions limitation is established at a
level sufficient to ensure that NAAQS are met at all times without the
use of dispersion techniques or production curtailment. This ultimate
emissions limit, which is to be calculated assuming stack'heights of
two-and-one-half times building height or less for stacks built after
1970, is computed through the use of diffusion modeling and is dependent
on the allowable stack height, the weather and topography in the
vicinity of the smelter and smelter size. The ultimate emissions limit
generally requires the capture of over 90 percent of the sulfur in the
input (feed) materials entering the smelter.
The other emissions limits are technology-related and depend on the
processing equipment used at a particular smelter. In increasing
order of stringency, they are RACT, BACT and LAER.
• RACT is usually defined as control of all strong sulfur dioxide
gases (approximately 4-5 percent S02> by a double absorption acid
plant, if these gases were not being treated, or control by a
single absorption plant if such a system were already being
utilized. RACT at existing smelters can achieve 50-70 percent
capture of the sulfur in the input (feed) materials.
• BACT and NSPS are usually the same. (NSPS can be less stringent
than BACT because of delays in NSPS revision). NSPS require that
gases from any new, reconstructed or modified smelting furnace,
roaster or converter be treated in a pollution control system
equivalent to a double absorption acid plant which removes
99.6 percent of the sulfur dioxide in the gas stream. BACT/NSPS
applied to non-reverb smelting can achieve over 90 percent control.
• LAER could achieve additional pollution control beyond BACT via
the control of fugitive emissions, weak gas scrubbing, etc.
Under the Clean Air Act Amendments of 1977 an existing smelter not
meeting the ultimate emissions limit can continue to operate under
a nonferrous smelter order (NSO). The NSO is essentially a five-year
variance, renewable once, which allows a smelter to operate using
Reasonably Available Control Technology (RACT) or as much control
equipment as it can afford, together with tall stacks and SCS. Only
those copper smelters that are technically or economically unable
to meet the ultimate emissions limit for sulfur dioxide are eligible
to operate under an NSO. Upon termination of the NSO, the smelter
must either be achieving the ultimate emission limit or it must
close down. As a condition of operating under an NSO, the smelter
must install as much pollution control equipment as it can afford,
must continue R&D on emissions reduction technology, and must achieve
ambient air quality standards.
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D. FINDINGS
1. Direct Impact of Pollution Control Regulations on Capacity
Growth
The basic conclusion emerging from an analysis of the historical
pattern of smelter capacity expansion is that the copper industry
has traditionally preferred incremental expansion at existing sites,
rather than the construction of new (greenfield) smelters. The lead
time required for planning, engineering, construction, shake-down and
start-up for small expansions at existing sites is about two-to-three
years while that for new (greenfield) smelters is about five-to-seven
years.
The presently promulgated environmental regulations, summarized above,
affect capacity expansion of the domestic copper industry in the
following fashion. First, they dc not allow (or, effectively prohibit)
small smelter expansions of the type used traditionally by the
industry. Second, while there are some uncertainties, the regulations
appear to allow the construction of NSPS caliber (or better) smelters
in new locations and also in existing smelter locations. However,
because of the lead time requirements, major new capacity of this
type is not likely to come on-stream before 1985. Finally, the
reverb based smelters will have to undergo major alterations to
non-reverb technology by 1988 or they would have to shut down.
Consequently, the currently promulgated environmental regulations
will effectively constrain domestic capacity growth until 1985 and
would require major expenditures for capacity maintenance between
1983 and 1988. In the interim, minor increases in capacity are
expected for hydrometallurgical processing of oxides and expansion
at non-reverb smelters.
The prospects for capacity expansion at the mining, milling and
refining stages of production are not independent of the growth or
contraction in smelting capacity. That is, smelting capacity
essentially represents the "bottleneck" in primary refined copper
production. Hence, the foregoing findings strongly suggest that the
supply of refined copper domestically will be constrained over the
next decade because of the constraints on domestic smelter capacity
growth.
The domestic copper industry faces a variety of theoretically plausible
paths for smelter capacity expansion, within the constraints or bounds
circumscribed by the regulations, and subject also to economic
constraints. These paths cover the following possibilities:
(1) all existing smelters will be in compliance with the requirements
of the 1977 Amendments by January 1, 1988; (2) some smelters will
choose to shut down instead of complying with the ultimate emission
requirements; (3) one or more greenfield smelters will come on-stream
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Arthur DLittklnc
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during the period 1985-1987; (4) additional leach-electrowinning
capacity will be brought on-strpam during 1978-1987; and (5) four non-
reverberatory smelters that are at or close to compliance with the
New Source Performance Standards (Inspiration, Hidalgo, Anaconda,
and Garfield ) will be allowed to increase their capacity without
installing incremental pollution control beyond NSPS.
Of the various permutations and combinations of these paths, two
combinations have been selected as the most plausible for the purpose
of economic impact analysis. These scenarios,labeled "Constrained
Capacity" and "Reduced Capacity", are defined as follows:
• Constrained Capacity; This scenario assumes that none of the
existing smelters will shut down; all smelters currently employing
reverberatory furnaces will make progress towards compliance by
January 1, 1988; that no new (greenfield) smelter capacity will
be coming on-stream during this period; and that only marginal
electrowinning capacity is expected to be introduced over the
five-year period 1983-1987.
• Reduced Capacity; This scenario, which is the more severe in
terms of capacity expansion, assumes that three smelters
•(Phelps Dodge-Douglas, Kennecott-McGill, and Asarco-Tacoma or
an equivalent smelter) will close down in 1983, for various
reasons. These three smelters have a combined capacity of
268,000 annual short tons of refined copper equivalent.
As under the Constrained Capacity scenario, no new (greenfield)
smelter capacity will be coming on-stream during this period,
and only marginal electrowinning capacity is expected to be
introduced during the five-year period 1983-1987.
2. Compliance Costs
Estimated pollution control capital expenditures, as well as operating
and maintenance costs over the period 1974-1987, under the two basic
environmental scenarios just described, are given in Table 1-1.
These estimates assume that there will be no fundamental change in
the relative cost and nature of pollution control technology between
now and 1988. The costs shown are for (1) the control of strong
streams using acid plants, (2) the control of fugitive emissions by
improved collection and the use of tall stacks for dispersal; and
(3) the conversion of reverberatory smelters to non-reverberatory
smelting by 1988.
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TABLE 1-1
ESTIMATES OF POLLUTION ABATEMENT AND CONTROL EXPENDITURES
BY THE UNITED STATES COPPER INDUSTRY8. 1974-1987
(In millions of 1974 dollars)
Year
1974
1975
1976
1977
1978
1979
I960
1981
1982
1983
1984
198S
1986
1987
1974-
19B7
1978-
L987
CONSTRAINED CAPACITY
Capita. Expenditures
Non-reverberatory
Related Capital
Expenditures
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
40.0
4Q.O
40.0
40.0
-
1,092.8
380.0
Reverberator/
Conversion
Investment
.
-
-
-
-
_
_
-
_
156.5
156.5
156.5
156.5
156.5
782.5
782.5 :
Total
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
196.5
196.5
196.6
196.5
196-5
1.875.3
1,162.5
flnAPAt* IfltO
W|9C c a I ing
and
Maintenance
Coats6
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.6
90.0
89.8
90.1
90.2
90.0
1,103.0
905.2
TOTAL
283.4
290.1
204.8
132.3
158.0
128.2
129.5
129.8
129.6
286.5
286.3
286.6
286.7
246.5
2.978.3
4,067.7
REDUCED CAPACITY
Capital Expenditures
Hon-reverber a tory
Related Capital
• Expenditures
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
-
1.092.8
380.0
Reverberatory
Conversiog
Investment
-
-
-
-
-
-
-
-
-
126.7
126.7
126.7
126.7
126.7
633.5
633. 5
Total
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
166.7
166.7
166.7
166.7
126.7
1.726.3
1,013.5
Operating
and
Maintenance
Costa
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.3
89.9
78.6
78.4
78.5
78.5
78.4
1,045.6
847. 8
TOTAL
283.4
290.1
204.8
132.3
158.0
128.2
129.5
129.8
129.9
245.3
245.1
245.2
245.2
205.1
2,771.9
1,861.3
<-!•'
{L
8
NOTES: For all footnotes, refer to Table XII-2 in the report.
SOURCE: Arthur D. Little, Inc., estimates.
-------
The cumulative capital investment is estimated to range between
$1.7 billion (under Reduced Capacity) and $1.9 billion (under
Constrained Capacity) in 1974 dollars over the period 1974-1987.
Cumulative direct operating and maintenance cost is estimated to
range between $1.0 billion (Reduced Capacity) and $1.1 billion
(Constrained Capacity) in 1974 dollars over the same period. Total
cumulative spending by the industry for pollution control over this
period, including both capital and direct operating costs, is hence
estimated to range between $2.8 billion and $3.0 billion in 1974
dollars.
Four points should be noted. First, these estimates exclude the
industry's spending for pollution control over the period 1970-1973.
Cumulative capital investment for pollution control over this period
is estimated at $402 million. Second, roughly one-third of the total
estimated cumulative pollution control expenditures over the period
1974-1987 have already been incurred (through 1977). Third, cumulative
investment for reverberatory conversion required under the Clean Air
Act Amendments of 1977, estimated at $783 million (in 1974 dollars)
accounts for over 60 percent of total capital expenditures over the
1978-1987 period under the two environmental scenarios. Fourth, the
expenditure levels given here will not necessarily be sufficient
for the smelters to meet the ultimate emissions limit in all cases.
3. Baseline Forecasts
Baseline forecasts provide a point of reference from which comparisons
can be made in order to gauge the relative and absolute magnitude of
the economic impacts. A given set of baseline forecasts represent
a fairly reasonable approximation of a generally plausible future
picture of the world which can be used as a benchmark for comparison.
For economic impact analysis, emphasis is generally put not on
absolute differences from baseline conditions but on relative (per-
centage) differences. To safeguard against any systematic bias in
the measurement of impacts, many alternative sets of experimental
baseline forecasts were developed under alternative macroeconomic
growth and other assumptions before deciding upon the baseline
forecasts shown in Table 1-2.
The macroeconomic growth scenario that is assumed generally reflects
moderate and steady growth in overall economic activity in the United
States. The European economies, meanwhile, are expected to follow a
slightly slower recovery and growth path, lagging the United States.
The baseline forecasts assume the existence of National Ambient Air
Quality Standards (NAAQS) but assume the absence of additional restrictions
regarding how such standards might be achieved. This means, in other
words, nominal industry compliance with NAAQS, through minimal
permanent control and extensive use of SCS, but no constraints on
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the modes of capacity growth. As a related matter, the baseline
costs for new capacity assume that this capacity would be built
with acid plants for controlling strong streams, but without other
pollution control measures. Pollution control costs are hence
treated as part of the cost of production.
The impact analysis period was defined as the 1974-1987 time span,
where 1974, the base year in the analysis, is also the start of the
impact analysis period. The year 1987 represents the terminal year
of the second Nonferrous Smelter Order (NSO) period specified under
the Clean Air Act Amendments of 1977.
4. Summary of Economic Impacts
The combined effects of both capacity constraints under the "Constrained
Capacity" and "Reduced Capacity" scenarios and the associated pollution
control expenditures result in the economic Impacts tabulated in
Table 1-2 and summarized below.
a. Impact on Prices
The price impacts of the presently promulgated environmental regulations
reflect the combined influences of both compliance costs and constraints
on capacity growth. Under Constrained Capacity, prices are 23.3 per-
cent higher in 1985 and 29.4 percent higher in 1987 than those
prevailing under baseline conditions. Under Reduced Capacity, real
prices are higher than the baseline prices by 32.8 percent in 1985
and 38.7 percent in 1987. The forecasts of prices under the Constrained
Capacity and Reduced Capacity scenarios should be interpreted as the
price levels that would be expected to result from environmental
regulations in the absence of a massive infusion of imports into the
United States. Imports would be much higher if the rest-of-the-world
(i.e., London Metal Exchange—LME) copper prices stay lower than
the levels assumed under baseline conditions. The baseline conditions
already show a persistent increase in the level of imports, a signifi-
cant reversal of past trends.
b. Impact on Production
The impact on domestic primary refined copper production closely
parallels the impact on copper prices, but in the opposite direction,
resulting in a decrease in output. The full force of the production
impact is felt in 1987, when domestic production falls 24.9 percent
below the baseline forecast under Constrained Capacity and 32.9 percent
under Reduced Capacity.
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TABLE 1-2
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATES COPPER INDUSTRY.
1974-1987; SUMMARY OF SELECTED RESULTS
(all dollar figures in 1974 prices; quantities are in thousands of short tons)
IMPACT VARIABLE/SCENARIO
1974 1977 1979 1981 1983 1985 1987
Primary Refined Copper Prices
Baseline
Constrained Capacity
Reduced Capacity
X Differences from Baseline
Constrained Capacity
Reduced Capacity
Primary Refined Copper Production
Baseline
Constrained Capacity
Reduced Capacity
Z Difference from Baseline
Constrained Capacity
Reduced Capacity
Net Imports
Baseline
Constrained Capacity
Reduced Capacity
X Differences from Baseline
Constrained Capacity
Reduced Capacity
£
Total Consumption
Baseline
Constrained Capacity
Reduced Capacity
77.2
77.3
77.3
0.1
0.1
a
1792.7
1790.6
1790.6
-0.1
-0.1
167.1
167.4
167.4
0.2
0.2
3397.8
3396.9
3396.9
56
59
59
5
5
2060
1971
1971
-4.
-4.
239.
251.
251.
4.
4.
3455.
3405.
3405.
.4
.4
.4
.3
.3
.7
.2
.2
3
3
6
5
5
9
9
1
9
9
68
73
73
6
6
2191
2039
.9
.5
.5
.7
.7
.6
.6
2039.6
-6.
-6.
274.
292.
292.
6.
6.
3792.
3708.
3708.
9
9
3
5
5
6
6
4
6
6
72
80
80
10
10
2314
2072
2072
-10.
-10.
361.
391.
391.
8.
8.
4027.
3899.
3899.
.9
.5
.5
.4
.4
.7
.4
.4
5
5
5
8
8
4
4
3
7
7
76
88
96
15
26
2477
2095
1867
-15.
-24.
356.
404.
435.
13.
22.
4221.
4019.
3917.
.6
.7
.6
.8
.1
.5
.6
.3
4
6
0
0
2
5
2
8
3
0
74.8
92.2
99.3
23.3
32.8
2688.4
2136.6
1905.5
-20.5
-29.1
513.8
583.0
611.2
13.5
18.9
4567.9
4274.1
4147.2
77.2
99.9
107.1
29.4
38.7
2897.3
2175.5
1943.0
-24.9
-32.9
571.2
661.1
689.6
15.7
20.7
4864.3
4474.1
4345.2
X Differences from Baseline
Constrained Capacity -0.02 -1.4 -2.2
Reduced Capacity -0.02 -1.4 -2.2
d
Employment
Baseline 62,953 58,051 64,886
Constrained Capacity 62.879 55.530 60.386
Reduced Capacity 62.879 55,530 60.386
I Differences from Baseline
Constrained Capacity -0.1 -4.3 -6.9
Reduced Capacity -0.1 -4.3 -6.9
-3.2
-3.2
68,530
61.357
61,357
-4.8
-7.2
73,350
62,044
55,285
-6.4 -8.0
-9.2 -10.7
79,595 85,780
63.258 64,410
56.416 57,526
-10.5 -15.4 -20.5 -24.9
-10.5 -24.6 -29.1 -32.9
NOTES: "Domestic production of refined copper by primary producers, from all sources
(domestically mined copper, imported ore/concentrate/blister/scrap, domestically
generated unalloyed scrap); although it contains some secondary refined copper,
it is exclusive of secondary refined output produced by secondary refiners.
Net of exports.
clncludes primary and secondary refined copper, directly consumed scrap and imports.
dTotal full-time equivalent employment (number of persons) Including mining and
milling, smelting and refining employment at all domestic primary producers
facilities; employment by secondary smelters/refiners are excluded.
SOURCE; COPMOD I (I.e., the acronym used for the Econometric Simulation and Impact
Analysis Model of the U.S. Copper Industry developed as part of this project;
refer to Chapter XI for a general description and to the Technical Appendix
accompanying this volume for a detailed description of this model).
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c. Impact on International Trade
The overall pattern emerging from the model forecasts under baseline
conditions is that net imports show a persistent increase over time,
which represent a reversal of past trends. Under Constrained Capacity,
net imports in the 1980s are generally 13-15 percent above baseline
levels. Under Reduced Capacity, net imports become 20.7 percent
higher than the baseline level by 1987. Again, imports would be much
higher if the LME copper prices continue to remain depressed.
d. Impact en Consumption
The drop in total consumption below baseline levels is expected to
reach 8.0 percent under Constrained Capacity and 10.7 percent under
Reduced Capacity by 1987. The drop in total consumption is not as
large as in domestic refined copper production, since demand for
copper remains relatively inelastic and consumers make greater use
of secondary refined copper, scrap, and imports, while restraining
their consumption somewhat because of higher prices.
e. Impact on Employment
The impact on industry-wide employment at all stages, of production
(mining through refining), under both the Constrained Capacity and the
Reduced Capacity scenarios, is expected to be felt sharply in terms of
curtailing employment growth that would otherwise be expected to occur
under baseline conditions. Basically, under the particular baseline
forecasts used, Constrained Capacity would prevent about 21,000 full-
time equivalent jobs and Reduced Capacity nearly 28,000 jobs by 1987,
which respectively represent 24.9 percent and 32.9 percent less
employment than under baseline conditions. It should be noted that
no significant compensating employment growth in the secondary copper
industry is expected. Likewise, employment growth at smelters due
to pollution abatement would be relatively small.
The employment impacts under Constrained Capacity do not reflect layoffs
but represent lower potential growth in a few Western states (e.g.,
Arizona, Utah, New Mexico, Montana, Nevada) where domestic copper
mining, milling, and smelting operations are largely concentrated.
The employment impacts under Reduced Capacity, with the exception of
potential layoffs at the three smelters assumed to close down under
this scenario (Kennecott-McGill, Phelps Dodge-Douglas, and Asarco-
Tacoma or an equivalent smelter), would also basically reflect foregone
employment growth.
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f. Community Impacts
If Kennecott-McGill (Nevada) and Phelps Dodge-Douglas (Arizona)
smelters actually do close down, as hypothesized under the Reduced
Capacity Scenario, the impact on these two isolated communities
would be severe. If, similarly, Asarco-Tacoma is closed down, as
further hypothesized under the Reduced Capacity Scenario, the local
impact would be quite significant.
These three smelters together employ about 3,100 persons (McGill,
1,480; Douglas, 610; Tacoma, 1,000). The McGill smelter is virtually
the only source of employment in that community and accounts for over
half the jobs in White Pine County, which contains McGill. Similarly,
the Douglas smelter is a major employer, providing about 15 percent
of total jobs in that community. Finally, the Tacoma smelter has
remained, over many decades, a significant source of employment in
Tacoma, even though the smelter currently contributes just over
one percent of all jobs in Greater Tacoma (Pierce County).
g. Additional Impacts
These main economic impact results are supplemented by the following
related findings]
• Smelter capacity utilization rates will remain extremely high
during the next ten years, becoming progressively higher under
the Constrained Capacity and Reduced Capacity Scenarios.
• Not much relief in the form of significantly increased supply
of secondary copper is expected over the next ten years under
either environmental scenario. Secondary copper prices, however,
rise above baseline levels; by 1987 scrap copper prices will
rise by as much as 27.0 percent above baseline forecasts under
Constrained Capacity and 35.4 percent under Reduced Capacity,
in view of the constraint on domestic smelter capacity growth
and the relatively inelastic supply of secondary copper. Mean-
while the demand for copper is expected to shift upward secularly
with the rise in industrial and investment activity.
h. Sensitivity Analysis
A sensitivity analysis was conducted to see how the impact results
reported above might change under a somewhat different specification
of the environmental/industry capacity growth scenarios. Specifically,
the Constrained Capacity and Reduced Capacity scenarios were modified,
by assuming alternative modes of smelter capacity expansion (including
new smelters) and correspondingly introducing new estimates of compliance
costs. Five different tests were performed. An examination of the
sensitivity analysis results generally indicates that the severity of
the impacts reported earlier, falling especially over the period
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Arthur DLittklnc
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1983-1987, would remain broadly unchanged. Overall, the impacts are
lessened when new capacity is assumed to come on-stream during
this period under the various sensitivity tests. Everything
considered, the lowest deviations from the baseline results appear
to be those associated with a modified version of the Constrained
Capacity scenario, which allows for new smelters to come on-stream
in 1985 and 1987.
The baseline forecasts underlying the impact analysis and sensitivity
tests reported above assume steady economic growth both in the United
States and in other industrial countries. They further assume a
gradual improvement in LHE copper prices, in line with the expected
macroeconomic growth conditions worldwide, along with expected costs
of production abroad as well as expected mine capacity expansion in
key copper exporting countries. However, worldwide economic recovery
and growth might continue to be quite slow, and the LME copper prices
might continue to remain at relatively low levels (i.e., significantly
below assumed baseline levels). Then an unavoidable consequence of
such a development would be a substantial rise in imports into the
United States, low domestic copper prices resulting from increased
foreign competition and a relatively depressed domestic copper
industry. Under such circumstances, the impact of the environmental
regulations on the domestic copper industry could prove extremely
serious.
5. Broader Implications of Environmental Regulations and Related
Issues
The environmental regulations and the impact results discussed earlier
have broader implications and raise certain issues which deserve
emphasis. These pertain to the regulatory environment, the growth of
the domestic copper industry and the international economic implications.
a. Regulatory Environment
Environmental regulations not only lead to increased production costs
due to the cost of compliance, but also cause uncertainty because of
their evolving nature. For the copper industry, a major source of
uncertainty in the future relates to the fugitive emissions problem
(i.e., the magnitude of the fugitive emissions, the degree to which
they might contribute to the violation of ambient standards even in
the vicinity of smelters using modern, "exemplary" technology and the
means which might be used to alleviate this problem). From a planning
standpoint, the problem of uncertainty would increase the degree of
risk associated with a new project, thus making the industry more
cautious and increasing both the lead times and the costs required for
adding new capacity. This, combined with the cumulative and sometimes
conflicting nature of the regulations, may further create a broader set
of unintended consequences, for example, by effectively curtailing
expansion of domestic productive capacity. Moreover, the existence
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of many regulatory agencies affecting a given industry, with little
or no coordination among them (in the apparent absence of any legal
requirement for them to coordinate their activities), may well
compound the unintended and unforeseen effects of their actions.
The situation may get more complex in the future if the present
pattern of regulation of industry by Federal Government agencies
continues.
b. General Issues Pertaining to the Future of the Domestic Copper
Industry
The following general conclusions are suggested from the foregoing
discussion and findings:
• Growth of the domestic copper industry; The constraint on domestic
smelter capacity growth imposed by the presently promulgated
federal environmental regulations, the continuing future uncertainty
regarding new regulations and the way they will be enforced will
quite likely slow down domestic smelter capacity expansion and
new resource development generally.
• Technological and energy implications; The federal regulations
affecting the copper industry in part represent an apparent
desire to force technological change away from reverb-based
technology towards new smelting technology more amenable to sulfur
dioxide emissions control via the use of sulfuric acid plants.
Although this new smelting technology is more energy efficient
than reverb-based technology as far as smelting is concerned,
the higher degree of pollution control offsets this advantage.
• The threat of substitution from aluminum; Aluminum prices could
increase relative to copper prices, because of the actions of the
major bauxite producing countries (e.g., increased taxes, carteli-
zation, etc.) or because of higher energy costs. This may slow
down the substitution of aluminum for copper but not necessarily
stop it, especially because domestic copper prices would also
rise because o'f compliance costs and constraints on domestic
capacity growth.
c. International Economic Implications
The capacity constraints and costs of compliance resulting from
environmental regulations may have significant international economic
implications beyond those noted above pertaining to international
trade effects. These can be summarized as follows:
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• Effects on the international competitive position of the domestic
copper industry: While the foregoing findings suggest that the
international competitive position of the domestic copper industry
will deteriorate, there may be mitigating factors which may also
increase the costs of foreign production. Among these factors can
be cited differential impacts of energy price increases, expected
high rates of inflation not offset by exchange rate adjustments,
high infrastructure investment requirements, generally lower labor
productivity, and a growing set of requirements by international
financing institutions (e.g., the World Bank) for pollution control
at new projects.
• Effects on the international investment behavior of the domestic
copper producers; Industry sources state that differences among
various countries in terms of pollution control costs alone are
likely to prove quite insignificant, in their decisions regarding
new investments abroad, compared with the large number of uncertain
factors associated with foreign investment in most developing
countries. Further, while political risks abroad are generally
assigned greater weight than environmental risks faced at home,
there is a growing climate of opinion that political risks abroad
are controllable through international financing, joint ventures,
majority ownership in the host country, and other means.
Accordingly, there appears to be emerging the perception that
the cycle of expropriation abroad is at an end, whereas the end
of environmental regulations in the United States is nowhere in
sight. Hence, new investment is likely to be exported abroad
to areas which are considered less risky politically. The recent
growth in copper production capacity in Canada takes on new
significance when viewed in this light. The Canadian copper
industry, which will be a major beneficiary of the capacity
constraint in the United States, is expected to emerge as a major
exporter of copper to the United States.
• Implications for the structure of the copper industry; During
the postwar period, the copper industry progressively became
geographically more diverse worldwide and less concentrated.
The capacity constraints emanating from environmental regulations
domestically and the poor economic conditions facing the industry
internationally are likely to slow down or delay the entry of new
firms. This, combined with the recent emergence of CIPEC, may
reverse the postwar trend.
• Implications for cartelization and international commodity
agreements!CIPEC, patterned after OPEC, the oil "cartel", has
yet to evolve a mechanism to control prices or, far short of that,
to stabilize prices through an international buffer stock
arrangement.
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In the normal course of events in the future, the likelihood
of the emergence of a CIPEC cartel would not appear to be high.
Nevertheless, the likelihood that an expanded CIPEC will be able
to exercise some influence or even control over the world price
of copper in the medium-term future cannot be ruled out. Such a
development could occur especially in the event of strong world-
wide economic recovery, and might be aided, to some degree, by
the constraint on smelter capacity growth in the United States.
Strong worldwide economic recovery and growth would help improve
the payments deficits of the CIPEC member countries and would,
hence, ease the pressure on them for competitive pricing among
themselves to obtain badly needed foreign exchange. In the
longer-run, however, CIPEC would not appear likely to influence
the course of world copper prices. Collusive control of copper
prices, at higher disequilibrium prices, would soon invite
increased primary copper supply from non-CIPEC sources, bring
about some increase in the supply of secondary copper and hasten
the substitution of other materials for copper. This would readily
undermine efforts at collusive control of world copper prices
over the long-run. Hence, for CIPEC, the ability to influence
prices over a relatively short period would have to be weighed
against longer-term earnings, in view of the generally self-
correcting forces quite strongly present in the world copper market.
E. OVERVIEW OF THE COPPER INDUSTRY
1. Introduction
The United States is the leading producer and consumer of copper in
the world, accounting for about one-fifth of total world refined
copper production, consumption and reserves. Except for certain
periods in the past coinciding with military developments or unusually
high rates of economic growth, the United States has been nearly
self-sufficient in copper. In the past two years, however, imports
of foreign refined copper have increased significantly, reaching
21 percent of total domestic refined copper consumption in 1976 and
roughly 25 percent in 1977.
With their sales from refined copper at about $2.5-3.0 billion, the
domestic primary copper producers employ over 60,000 people in mining
through refining, concentrated in such key copper producing states as
Arizona, Utah, New Mexico, Montana and Nevada.
2. Sources of Copper and Production Technology
There are three major sources of copper: sulfide copper ores, oxide
copper ores and scrap. Of" these, the sulfide resources are the most
important and we expect them to continue to play a dominant role in
meeting demand in the foreseeable future.
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Production of refined copper in the United States from all sources
is shown in Figure 1-2. Domestically mined copper accounts for a
major share of the total copper supply stream. In addition, copper
recovered from scrap represents an important source of copper.
The production of primary (mined) copper is based mainly on the
exploitation of low grade sulfide mineral deposits on a large scale
and involves four stages of processing:
• mining—where ore containing approximately 0.4-2 percent copper
is mined;
• beneficiation (or milling)—where the copper-containing minerals
are separated from waste rock to produce a concentrate containing
about 25 percent copper;
• smelting—where concentrates that contain about 25 percent copper
are smelted to produce "blister" copper of 98 percent purity;
• refining—where blister copper is refined electrolytically to produce
cathode copper of 99.9 percent purity. Subsequently, cathode copper
is melted and cast into various shapes for fabrication.
About 98 percent of the domestic mine production of copper comes from
ores mined primarily for their copper content, the remainder is
recovered from complex or mixed base-metal ores. The copper ores
also are the source of significant quantities of by-products and co-
products such as gold, silver, molybdenum, nickel, platinum, selenium,
tellurium, palladium, 'arsenic, rhenium, iron, lead, zinc, and sulfur.
To minimize transportation costs, mills are almost always located
close to the mines. The value of the concentrates is high enough to
allow some flexibility in smelter location. Still, most smelters are
located near the mills which supply them or on tide water or rail head
in order to receive concentrates from distant mills. Refineries can
be located anywhere between smelters and fabricators, since the
transportation costs for blister and refined copper are about the
same.
Most of the domestically mined copper is produced in five western
states—Arizona, Utah, New Mexico, Montana, and Nevada. Over 80 per-
cent of total United States mine production is located in Arizona,
Utah and New Mexico taken together. Arizona alone accounts for well
over half the total United States mine production of recoverable
copper (about 63 percent in 1976). As shown in Figure 3, the
copper smelters and refineries are also concentrated in the western
states.
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COPPER PRODUCTION SYSTEM IN THE UNITED STATES. 1974
(Thouundi of Short Tom of Copper Contain)
FIGURE 1-2
Rows of ore, concentrate, end refined copper
. Flowi of wrap copper
Source: Compiled from Copper Development Association, Inc., Copper Supply and Coraumptlon, 1957-1975. Tablet 1 and 2.
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CENSUS REGIONS
i
ISJ
Source: Arthur D. Little, Inc., (1977)
FIGURE 1-3 : LOCATION OF PRIMARY COPPER SMELTERS AND REFINERIES
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Different waste streams are generated during copper production. Large
quantities of solid wastes (and in some cases, water effluents) are
produced during mining and milling. However, in terms of complexity
and cost, the air pollution problems of the smelters are currently
the most important. In the United States, pollution control technology
applied to standard reverberatory smelters can generally capture only
about 50-70 percent of the sulfur in a smelter's feed materials through
the manufacture of suIfuric acid. The use of new pyrometallurgical
(state-of-the-art) technology would increase sulfur capture to over
90 percent. Even then, a typical smelter would generate 20 to 50
tons/day in the form of sulfur dioxide (S02) emissions. By contrast,
EPA defines a major source as one that emits over 100 tons/year.
3. The Domestic Copper Industry in World Perspective
The United States, despite its declining share of total world
consumption and production, still accounts for 24 percent of total
world consumption and production, and over 18 percent of total world
mine output (22 percent of world refined copper output).
In terms of its market structure, the domestic copper industry consists
of the "primary" and the "outside" market sectors. The primary sector
comprises firms which sell the bulk of their refined copper output
(mostly from mined copper but also including some refined from scrap)
on the basis of a commonly-followed domestic producers' price.
The "outside" market, on the other hand, includes firms (e.g., merchants,
scrap dealers and secondary refiners), which sell their copper output
on the basis of one of several "outside" market prices.
The primary sector consists principally of the following firms:
Kennecott, Phelps Dodge, Anaconda/ARCO, Magma/Newmont, Duval/Pennzoil,
Cyprus, Asarco, Copper Range/Louisiana Land and Exploration,
Inspiration, Cities Service, Ranchers Exploration, Hecla (in part-
nership with El Paso Natural Gas Company) and others. These firms
are vertically integrated to different degrees from mining to refining
and beyond into semifabrication. Several of the major copper pro-
ducers are also major producers of other metals, such as lead and
zinc, and others are aluminum producers. A number of producers
participate jointly in foreign copper mining companies, notably in
Canada, Africa, and South America.
The domestic copper industry has undergone important structural changes
during the postwar period, with the entry of new firms at various
stages of production, shifts in the degree of integration of firms,
and important changes in ownership patterns (e.g., acquisision of copper
companies by oil companies). As a result, the industry has become more
diverse and somewhat less concentrated. In addition, the industry has
become more complex or interdependent in terms of domestic or foreign
joint-investments and buyer-seller relationships (e.g., custom/toll
smelting and refining arrangements).
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Internationally, copper output Is' highly concentrated in a relatively few
countries. Along with the United States—still the largest single
producer—five other countries (Canada, Chile, Zaire, Zambia, U.S.S.R.)
together account for 71.2 percent of total world mine output in 1974.
There is considerable international trade in copper in all forms: ores,
concentrates, blister, refined and fabricated products. The bulk of the
world's copper exports is from the developing countries to Europe, Japan
and the United States, with smaller amounts from Canada, South Africa
and Australia. Japan and other industrial countries in Western Europe
are heavily or even entirely dependent on external sources of primary
copper.
During the postwar period, the copper industry has become not only more
diversified geographically worldwide but also less concentrated as new
firms have entered the industry. However, an opposite trend towards the
nationalization of copper mining and processing operations in major
copper exporting countries has brought about a significant shift in
ownership patterns in the world copper industry in recent years. Chile,
Zambia, Peru and Zaire formed in 1968 the Conseil Intergouvernemental des
Pays Exportateurs de Cuivre (CIPEC), also known as the Intergovernmental
Council of Copper Exporting Countries, which is patterned after OPEC, the
oil cartel. These four original CIPEC countries together account for
about 37 percent of Free World mine production in copper. With recent
additions to its membership, CIPEC's share of internationally traded
copper has increased to more than 70 percent.
4. Supply. Demand, Prices and Financial Performance
a. Supply
Copper reserves in the United States, mostly in the form of sulfide
deposits, have been estimated at about 90 million short tons of copper
(metal content), with an additional 320 million short tons in the form
of "other" deposits, including undiscovered (hypothetical and speculative)
deposits. The United States accounts for about 20 percent of known
world copper reserves and other copper resources. Five states—Arizona,
Utah, New Mexico, Montana, and Michigan—account for more than 90 percent
of the total domestic reserves. The average ore grade of the domestic
reserves held by such major producers as Kennecott, Phelps Dodge,
Anaconda and Magma range in the neighborhood of 0.70-0.80 percent, the
ore grade at some currently producing mines falls well below this range.
We expect sulfide reserves to continue to play a dominant role in meeting
growing demand in the foreseeable future. In contrast with sulfide
reserves, the oxide reserves are quite small and represent a far less
important source of primary copper.
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Although the bulk of domestic copper supply originates from primary or
mined copper, secondary copper recovered from scrap also represents a
significant source of copper supply, accounting for over 40 percent of
domestic copper consumption. Copper obtained from scrap enters the
supply stream in two forms: as refined copper, in which case it becomes
indistinguishable from primary refined copper, and in the form of scrap,
which is used directly. Although the supply of secondary copper is
inelastic, it is not completely unresponsive to changes in price.
The supply of copper from the available reserves is characterized by long
adjustment periods. Typically, investments are large, have long productive
life-expectancy, and are perceived to be highly risky in view of cyclical
fluctuations in copper prices. Because of the cyclicality of the
copper Industry, the threat of long-run substitution from other materials,
competition from both the secondary and foreign producers plus other
factors, investments are made with an expected long-run target rate of
return. This defines the industry's "incentive price", that is, the
price at which the firms would be willing to stay in business over the
long-run, where revenues are sufficient to cover full costs, including
a return on investment high enough to attract new capital. Hence, the
long-run price of copper would tend to equal the long-run economic cost
of copper (i.e., the price sufficient to induce continued investment at
all stages of production).
The domestic copper industry is believed to have experienced sharp
increases in production costs in recent years because of a combination
of factors including declining ore grades, stagnant productivity, and
steep rises in energy and other factor costs, and pollution control costs.
Costs of mining and concentrating have traditionally formed, by far, the
largest proportion of total production costs of refined copper. Smelting
and refining costs have represented only a small proportion of the total
cost, with smelters and refineries functioning mainly as "service" opera-
tions on fixed and relatively low profit margins.
During the postwar period, domestic smelter capacity growth has occurred
mainly through incremental additions to existing smelter operations,
rather than the construction of new "grassroots" (or greenfield) smelters.
This growth in capacity was achieved by improved beneficiation techniques
which increased the copper content of concentrates and also because of
improvements in reverberatory smelting technology.
b. Demand
Demand for copper is a derived demand, since it is used as an intermediate
input in the production of final goods which are ultimately demanded for
consumption. In 1974, wire mills, which use only refined copper,
accounted for 47 percent of total copper consumption. Brass mills, which
consume refined copper and scrap in fairly equal proportions, accounted
for about 39 percent of total consumption. Ingot makers, who use almost
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entirely scrap, were the third largest consumers at 7 percent. Foundries,
consuming predominantly scrap, used about 4 percent, with powder plants,
and "other industries" accounting for the remainder.
The major end-use industries consuming semifabricated goods are
electrical and electronics products, building construction, consumer
and general products, industrial machinery and equipment, transportation,
and ordnance and accessories. Of these, the largest use of copper is in
electrical equipment and supplies.
It is generally agreed that aluminum has been the most serious competitor
to copper. The greatest replacement of copper has been in the power
wire and cable sector, where some 40 percent of insulated power cable
and over 90 percent of bare conductor applications are now provided by
aluminum. Copper and aluminum are also mutually interchangeable in some
heat exchanger applications.
Available econometric studies of demand for copper, including our own,
generally indicate that in the short-run demand is quite inelastic with
respect to both price and activity variables. The long-run elasticity
estimates are all greater than the short-run estimates, indicating that
the response of demand to relative prices and activity is more sensitive
in the long-run. However, even the long-run estimates have been found
in about half of the studies examined to fall in the inelastic range.
c. Prices
Historically, copper has been marketed at prices based on a number of
different systems, some of them quite complex. Nevertheless, two
basic pricing systems can be distinguished, the producer prices and
prices related to quotations on metal/commodity exchanges.
Producer prices refer to prices established independently by the major
primary producers. In the United States, the domestic producers' price
is a set of nearly uniform price quotations used by the major domestic
primary producers for a good part of the postwar period and by Noranda,
one of the Canadian producers, for sales of primary refined copper in
the United States. During the postwar period, about 75 percent of all
refined copper production in the United States has been sold at the
domestic producers' prices.
Copper is sold internationally (outside North America) by most producers
most of the time, at prices related through various formulas to quotations
on a metal/commodity exchange, principally the London Metal Exchange (LME),
The LME and the New York Commodity Exchange (COMEX) are two organized
metal exchanges (markets). Of the two, the LME is generally considered
to be the more important in terms of turnover, physical deliveries, and
its influence on the pricing of copper in general. Most of the "formulas"
for pricing copper that are found on long-term contracts are related, in
one way or another, to LME prices, since LME prices are generally
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considered to reflect, without delay, changes in the supply and demand
situation worldwide. It is important to emphasize that the LME and
COMEX are basically hedge and speculative markets, rather than physical
markets.
In the United States the label "outside market" is used to denote all
trade in copper, apart from sales made at the producer price by the
primary producers. Thus, the "outside market" Includes the secondary
industry (including scrap dealers and secondary refiners), some of the
smaller domestic producers of primary copper and transactions in
physical copper on the LME and COMEX plus imports based on LME quotations.
Demand for copper is quite inelastic in the short-run, and the changes in
copper supply are basically slow, characterized by long adjustment
periods. Hence, wide swings in demand over the business cycle in
industrial countries, combined with speculative activity in the very
short-run on the two organized commodity exchanges,have contributed to
the volatility of copper prices internationally.
Generally speaking, the domestic primary producers have tended to change
their prices only slowly and not by the magnitude often experienced by
the LME price. As a result, the producers' prices have generally remained
well below LME prices during periods of strong-demand and above LME
prices during periods of weak demand. In other words, there has existed
a two-price system for refined copper in the postwar period which was
characterized by periods of wide divergence between the outside market
price for copper (i.e., the LME price) and the domestic producers' price
A combination of factors appears to have had substantial restraining
influence on the pricing decisions of the domestic primary producers which
resulted in the two-price system. These factors include the actual (as
well as the expected) threat of long-run substitution In favor of aluminum,
some competition from secondary producers, the apprehension that domestic
customers might shift to overseas suppliers if the domestic producers'
price remained above the LME price over a prolonged period, the presence
of United States government stockpiles, and the threat of governmental
Intervention (e.g., price controls).
d. Financial Performance
In the past decade, the United States copper industry has experienced
modest growth in sales, low return on invested capital, eroding profit
margins and higher debt, reflecting the combined pressure of inflation,
higher cost of capital, increased capital requirements for environmental
control and the worst recession during the postwar period.
Overall profitability for the copper producers, in terms of operating
margin on sales, declined from about 23 percent in 1967 to 19 percent in
1974. Over the same period, profit margins for large industrial
companies and manufacturers in general was rather stable. In terms of
after-tax return on stockholders' equity, copper producers have shown a
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rate of return equal to the Federal Trade Commission (FTC) average for
all manufacturing. However, the copper industry has been characterized
by much greater volatility in its rate of return. This, in turn, stems
from the cyclicality of the industry and fluctuations in copper prices.
Capital expenditures by most companies increased sharply in recent years.
A significant portion (i.e., about 25 percent) of total industry capital
expenditures over the period 1972-1975 has been for pollution abatement,
mostly associated with S0£ control at smelters. About 60 percent of
the total represents investment in mining and milling capacity.
With capital expenditures increasing faster than internal cash generation
(from earnings, depreciation, and deferred taxes), the cash-flow position
of the companies has deteriorated. Consequently, there has occurred in
recent years a sharp increase in external financing. Over the last five
years, overall debt has approximately doubled, while equity has increased
insignificantly. Indeed, some companies are believed to have temporarily
reached prudent limits to debt in their capital structure and await higher
earnings and stock prices to restore balance and financing flexibility.
F. LIMITS OF ANALYSIS
The objective of this study has been to assess the economic impact of
the Clean Air Act Amendments of 1970 and 1977 and the Federal Water
Pollution Control Act Amendments of 1972, as described above. Other
environmental regulations, including those associated with occupational
safety and health, have not been considered in this study.
The computerized econometric simulation modeling approach employed in
this study focuses on the domestic copper industry and deals less
comprehensively with developments in the rest-of-the-world. For the
latter, the model relies on inputs (e.g., LME copper prices) based on
analyses of economic growth in the other industrial countries, costs
of production abroad, and mine capacity expansion in key copper
exporting countries. A comprehensive worldwide modeling approach was
contemplated but dropped, in view of resource constraints and competing
priorities.
Over the next five-to-ten years, stagnant economic conditions or slow
economic growth worldwide, and low LME copper prices, would represent
a sharp and persistent reversal of the basic conditions that have
prevailed during most of the postwar period. The econometrically
estimated equations in the model reflect the prevalent postwar conditions.
Hence, a sharp break with these postwar trends results in the model not
yielding "strictly" convergent (i.e., mathematically perfectly
consistent) solutions. That is, the model does not perform as well
under such an unusual situation, which would represent a prolonged state
of downturn for the domestic copper industry. From this we conclude
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that the domestic copper industry would be severely hurt under such
pessimistic assumptions—a conclusion that would be intuitively apparent
without the aid of a model.
This study has not examined the cost-effectiveness of the present
set of environmental regulations. Such an investigation would identify
the socially least-cost environmental control approaches, given the
present regulations, assuming that national economic benefits
emanating from such regulations are known or accepted at face value.
Accordingly, .little or no analysis of alternative approaches to pollution
control has been performed in this study.
Further, no attempt has been made to quantify the incremental national
economic benefits and costs associated with the present set of
regulations or to quantify the benefit-cost gradients associated with
alternative combinations of regulatory strategies. Such an investi-
gation would have as its purpose the quantification of the national
benefit-cost tradeoffs to choose socially optimal environmental control
policies.
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CHAPTER I
NOTES
1. Other studies in this series include petroleum refining, iron and
steel, pulp and paper, capital markets, electric utilities, foundries,
and others.
2. In most cases, local regulations and standards are such that Federal
standards are controlling. An exception is the set of standards of
the Fuget Sound Air Pollution Control Agency which affects the
Tacoma smelter.
3. Strong streams are defined as those containing over 4-5 percent SO*-
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II. PRODUCTION AND POLLUTION CONTROL TECHNOLOGY
A. INTRODUCTION
In this chapter, we discuss the conventional technology for producing
copper and the pollution control technology which interfaces with that
production technology to reduce emissions. A brief discussion of new
technology is also included. The production of copper from primary
(virgin) sources is based mainly on the exploitation of sulfide
mineral deposits, and involves four stages of processing; mining,
beneficiation or milling, smelting, and refining. Subsequently, the
refined copper is melted and cast into various shapes for fabrication.
A small quantity of copper is produced from oxide ores by hydro-
metallurgical techniques. This involves the dissolution of copper
in sulfuric acid solutions; concentration/purification, if necessary,
by liquid ion exchange; and recovery of the copper by precipitation
on scrap iron or via electrowinning. During mining and milling,
large quantities of solid wastes (and in some cases, water effluents)
are produced. However, in terms of complexity and cost, the air
pollution problems of the smelters are currently the most important.
To minimize transportation cost, mills are almost always located close
to the mines. The value of the concentrates is high enough to allow
some flexibility in smelter location. Still, most smelters are located
near the mills which supply them or on tide water or rail head in order
to receive concentrates from distant mills. Refineries can be located
anywhere between smelters and fabricators, since the transportation
costs for "blister" copper from smelters and refined copper are about
the same.
Considerable quantities of copper scrap are recycled by the primary
producers, and by the producers of alloyed and unalloyed copper ingot.
Such recycling involves melting for high-grade scrap but different
types of refining for lower-grade scrap.
In the long-run, because the bulk of United States copper reserves is of
the sulfide type, most of the copper would continue to be produced from
sulfide concentrates. The use of new pyrometallurgical (non-reverb
based) technology would increase sulfur capture to over 90 percent and
decrease the energy consumed in smelting. Several hydrometallurgical
processes have been developed for recovering copper from sulfide concen-
trates. While these processes are not energy-efficient, their attractive-
ness derives from the fact that such plants can be built on a much smaller
scale than smelters and they convert sulfur in concentrates to forms
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other than sulfurlc acid. Because oxide reserves are limited, the
recovery of copper from copper oxide ores will not play a major
role in total copper supply.
B. PRODUCTION TECHNOLOGY
Production of primary copper involves four basic activities: mining,
milling, smelting and refining. Refined copper is then fabricated
for various end-use markets. The four stages of primary production
are:
• mining—where ore containing approximately 0.4 to 2 percent
copper is mined;
• beneficiation—where the copper-containing minerals are separated
from waste rock to produce a concentrate containing about 25 percent
copper;
e smelting—where concentrates are melted and reacted to produce
98 percent pure "blister" copper; and
e refining—where blister copper is refined electrolytically to
produce 99.9 percent pure cathode copper. Some of the new
hydrometallurgical processes combine the functions performed
by smelting and refining.
A generalized flowsheet of copper processing is shown in Figure II-l.
Because previous reports and the published literature'1 contain
detailed information on copper technology, only a brief summary is
presented here.
1. Mining
Copper-bearing materials are found near the surface or deep in the
ground. Mining is the first step in their exploitation. About
85 percent of the total copper ore mined comes from open pits, where
ore is removed from the surface rather than from underground workings;
the rest comes from underground mines. Underground mining methods
for copper ores involve caving and/or cut-and-fill mining.
2. Beneficiation/Concentration
From a processing viewpoint, copper ores can be classified in three
categories—sulfide, native copper, and oxide. Each category requires
different beneficiation processes. A sulfide ore is a natural
mixture that contains copper-bearing sulfide minerals, associated
metals, and gangue minerals (e.g., pyrites, silicates, aluminates)
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FIGURE II-l
GENERALIZED FLOWSHEET FOR COPPER EXTRACTION FROM SULFIDE ORES
MINING
BENEFICIATION
SMELTING
REFINING
Acid
Plant
Ore
Deposit
^
Waste
to Dumo
Ore t Water &
0.4-2.0% Cu I Reagents
Crushing
^ gases
1
Sulfuric
Acid
Reductant
Flux Fuel
Air Flux 1 1
I 1 . * * -
Converter Matte Reverberatory
Slag f |
_
1
Copper SJag t0
98-99% Dump
i f
Fire-Reflnine AnndP* , Electrolytic
ition 1 i
Cone
25
_^ Gases
to Stack
^^^^^ Ano
to
leta
Tailings
to Pond
Air
I
Fire-Refined
Copper
Copper
Cathodes
99.9% Cu
Optional roasting step not shown.
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that at times have considerable value (e.g., molybdenum, silver, gold,
as well as other metals). The sulfide ores are treated primarily by
crushing, grinding, and froth flotation to produce a concentrate
(or several concentrates) of sulfide minerals; worthless gangue is
rejected as tailings. Generally, only sulfide ores are amenable to
concentration procedures. The output of this beneficiation process,
concentrate, may contain 11-32 percent copper. Mine/mill output is
typically defined in terms of recoverable copper content in concentrate
form.
In native copper ores the copper occurs in metallic form. The Lake
Superior district in Michigan is the only major source of ore in this
type. Although the reserves of this ore are extensive, they contribute
only a little of the total U.S. mine production of copper.
Finally, the non-sulfide, non-native ores of copper are termed "oxide"
ores, the copper oxide content being measured by and synonymous with
solubility in dilute sulfuric acid. An "oxide" copper ore can contain
copper oxide, silicate or carbonate minerals and gangue. In the South-
western United States, many deposits have a capping of oxide ore below
which is a transition zone of various mixtures of oxide and. sulfide
copper minerals and then the primary sulfide deposit. The oxide ores
have been treated metallurgically in a variety of ways, the character
of the gangue minerals having a very important bearing on the type
of metallurgical treatment used. In the United States, however, oxide
ores are treated primarily by leaching with dilute sulfuric acid.
Copper is recovered in metallic form from leach solution by precipitation
on iron scrap (cementation) or by electrowinning from the solution
as discussed in detail later in this chapter.
Commonly associated with copper are minor amounts of other metals whose
presence can have a beneficial or a harmful effect on mine profitability.
Molybdenum, lead and zinc are valuable only if recovered as separate
sulfide concentrates by differential flotation. Minor amounts of
selenium, tellurium, and precious metals stay with the copper during
milling and smelting and are extracted during electrolytic refining.
Of these, the precious metals can have a major beneficial effect if
present. Arsenic, antimony and bismuth, as well as lead and zinc in
the ores, cause problems in standard pyrometallurgical processing and
electro-refining, and their presence above certain levels results in a
cost penalty. Nickel and cobalt can interfere with electrolytic
refining, but they do not occur in significant amounts in the United
States copper deposits.
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3. Smelting
Because most United States copper is extracted from low-grade sulfide
ores that require concentration, current pyrometallurgical practice for
recovery of copper is fairly uniform from smelter to smelter and is
adapted to treating fine-grained sulfide concentrates that consist mainly
of copper and iron sulfides and gangue. Copper's strong affinity for
sulfur and its weak affinity for oxygen as compared with that of iron and
other base metals in the ore are the basis for the three major steps in
producing copper metal from sulfide concentrates: roasting, smelting
and converting.
a. Feed Materials
Flotation concentrates containing from 15-30 percent copper constitute the
bulk of the feed to the smelters. In addition, smelters will charge copper
precipitates containing 70-85 percent copper, siliceous flux and limestone.
b. Drying
The flotation concentrates received by the smelter are a wet filter cake .
and can contain 10-15 percent moisture. Cement copper can contain as much
as 30 percent moisture. The charge to a reverberatory furnace can be dried
so that its overall moisture content is 4-8 percent without unduly in-
creasing dusting problems in the reverb. The removal of moisture in drying
reduces the fuel requirements in the reverb. Also the drier acts as a
blender for homogenizing the charge. Rotary or multiple hearth driers
are used for drying the feed materials.
c. Roasting
About half the copper smelters in the United States roast their charge
prior to feeding in the reverberatory furnace. The older smelters use
multiple hearth roasters for this purpose while the new smelters used
fluidized bed roasters.
The object of roasting copper sulfide concentrates is to regulate the
amount of sulfur in the materials and to remove certain volatile impuri-
ties such as antimony, arsenic, and bismuth. In modern practice, the
grade of the concentrate is controlled sufficiently at the concentrator
and roasting is not essential to control the sulfur content of the charge.
However, in the case of custom or toll smelters, the composition of feed
materials can vary widely and roasting is practiced to blend and control
the sulfur content of the charge.
Elimination of some of the sulfur in roasting results in a higher grade
matte in the reverberatory furnace and decreases the oxidizing load on the
converters. Sulfide roasting can be autogeneous; additional fuel is not re-
quired. The charging of hot roasted calcines into the reverberatory furnace
can decrease its fuel consumption per ton of charge by about 40 percent
and, consequently, increase reverb capacity. In addition, roasting also
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reduces the emissions of sulfur dioxide from the reverb. The reason for
this is as follows: The two major constituents of concentrates utilized
by almost all the U.S. smelters are chalcopyrite, CuFeS2, and pyrite, FeS_.
These minerals contain sulfur that is loosely held or "labile" which is
given off by melting the minerals.
2CuFeS2 = Cu2S + FeS + S
FeS2 = FeS + S
Cu2S and FeS form matte, whereas the labile sulfur reacts with oxygen in
the reverb gases to form S(>2. Removal of the labile sulfur during roasting
can reduce emissions from the reverb. Also the lower fuel requirement per
ton of charge when using calcine smelting reduces the volume of reverb
off-gases.
Both types of roasters (multiple hearth and fluidized bed) usually operate
around 1200°F. Sulfur dioxide concentration in the wet off-gas is usually
2-10 percent with multiple hearth1roasters and varies because of dilution
with air. With fluid bed roasters the wet off-gases can run 12-14 percent
sulfur dioxide. Both types of roasters involve handling and collecting of
large quantities of hot abrasive dust which can lead to high maintenance
costs.
d. Reverberatory Furnace Smelting
Roasted and unroasted materials are melted after mixing with suitable
fluxes in reverberatory furnaces. Liquid converter slag is also charged
into the reverberatory furnace to recover its copper content. Heating
of the charge is accomplished by burning fuel in the furnace cavity, the
heat being transmitted to the charge primarily by radiation from the
roof, walls and flame.
Most of the reverbs in the United States use natural gas/fuel oil as a
fuel and only a few use powdered coal. The maximum smelting capacity
of a reverb is limited by the amount of fuel that can be burned (a function
of reverb shape and size) and the quantity of heat required by a unit
weight of charge. Reverb throughput can be Increased by drying the
charge, preheating the charge by roasting and by preheating or enriching
the combustion air.
In the reverberatory furnace, copper and sulfur form the stable copper
sulfide, Cu2S. Excess sulfur unites with iron to form a stable ferrous
sulfide, FeS. The combination of the two sulfides, known as matte,
collects in the lower area of the furnace and is removed. Such mattes may
contain from 15-50 percent copper, with a 40-45 percent copper content
being most common, and also contain impurities such as sulfur, antimony,
arsenic, iron, and precious metals.
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The remainder of the molten mass containing most of the other impurities
and known as slag, being of lower specific gravity, floats on top of the
matte and is drawn off and discarded. Slags in copper smelting are ideally
represented by the composition 2FeO.Si(>2, but contain alumina from the
various charge materials and calcium oxide which is added for fluidity.
Since reverb slags are discarded, the copper contained in the reverb slag
is a major cause of copper loss in pyrometallurgical practice. The con-
centration of copper in the slag increases with increasing matte grade.
This behavior limits the matte grades normally obtained in conventional
reverberatory practice to below 50 percent Cu.
When using a reverb for green charge smelting, 20 percent to almost 45
percent of the sulfur in the feed is oxidized and removed from the
furnace with the off-gases. The wet off-gases can contain 1.5-3 percent
sulfur dioxide. When using calcine smelting, sulfur dioxide evolution is
lower and about 10-15 percent of the sulfur in the unroasted feed material
is contained in the reverb off-gases. SC>2 concentration in the wet off-gases
in this case can vary between 0.5 to 1.5 percent.
The hot gases from the reverb are cooled in waste heat boilers which
extract up to 50 percent of the sensible heat in the gases. A considerable
amount of dust is removed in the waste heat boiler and the gases are further
cleaned in electrostatic precipitators before venting to the atmosphere.
e. Converting
Matte produced in the reverberatory furnace is transferred in ladles to
the converters using overhead cranes. The converters used in copper
smelting are of the cylindrical Fierce-Smith type, the most common size
being 13' x 30'. Air is blown from the side through a series of openings
called tuyeres. During the initial blowing period (the slag blow) FeS
in the matte is preferentially oxidized to FeO and FegO^ and sulfur is
removed with the off-gases as S02. Flux is added to the converter to
combine with iron oxide and form a fluid iron silicate slag. When all
the iron is oxidized, the slag is skimmed from the furnace leaving behind
"white metal" or molten Cu2S. Fresh matte is charged into the converter
at this stage and the slag blowing continued until a sufficient quantity
of white metal has accumulated. When this happens, the white metal is
oxidized with air to blister copper during the "copper blow." The blister
copper is removed from the converter and cast or subjected to additional
fire refining prior to casting. Converter blowing rates can vary between
12,000 to 30,000 scfm of air. Also, the S02 content of the off-gases is
lower during "slag blow" than during "copper blow."
Cooling of the hot converter gases is necessary in order to prevent
thermal damage to the dry gas cleaning equipment such as cyclones or
electrostatic precipitators. Traditionally, this cooling was accomplished
by adding dilution air that varied from 2-6 times the converter off-gas.
With dilution air, S02 concentrations in the converter off-gases are from
1-7 percent. With close fitting hoods or with Hoboken converters, the
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off-gases can have 4-10 percent S02. However, when dilution air is not
used, cooling devices such as waste heat boilers, air/gas heat exchangers
or water sprays are necessary.
With proper hooding, the converter off-gas is sufficiently high in sulfur
dioxide so as to be suitable for sulfuric acid manufacture, but converting
by its very nature is a batch operation and the off-gas flow rates vary
widely. In the smaller copper smelters which use two or three converters,
the scheduling of converter blows in order to obtain relatively steady
flows to the acid plant is a difficult problem.
4. Refining
The blister copper produced by smelting is too impure for most appli-
cations and requires refining before use. It may contain silver and
gold, and other elements such as arsenic, antimony, bismuth, lead,
selenium, tellurium, and iron. Two methods are used for refining
copper—fire refining and electrolysis. Electrolytic copper is refined
by electrolytic deposition, remelted, and cast in commercial shapes,
while fire-refined copper is refined by using only a pyrometallurgical
process.
The fire-refining process employs oxidation, fluxing and reduction.
The molten metal is agitated with compressed air; sulfur dioxide is
liberated, and some of the Impurities form metallic oxides which
combine with added silica to form a slag. Sulfur, zinc, tin, and
iron are eliminated almost entirely, and many other impurities are
partially eliminated by oxidation. Lead, arsenic, and antimony can
be removed by fluxing and skimming as a dross. After the impurities
have been skimmed off, copper oxide in the melt is reduced to metal
by inserting green-wood poles below the bath surface (poling). Reducing
gases formed by pyrolysis of the pole convert the copper oxide in the
bath to copper. In recent years, reducing gases such as natural gas,
reformed natural gas or ammonia have been used.
If the original material does not contain sufficient gold or silver
to warrant its recovery, or if a special purpose silver-containing
copper is desired, the fire-refined copper is cast directly into
forms for industrial use. If it is of sucn a nature as to warrant the
recovery of precious metals, fire refining is carried only to insure
homogeneous anodes for subsequent electrolytic refining.
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A major portion of United States blister output is electrolytically
refined. In electrolytic refining, blister copper cast in anode shape
and cathodes (thin copper sheets prepared separately) are hung alter-
nately in plastic-lined or lead-lined concrete electrolytic cells that
contain the electrolyte—essentially a solution of copper sulfate and
sulfuric acid. When current is applied, copper is dissolved from the
anode and an equivalent amount of copper plates out of solution on the
cathode. Such impurities as gold, silver, platinum-group metals, and
the selenides and tellurides fall to the bottom of the tank and form
anode slime or mud. Arsenic, antimony, bismuth, and nickel enter the
electrolyte. The electrolyte has to be treated to prevent the buildup
of these impurities since they would have a deleterious effect on
cathode purity. After the plating cycle is finished, the cathodes
are removed from the tanks, melted, and cast into commercial refinery
shapes. Anode scrap is remelted to form fresh anodes. The copper
produced has a minimum purity of 99.9 percent.
5. Hydrometallurgy of Oxides
About 10-15 percent of the United States copper production comes from
oxide sources. The hydrometallurgical treatment of such ores with
dilute sulfuric acid to dissolve the contained copper is an old estab-
lished technology. Since surplus sulfuric acid is available near the
mines as a result of pollution control measures at smelters, acid
leaching of mine waste dumps and mill tailings is widely practiced
in addition to the leaching of oxide ores mined specifically for
this purpose. Since many of these materials contain limestone, such
a leaching process indirectly disposes the acid by neutralization.
Once in solution, copper is recovered either by precipitating on iron
scrap or via LIX (liquid ion exchange)-electrowinning. In the first
case, scrap iron is reacted with the pregnant leach solution in
precipitation cones or in launders. Iron consumption in this
reaction is several times the stoichiometric amount and is typically
2-3 Ib iron/lb copper precipitated. Precipitated copper or cement
copper is usually shipped to a smelter for processing.
In the LIX-electrowinning process, the pregnant solution is contacted
with a liquid ion exchange (LIX) reagent. The LIX reagent is typically
dissolved in an organic liquid such as kerosene, which is relatively
insoluble in water. During contacting, copper in the pregnant leach
solution preferentially transfers to the organic phase. The copper-
depleted leach liquor is then recycled to the leaching system. The
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loaded organic liquid is next contacted with a strongly acidic aqueous
solution (recirculating cell electrolyte) which strips copper from the
organic phase. In this fashion, LIX takes copper from a dilute impure
aqueous solution (leach liquor) and selectively transfers it to a
relatively pure, concentrated solution suitable for electrowinning.
The copper-containing solution is next electrolyzed in electrowinning
cells, i.e., cells with insoluble anodes where copper is plated from
the solution onto the cathodes. Cathodes from LIX-electrowinning
approach the quality of electrorefined cathodes, but usually contain
some impurities carried over from the "insoluble" anodes.
C. FORMS OF COPPER
Both electrolytic and fire-refined copper are sold in several classes
of regular or standard refinery shapes (consisting mainly of hori-
zontally cast wirebars, cathodes, ingots, and ingot bars, cakes,
slabs and billets) and as copper powder. The shapes are largely
determined by the requirements of the fabricators' equipment.
For analytical purposes, the 40 distinct types of refined copper
classified and graded by the American Society for Testing Materials
(ASTM) can be collapsed into "refined copper" as a generic category,
for two reasons. First, many users can to some extent substitute
the various types of copper. For example, brass mills and foundries
are fairly flexible. Second, copper producers possess the flexibility
to produce more of one form and less of another. In the short run,
both producers and fabricators have much less flexibility. However,
for periods greater than six months there appears little reason to
distinguish among various types of refined copper in explaining
the behavior of the market for refined copper. Further, market
institutions indicate that it is reasonable to work in terms of refined
copper, since a considerable degree of flexibility is allowed in
substituting one type of copper for another and the producers' price
for various types of copper shapes is generally stated in terms of a
differential from the price of electrolytic copper wirebars.
D. THE SECONDARY INDUSTRY
The term "primary metal" refers to metal recovered from ores or virgin
sources. The term "secondary metal" came into wide use before it had
acquired a singular meaning and still carries misleading connotations.
It is important to recognize that "secondary" pertains only to origin
and not to quality. That is, secondary refined copper is physically
equivalent to a corresponding grade of virgin refined copper. The term
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means only that the copper was recovered from scrap rather than from
copper ore. Secondary copper loses its identity, except statistically,
as soon as it is produced. It is not possible, for example, to
determine whether a copper wirebar was derived from the scrap charged
to a converter, or whether a brass ingot is made from remelted brass
scrap or from primary alloys.
There are three major categories of scrap users: primary producers,
producers of unalloyed copper and producers of alloyed copper including
ingot producers, foundries, and brass and bronze mills. The primary
industry will purchase scrap for process reasons (e.g., cooling of
converters) and also to supplement the production from primary sources.
The producers of unalloyed and alloyed copper are labelled the secondary
copper industry.
The secondary copper industry utilizes a variety of processes to melt
and refine copper scrap. Melting units include blast furnaces,
reverberatory furnaces and electric furnaces. Refining is achieved
via fire-refining or electrolytic refining. Often, product specifications
are reached by diluting lower-grade secondary copper with purer grades
in order to minimize the need for refining.
Copper scrap, as a generic term, refers to a variety of materials.
There are five classifications of unalloyed copper scrap and more than
30 classifications of copper base or alloyed scrap. Some types of scrap
are virtually pure copper, while others are alloys, or mixtures of alloy
types that have copper contents ranging down to as little as 30 percent.
Refinery slags, dross, skimmings and ash, which sometimes have even
lower copper contents, are regarded as secondary material, since they
are treated by the secondary copper industry, although technically
they are not scrap copper. Small quantities of copper are also
recovered from non-copper base scrap.
Finally, alloyed copper, which refers to alloys of copper and other
metals, consists of "yellow brass" and other distinctive types of
alloyed copper scrap used by fabricators (foundries and mills) as a
convenient way of arriving at a fabricated product made of a particular
alloy. Rather than purchasing pure constituent metals, making the
alloy and then fabricating it, a fabricator may find it convenient
to purchase one of the many types of copper alloys as scrap.
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E. POLLUTION CONTROL TECHNOLOGY
1. Introduction
The major emissions at the mining and milling stage of production are
solid wastes and water. Except for dust emissions, air pollution is
not a problem. Of all the environmental regulations that impinge on
the four segments of the domestic copper industry, the air pollution
regulations that affect the smelters are currently the most important.
The two pollutants of major concern at this time at the primary copper
smelting stage of production are air-borne particulates and sulfur
dioxide (S02). Described below is the process technology required for
pollution control.
2. Pollution Control Technology for Conventional Smelting
At conventional copper smelters, both particulates and S02 are generated
at several individual sources, with distinctive characteristics for
the off-gas or emissions at each source. For each of these streams,
many factors determine which of the air pollution control methods
(or combinations) can best be used.
There are two principal methods of control: (1) physical removal of
the potential pollutant from the carrying gas stream before discharge
to the environment and subsequent disposal, or (2) actual reduction
in the emissions generated by the process. If pollution is defined
and measured in terms of concentration levels of a contaminant in the
local ambient air, a third control method is the dispersion of the
contaminant combined with changes in the operating rates. Figure II-2
is a schematic flow diagram of the conventional smelting and refining
process. The sources of emissions are shown in four categories: air,
solid, water and fugitive. The last category includes air emissions
that come from diffuse sources. Table II-l shows the magnitude of
these streams and the major constituents.
3. Air Pollution
Existing copper smelters have to meet Federal Ambient Air Quality
Standards for particulates (75 yg/m3) and sulfur oxides
(80 pg/m3—primary; annual mean). New copper smelters have to meet
New Source Performance Standards in addition. (See Chapter IX for
a discussion of the many regulations on pollution control requirements).
Existing copper smelters reduce the sulfur dioxide concentrations in
their vicinity by: (1) capturing S02 in gas streams as sulfuric acid
(by the contact process) or as liquid S02 (using DMA scrubbing);
(2) using a tall stack to disperse dilute gas streams; and (3) curtailing
production.
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FIGURE I1-2
Concentrate
SOURCES OF EMISSIONS IN CONVENTIONAL
Recycled Dust
r ~ - — i
Roasting
l_ _|
I
©
,1 i
Reverb Gas ,
Smelting
Gas Cooling
&
Dust Catching
COPPER SMELTING AND REFINING
Dust
Cds
Cooling
MiTtc xj^ * (?7) Slag
Gas Cooling
»(S7)Duet Bleed
Dust
^ -,
Dust
T
ESP
1
ESP*
rolrf n.. . Aeld Pl.nt »
Cleaning
Stac.
M
I
Stack
CJ
Electrolytic
Copper
Efflurnt Typ.-a: - Air;
- Hater; (§} - Solid Wastes; (PJ - fugitive
- I lort r.ibl-itlc
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I
s
TABLE II-l
EMISSIONS FROM CONVENTIONAL SMELTING
Stream
Air Pollution
A-l - Reverb Gas
A-2 - Acid Plant Tail Gas
A--3 - Anode Furnace Gas
Stream Size
82,000 SCFM
38,800 SCFM
NA
Major Constituents
SO.: 1-2%; QZ: 5%; Particulates: 50
S02: 0.2%
Flue Gas, Some SO., Particulates
Water Pollution
W-l - Slag Granulation
W-2 - Acid Plant Slowdown
W-3 - Contact Cooling
W-4 - Black Acid Bleed
50,000 liters/kkg
14,000 liters/kkg
7,800 liters/kkg
700 liters/kkg
TDS, SSS
TDS, TSS, Acidity
TDS, TSS (usually recycled)
Acidity, TDS, TSS
• Solid Wastes
S-l - Reverb Slag
S-2 - Dust Bleed
3 tons/ton Cu
0.3 tons/ton Cu
Iron Silicates
Copper Oxides, Minor Elements
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The contact sulfuric acid process is well established for treating
S02-containing off-gases from metallurgical plants. Modern contact
acid plants require at least 4.5-5 percent sulfur dioxide in the feed
gas in order to operate autogeneously, i.e., without external fuel. For
lower concentrations of S02 an additional fuel input is required.
The acid-plant size is primarily a function of the volume of gas
handled. Hence, for a constant acid output, an acid plant operating
on more dilute gases is much larger (and more expensive) than an acid
plant operating on more concentrated gases. With the currently used
vanadium pentoxide catalysts, the upper level of S02 concentration in
the feed gas to an acid plant is between 7 and 9 percent. Gas streams
more concentrated than this require dilution or specially designed
plants.
Only one smelter practices DMA scrubbing of converter gases to produce
liquid S02 for sale or for enrichment of feed gas to an acid plant.
The tall stack discharges sulfur dioxide at such heights that the gas
is diluted when dispersed into the lower atmosphere. It is possible
to heat the stack gases to increase plume height for additional
dispersion and dilution. Because tall stacks can disperse and dilute
when used in conjunction with other means of limiting emissions, no
simple relationship is available to predict ambient concentrations as
a function of percent sulfur recovery. Computer modeling has to be
used for this purpose. The overall control strategy has to be well
defined and local weather patterns have to be considered.
The third method for controlling sulfur dioxide concentrations at
ground level is to curtail production when adverse weather conditions
prevail. This method has been referred to as "closed loop control"
or as a Supplementary Control System (SCS) when it is based on
monitoring sulfur dioxide concentrations at ground level at various
sites in the areas surrounding the smelter and using this information
to control the smelter operating rate. When ground level concentrations
increase as a result of adverse weather conditions, the smelter operation
is curtailed to reduce the emission rate.
Most copper concentrates contain more sulfur than copper, e.g., 31 percent
sulfur versus 25 percent copper. About 1 to 2 percent of the sulfur
entering the smelter is lost in the slag and perhaps 3 to 5 percent
evolves as fugitive emissions. The remaining sulfur is in gaseous
effluents from the roaster, reverb and converters. Typical percentage
sulfur distributions in conventional smelting are:
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Calcine Smelting Green Charge Smelting
Roaster 20
Reverb 25 40
Converter 50 55
Slag and Fugitives 5 5
Total 100 100
The conventional smelting process evolved in geographical areas where
acid markets were unavailable and all S02-containing gas streams were
vented to the atmosphere (after particulate control, if necessary).
Thus, conventional technology used gas-handling techniques (for example,
dilution air for cooling of converter gas) which would not be used if
the stream were to be treated for S02 recovery. However, streams from
the roaster (in some cases) and converter can be handled to minimize
air leakage. This results in S02 concentration greater than 4 to 5
percent which is adequate for autogenous sulfuric acid manufacture—the
least costly control technology for removing S02 from such streams.
The reverb gases are a high-volume (up to 100,000 SCFM) and low-
concentration (0.5 to 2 percent 802) stream that is not amenable to
autogenous sulfuric acid manufacture.
With conventional smelting, as well as with the new smelting processes
(discussed in the next section), S02 control is achieved via an
"end-of-pipe" treatment facility, usually a sulfuric acid plant.
However, changes in processing and in gas handling and gas cooling
are necessary for proper interfacing between process units and pollution
control units.
In addition to S02, the reverb gas contains participates. The use of
electrostatic precipitators permits the particulate emission levels
established for copper smelters to be met.
4. .Solid Wastes
In a copper smelter, slightly more than three pounds of solid waste
are generated per pound of copper. The major waste stream is in the
form of slag. Occasionally, this solid waste stream also includes
stockpiled flue dust.
a. Slag
The converter slag is recycled to the reverb in order to recover
its copper content. The slag tapped from the reverbatory furnace
(and granulated in some cases) is disposed as an inert rock. Reverb
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slag is mainly an iron silicate, containing about 0.5 to 0.9 percent
copper and minor elements in dilute form.
b. Flue Dust
The flue dust results from entrained particles and condensed effluents
in the gas stream. Typically 3 to 6 percent of the total weight of
solids entering the smelter is evolved as dust. Coarse particles
are caught in the cooling chambers, while fine particulates are
removed by electrostatic precipitators operating slightly above the
dew point of the gas stream.
All flue dusts contain entrained copper and they are mostly recycled
to the reverberatory furnace. They may also contain volatile
impurities in a "concentrated form. Excessive impurity build-up by
dust recirculation would impair the quality of the blister copper.
At times it is economical to process these dusts further in order to
recover such metals as zinc, lead, arsenic, etc. Depending on the
composition of the feed, a fraction of the dust generated may be
diverted and either stored or sold to other specialized smelters
which recover the contained metals.
5. Water Pollution
In a copper smelter and refinery the sources of wastewater are:
• slag granulation (if this is practiced);
e acid plant blowdown (i.e., blowdown from wet scrubbers ahead
of the acid plant);
o metal cooling;
o spent electrolyte and washings; and
e storm water commingling with process wastewater.
The primary copper industry has to meet three specific effluent
limitation guidelines. These are:
o Best Practical Control Technology Currently Available (usually
referred to as BPT)—to be met by industrial discharges by 1977.
• Best Available Technology Economically Available (usually
referred to as BAT)—to be met by 1983.
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• New Source Performance Standards (NSPS)—to be applied to all new
facilities constructed after the promulgation of the guidelines.
In order to meet the effluent limitations, the recommended treatment
technology must remove suspended solids, adjust pH, and remove the
specific heavy metals. The recommended technology (for both BFT
and BAT) is lime treatment, settling, and any necessary pH adjustments
and filtering. This technology is recommended because all of the heavy
metals included in the proposed effluent limitations have a very low
solubility in the alkaline pH range, and the addition of lime causes
them to precipitate out of solution as hydroxides and carbonates.
The metal precipitates, along with other suspended solids present In
the wastewater, are separated from the wastewater stream by means of
settling, and are withdrawn as a sludge. Since the wastewater is still
at a high pH after this step, it is necessary to lower the pH. This
step is usually performed in a separate basin.
Other recommended techniques for improving the effectiveness of the
previously mentioned end-of-pipe treatment are: reuse of water in
other operations; control of mine water drainage by modificaton of
mining techniques, construction of diversion structures, or ditching;
and use of solar evaporation to eliminate the discharge of excess water.
F. NEW PROCESS TECHNOLOGY
United States smelting technology evolved in a framework of low energy
costs and in locations distant from sulfuric acid markets and urban
population centers. Because of the relatively high cost of transporting
sulfuric acid, its recovery was usually not economic. Also, S02
containing gases could be discharged to the atmosphere in remote
locations. Thus the technology was not aimed at recovering sulfur
values as sulfuric acid (as is the case in some other industrialized
countries) and was not particularly efficient in its use of energy.
Several changes have occurred in the past five years on the economic
and regulatory scene which indicate that the currently used technology
is not longer applicable for the construction of new smelters:
• Energy costs for smelting have Increased rapidly. Cheap
natural gas, the fuel used by most smelters is not now
available to the smelters, particularly in peak demand
months (winter), and might not be available at all in the
future.
• Emissions of S02 to the atmosphere have to be controlled.
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• The sulfuric acid produced by smelters cannot always be
economically transported to traditional acid markets. It
often has to be disposed of in the general vicinity of the
smelter. The resulting availability of low-priced acid in
the West has made it possible to use it in the manufacture
of wet process phosphoric acid from low-grade western phosphate
rock or to use it to leach mine dumps and low-grade deposits
which could not otherwise be leached economically. An alternative
is to neutralize the acid with limestone, as is being done indirectly
by leaching copper ores high in limestone.
New process technology has evolved in response to various shortcomings
of conventional technology and as a result of external constraints.
This new technology falls into three major categories:
• New smelting processes (Outokumpu, Mitsubishi, Noranda,
electric, top blown rotary converter—TBRC, etc.),
• Hydrometallurgical processing of sulfide concentrates
(Arbiter, Clear, Cymet, etc.), and
• Hydrometallurgical processing of oxide/sulfide ores,
mine dumps, etc.
The new smelting processes are more energy efficient and can reduce
total energy required in smelting. They produce a concentrated
stream of sulfur dioxide from the smelting unit which can be
economically converted to sulfuric acid. The adoption of this tech-
nology would avoid the use of reverbs which produce dilute S02-containing
streams. Sulfur capture would increase from about 50 to 70 percent for
current technology to over 90 percent. The major shortcoming of the new
processes other than electric smelting is their unproven applicability
to impure smelter charge (charge high in As, Sb, Bi, Pb, Zn, Se, Te,
etc.). Until this issue is resolved, the new processes would have to
be utilized in smelters that smelt clean concentrates in regions where
acid markets are available. All pyrometallurgical processes, conventional
as well as new, offer significant economies of scale, the smallest
economic size being approximately 100,000 tons/year of copper.
The hydrometallurgical processes for sulfide concentrates produce cathode
copper directly, and release sulfur in the concentrates in forms other
than S02. It may be feasible to build hydrometallurgical plants sized
around 40,000 tons of copper per year at unit capital requirement which
is about the same as that of a large (over 100,000 tons/year) copper
smelter and refinery. The hydrometallurgical processes, in general,
are not energy efficient and utilize more energy than pyrometallurgical
processes and refining. Furthermore, the leached solid wastes will
require land disposal into areas prepared to prevent groundwater
leaching of soluble substances and to prevent airborne particulates.
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Because such plants will probably be located generally in the semi-arid
western United States, such a disposal area can be established with
some degree of confidence. Overall, these processes are likely to be
utilized in locations remote from sulfuric acid markets where a large
smelter is not justified.
Sulfuric acid leaching of oxides is not a primary copper recovery
process but can be considered as an acid neutralization/disposal
technique that also recovers copper from resources previously considered
sub-marginal. Since the typical western United States smelter locations
are distant from major sulfuric acid markets, the sulfuric acid produced
to minimize air pollution has to be utilized for leaching of marginal
resources (mine dumps, tailings, oxide ores, etc.) or for making wet
process phosphoric acid. The leaching of dumps and surface deposits
without contamination of groundwater is possible in the arid West but
might not be possible in other parts of the United States.
In the copper electrorefining area, there are several new developments
which will allow the existing plants to significantly increase their
productive capacity in the short-term at low cost and without affecting
copper cathode quality. These techniques are based on improving electro-
lyte flow patterns, periodic reversal of current, automatic scanning of
operations for process control, etc. Of these, periodic reversal of
current (PRC) is the most promising and is already being adopted in many
parts of the world.
About 40 years ago, the recovery of copper shifted from the treatment
of small, high-grade deposits to the treatment of large, low-grade
deposits. The technology of exploiting these low-grade deposits was
based on large-scale mining, milling and concentration of sulfide ores.
Since it appears that the bulk of the world's copper reserves are in
the form of sulfides, this trend will continue with oxide ores being
mined on an opportunistic basis but usually as an adjunct to the
exploitation of sulfides.
There appear, on the technological horizon, two techniques which could
alter the resource base or the costs of production. The large-scale
mining of ocean nodules is expected to provide manganese, copper, nickel
and cobalt. While the utilization/marketing of the manganese is
potentially a problem, the costs of production of the other three metals
would be "competitive" at current prices. The other technique is
"solution mining" of low-grade deposits (sulfide and oxide) which, if
technologically proven, could provide a fundamentally new way of
exploiting low-grade deposits.
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CHAPTER II
NOTES
See, for example, two previous reports prepared by Arthur D. Little,
Inc. (ADL) for U.S. Environmental Protection Agency (EPA): Economic
Impact of Anticipated Pollution Abatement Costs—Primary Copper
Industry (1972) and Economic Impact of New Source Performance Standards
on the Primary Copper Industry: An Assessment (October, 1974).
Also, Extractive Metallurgy of Copper, Biswas and Davenport
(Pergamon Press, 1976).
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III. THE STRUCTURE OF THE UNITED STATES COPPER INDUSTRY
A. INTRODUCTION
Chapter II presented a discussion of the various stages of copper
production from primary sulfide mineral deposits and gave a description
of the conventional technology for producing copper and the pollution
control technology which interfaces with that production technology
to reduce emissions. This chapter describes the organization and
key aspects of the structure of the United States copper industry.
Analysis of the competitive structure of an industry/market requires
the examination of three interrelated areas: (a) structure, (b) conduct
(behavior) and (c) performance. The three areas or concepts are
interrelated in that the structure of a market is generally understood
to determine the conduct (i.e., pricing behavior) of the participants
in the market, and the conduct, in turn, is believed to determine the
performance (e.g., financial) of the participating firms. The causal
directions, however, are not always clear. This chapter is concerned
mostly with the first of these three interrelated areas (i.e.,
structure) and only by implication with the second area. (Pricing
is covered in Chapter VIII). The financial performance of the
participating firms is discussed in the next chapter.
This chapter focuses on domestic copper supply, definition of domestic
copper industry segments or markets on the basis of the pricing
behavior of the participating firms, the geographical distribution
of the industry, and the degree of concentration as well as vertical
integration.
Most of the discussion will be concerned with the primary producer
segment of the domestic copper industry (i.e., that portion of the
industry concerned predominantly with supplying refined copper
produced from virgin ore and blister rather than from scrap). We
will, however, discuss relevant aspects of the secondary copper
Industry, as well.
The United States is the leading producer and consumer of copper in
the world, accounting roughly for one-fifth of total world refined
copper production, consumption and reserves. Except for certain
periods in the past coinciding with military developments or unusual
"demand crunch" periods, the United States has been nearly self-
sufficient in copper.
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About 98 percent of the domestic mine production of copper comes from
ores mined primarily for their copper content, the remainder is
recovered from complex or mixed base metal ores. The copper ores
also are the source of significant quantities of byproducts and co-
products such as gold, silver, molybdenum, nickel, platinum, selenium,
tellurium, palladium, arsenic, rhenium, iron, lead, zinc, and sulfur.
Most of the domestically mined copper is produced in five western
states—Arizona, Utah, New Mexico, Montana and Nevada. Over 80
percent of total United States mine production is located in Arizona,
Utah and New Mexico taken together. Arizona alone accounts for well
over half of total United States mine production of recoverable copper
(about 63 percent in 1976).
Production of domestically mined copper accounts for a major share of
the total United States refined copper supply stream. It should also
be noted that refined copper from scrap, produced both by refineries
and by "secondary plants" (i.e., numerous small smelters of scrap
copper), makes an important contribution to total United States refined
copper supply. Unrefined copper from new and old scrap, used directly,
also represents, on its own right, a significant source of copper supply.
The domestic copper industry can be segmented into "primary" and
"outside" market sectors, for analytical purposes, on the basis of the
pricing behavior of the firms on the sellers' side. By this criterion,
the primary sector consists of firms which sell the bulk of their
refined copper output (mostly from mined copper but also including
some refined from scrap) on the basis of a commonly-followed domestic
producers' price. Firms participating on the "outside" market, on the
other hand, are those which sell their copper output, regardless of
its form (i.e., whether refined or scrap) and regardless of its origin
(i.e., whether processed from mined copper—from domestic or foreign
source—or refined from scrap) on the basis of one of several "outside"
market prices explained in detail in Chapter VIII.
It should be noted, in this connection, that defining the structure of
the domestic copper industry segments/markets on the basis of the
pricing behavior of the participating firms presents considerable
difficulties. For this reason, the "primary" and "outside" market
designations used here should be taken as largely suggestive and not
as definitive.
The primary sector consists principally of the following firms:
Kennecott, Phelps Dodge, Anaconda/ARCO, Newmont, Duval/Pennzoil,
Cyprus, Asarco, Copper Range, Inspiration, Cities Service, Ranchers
Exploration, Hecla (in partnership with El Paso Natural Gas Company)
and others. These firms are vertically integrated to different degrees
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from mining to refining and beyond into semifabrication. Further, in
cases where a few of these firms are integrated forward into semi-
fabrication, not all of the input requirements of these semlfabricating
subsidiaries are supplied by the parent-company's refined output. Several
of the major copper producers are also major producers of other metals,
such as lead and zinc, and others are aluminum fabricators. A number
of producers participate jointly in foreign copper mining companies,
notably in Canada, Africa and South America.
The United States copper industry, consisting predominantly of the
"primary" sector, is highly concentrated. In 1974, four firms—Kennecott,
Phelps Dodge, Anaconda, and Newmont—accounted for 64 percent of total
United States mine production. Eight firms, including these four plus
Duval, Cyprus, Asarco and Copper Range, accounted for 88 percent of the
total. Seven firms—Asarco, Kennecott, Phelps Dodge, Newmont, Anaconda,
Inspiration, and Copper Range—together represent virtually all of
the United States smelter and primary refinery capacity.
Although highly concentrated, the domestic copper industry has undergone
important structural changes during the postwar period, with the entry
of new firms at various stages of production, shifts in the degree of
backward or forward integration of new or old firms, and important
changes in ownership patterns (e.g., acquisition of copper companies
by oil companies). As a result, the industry has become more diverse
and somewhat less concentrated. In addition, the industry has
become more complex or interdependent in terms of domestic or foreign
joint-investments and buyer-seller relationships (e.g., custom/toll
smelting and refining arrangements).
B. INDUSTRY DEFINITION
For the purposes of this study, copper producers, or more generally, the
copper industry, is defined in terms of the mining, milling, smelting
and refining stages of production. Downstream fabricating and semi-
fabricating operations, encompassing brass mills, wire mills, foundries,
powder plants, etc., are not covered in this study, largely because most,
if not nearly all, of the pollution abatement impact problem is
concentrated at the mining through refining stages of production and
particularly on the smelting stage where sulfur oxide emissions occur.
These four stages of production are defined by the United States Bureau
of the Census as follows:
1. SIC 1021—Copper Ores (Mining and Milling)
The copper ores industry includes establishments primarily engaged
in mining, milling, or otherwise preparing copper ores. This industry
also includes establishments primarily engaged in the recovery of
copper concentrates by precipitation and leaching of copper ores.
Establishments primarily engaged in the recovery of refined copper
by leaching copper concentrates are classified in SIC 3331.
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2. SIC 3331—Primary Copper (Smelting and Refining)
This industry comprises establishments primarily engaged in smelting
copper from the ore and in refining copper by electrolytic or other
processes. Establishments primarily engaged in rolling, drawing, or
extruding copper are classified in industry 3351 (Copper Rolling
and Drawing).
3. SIC 33412—Secondary Copper (Part of SIC 3341)
This industry (SIC 33412) comprises establishments primarily•engaged
in recovering copper from copper and copper-base alloy scrap by
utilizing a variety of melting and refining methods (described in
Chapter II). Establishments primarily engaged In assembling, sorting,
and breaking up scrap metal, without smelting and refining, are
classified in trade industries.
4. Part of SIC 5093—Scrap and Waste Materials
To complete the definition of the copper Industry, in terms of
producers/stages of production, we need to add establishments primarily
engaged in assembling, breaking up, sorting and wholesale distribution
of copper scrap (classified as part of SIC 5093—Scrap and Waste
Materials).
It should be noted, in this connection, that scrap copper, which as
a generic term refers to a variety of distinct materials, can be
divided into two general categories—old scrap and new scrap. This
distinction is important, although old scrap and new scrap are
physically much the same. The quantity of new scrap generated each
year is considerably larger than the quantity of old scrap which
reaches the markets. Old scrap is composed of obsolete, worn out,
or damaged copper products which have been discarded, such as old
car radiators, discarded power lines, pipe and ship propellers. New
scrap is composed of clippings, punchings, turnings, defective or
surplus goods and drosses which are generated by the manufacturing
process and fabricators. New scrap does not include "home scrap" or
"turnaround", which are terms applied to materials recycled by
fabricators without an intervening sale or transport over a considerable
distance. Some types of scrap are specifically old scrap or new scrap,
but usually a given type may be either.
Old scrap can be broadly classified into "low grade", "intermediate
grade", and "high grade" material. Low grade material is recovered
as refined copper by primary and secondary producers. Intermediate
grade material is composed of alloy copper products. If the material
is well sorted and the composition is known, it may be used directly
by fabricators, especially by foundries. Otherwise it will usually
be made into copper alloy ingot. High grade scrap, which is very
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nearly pure copper, may either be refined or used by fabricators as
a substitute for refined copper.
Table III-l gives a general statistical overview of the primary copper
industry as defined above (i.e., SIC 1021 and SIC 3331, covering
primary copper mining, milling, smelting and refining), with reference
to three benchmark census years 1954, 1963 and 1972. It can be seen
that while the number of establishments have remained fairly stable
over the 1954-1972 period, total employment has shown some growth
(approximately 1.3 percent per year). Value added, the industry's
contribution to Gross National Product (GNP) has grown three-fold
during this period in nominal terms or nearly doubled, in real or
constant dollars terms.
C. AM OVERVIEW OF COPPER SUPPLY CHANNELS AND CONSUMPTION IN THE
UNITED STATES
Figure III-l is a simplified diagram showing the flow of copper supply
in the United States in 1974 from principal sources, through the various
stages of production. Two principal sources of copper can be immediately
discerned: primary copper, produced from domestic and foreign ores,
and secondary copper, obtained from scrap. Mined copper represents,
of course, the major source of the nation's copper supply. Nonetheless,
the contribution of scrap (copper-based and other than copper-based)
to the total copper supply stream is not, by any means, negligible.
It can further be observed that copper obtained from scrap enters the
supply stream in two forms: as refined copper, in which case it
becomes indistinguishable from primary or mined refined copper, and
in the form of scrap, which is used directly.
These observations can be given numerical dimension by noting the
following, with reference to 1974:
• 69.4 percent of the total copper supply of the United States
(i.e., production adjusted for inventory changes, imports and
exports) was in the form of refined copper produced from
domestic and foreign ores and in part from scrap; the rest
(i.e., 30.6 percent) was in the form of scrap copper used
directly.
• Domestic mine production accounted for 74.7 percent of the
nation's total refined copper output, 72.6 percent of total
refined copper supply, and 50.4 percent of total copper supply
from both primary and secondary sources.
• Most of the scrap recovered in the United States is used directly
(i.e., 66.7 percent), without further refining, by semifabricators
and end-users; the remainder is smelted and refined. Refined
copper from scrap accounts for 22.6 percent of total refined
output.
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TABLE III-l
O
C
•^
r*
{1
R
UNITED STATES COPPER INDUSTRY: GENERAL
Hear and Industry
Segment (SIC")
1954
SIC 1021— Copper
Ores (Mining and
Milling)"
SIC 3331— Primary
Copper (Smelting
and Refining)
TOTAL
1963
SIC 1021— Copper
Oreo (Mining and
Milling)
SIC 3331— Primary
Copper (Smelting
and Refining)
TOTAL
1972
SIC 1021— Copper
Ores (Mining
and Milling)
SIC 3331— Primary
Copper (Smelting
and Refining)
TOTAL
Establishments
Total
(number)
210
28
238
160
33
193
187
31
218
With 20
Employees
or More
(number)
41
28
69
41
33
44
70
31
101
All Employees
Dumber
(1.000)
27.8
14.7
42.5
26.5
14.9
41.4
. 36.4
17.2
53.6
Payroll
(million
dollara)
136.1
63.3
199.4
187.3
96.1
283.4
388.2
173.2
561.4
STATISTICS, 195A, 1963 AND 1972
Production, Development,
and Exploration Workers
Number
(1.000)
21.5
12.4
33.9
21.4
12.7
34.1
27.8
14.4
42.2
Han-Hours
(millions)
46.7
25.0
71.7
45.3
25.8
71.1
56.3
28.7
85.0
Wages
(million
dollars)
98.5
51.2
149.7
142.4
77.9
220.3
279.0
138.2
417.2
Value added
in Mining
(million
dollara)
334.9
159.2
494.1
417.1
285.5
702.6
1.014.4
487.8
1.502.2
Cost of Value of Capital
Supplies, etc. Shipments Expenditures
and Purchased and Receipts
Machinery
Installed
(million (million (million
dollara) dollars) dollars)
256.1 508.7 82.2
c c 4.3
JKJ,
340.2 670.2 87.1
970.0 1.245.5 13.1
1.310.2 1,915.7 100.2
767.4 1,572.6 209.2
2,298.5 2,771.1 119.7
3.065.9 4.343.7 328.9
HOTES:
"standard Industrial Classification.
Excludes data for two copper ore establishments In Alaska with less than fifteen eaployees.
Cost of materials and value of shipments are not shown since these figures contain extensive duplication.
SOURCES;
United States Bureau of the Census. D. S.
Census of Manufactures: 1958. Vol. II. Indi
istry Statistics. Part 2. Major Groups 29 to 39 (Washington, D.C.:
1). S. Government Printing Office, 1961), p. 33C-7;
United States Bureau of the Census. Census of Mineral Industries. 1972. Subject. Industry; and Area Statistics
Printing Office, 1976), p. 103-5.
United States Burea
GrouDS 333 and 336.
(Washington, O. C.: 0. S. Government
UM&;£ 5r%:J:?;rio^uf^rrv*^ "«— — *"°Ys. »c industry
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FIGURE III-l
COPPER PRODUCTION SYSTEM IN THE UNITED STATES.
(Thousands of Short Tons of Copper Content;
1974
Otter Thin
Copper Bn.
Scnp
211
•
1
kV
Scri
1
1.461.8
How of on. corantria. md nfmid eopptr
. Flow ol icrip copplr
tara CompiM horn Copmr Omlopmnl Aaaaition. Int.. Cofftr Supply ml Om/mpffen. M57- '975. Tibia 1 ind 2
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Production of refined copper in the United States from all sources
is detailed, in Table III-2, for 1974, 1975 and 1976, based on data
from United States Bureau of Mines. We should underscore, again,
the importance of domestically mined copper in the total United States
refined copper supply stream and should note, secondarily, the fact
that refined copper from scrap, produced both by refineries and by
"secondary plants" (i.e., numerous small smelters of scrap copper),
makes an important contribution to total United States refined copper
supply.
Anticipating a more detailed discussion in Chapter VII-Demand, we
should briefly note here that there are six major groups of consumers
of refined copper and scrap: four copper semifabricating industries
(i.e., wire mills, brass mills, foundries and powder mills), ingot
makers and a group of "other industries" (e.g., chemicals, steel,
aluminum). The one characteristic shared by the four semifabricating
industries is that their basic input is copper. Their production
technologies are almost completely different and their products are
not substitutes or complements in any important ways.
The general task of the semifabricating industries is that of altering
the shape of copper Inputs. Wire mills and brass mills use mechanical
means—drawing, rolling, cutting, etc.—to do this. Foundry products
(plumbing fixtures, brass fittings, ship propellers) are cast. The
final outputs of the semifabricating industries are semifabricated
copper products (semis), which cover such products as electrical
wire, pure and alloyed tube, sheet, castings and powder.
Small quantities of refined copper are used directly by chemical
producers and small quantities of blister copper (from which refined
copper is produced) are used by foundries; but these are minor
exceptions to the use of refined copper, scrap copper, and copper
alloy ingots by semifabricators.
D. THE STRUCTURE OF DOMESTIC COPPER MARKETS
1. Basic Considerations
Although some transactions in copper concentrates or blister do take
place, mined copper is produced, sold, purchased and used mainly in
refined form. Refined copper is marketed in regular or standard shapes
consisting largely of wirebars, cathodes, ingots and ingot bars, cakes,
slabs, and billets. Market transactions in refined copper, therefore,
define the relevant copper market for the industry as a whole. Prices
of blister or concentrates, whether they are actual or transfer prices,
are derived from and depend upon refined copper prices, for example
as a discount from the producers' price or as a premium over it
depending upon overall market conditions. For analytical purposes,
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TABLE III-2
>
-I
D
PRODUCTION OF REFINED COPPER IN THE UNITED STATES. BY SOURCE, 1974-1976'
(thousands of short tons)
SOURCE
TOTAL (primary and secondary)
Primary (new) refined copper
produced In the United States
from domestic ores, as .
reported by refineries
from foreign ores, matte,
etc. , as reported by
refineries'*
Secondary refined copper
produced in the United
States0
from new scrap
from old scrap
1974
TOTAL
2,151,566
1,654,658
1,420,905
233,753
496,908
NA
NA
Produced by:
Refineries
2,067,177
1,654,658
1,420,905
233,753
412,519
229.328
183,191
Secondary
Plants"
84,389
-
-
—
84,389
NA
NA
1975
TOTAL
1,787,864
1,443,378
1,286,189
157,189
344,486
NA
NA
Produced by:
Refineries
1,714,258
1,443,378
1,286,189
157,189
270,880
139,230
131,650
Secondary
Plants6
73,606
-
-
_
73,606
NA
NA
1976
TOTAL
1,911,668
1,537,188
1,420,603
116,585
374,480
NA
NA
Produced by:
Refineries
1,825,874
1,537,188
1,420,603
116,585
288,686
144,215
144,471
Secondary
Plants6
85,794
-
-
_
85,794
NA
NA
NOTES AND SOURCES:
8U.S. Bureau of Mines, Mineral Industry Surveys. "Copper in 1976" (April 15, 1977). p. 4.
The separation of refined copper into metal of domestic and foreign origin is only approximate, as accurate separation is not possible at this
stage of processing.
Includes copper reported from foreign scrap.
U.S. Bureau of Mines, 1974 Minerals Yearbook. Copper. Preprint, p. 29.
^V.S. Burea of Mines, Mineral Industry Surveys. "Copper in December 1976" (March 10, 1977), p. 3.
NA: Not available on a consistent basis from public sources.
-------
it is generally accurate to think in terms of a unified market for
copper, since the various forms in which refined copper or its equivalent
are marketed are substitutable for each other at a relatively small cost.
The domestic copper industry has in the past been segmented into
"primary" and "secondary" sectors on the basis of whether the copper
product transacted in the market has originated from mined copper
(virgin ore) or from scrap. By this definition, based on the source
of copper, firms in the primary sector would be those which predominantly
transform mined copper into refined copper, while firms in the secondary
sector would be those which either predominantly process scrap copper
into secondary refined copper or prepare it for direct consumption in
the form of unrefined copper scrap.
For an economic analysis of the domestic copper industry, such a
segmentation of the industry into primary and secondary sectors, on the
basis of the source of the copper transacted in the market, is not
very useful. First, the pricing behavior of the firms in the industry
does not fall neatly into two non-overlapping categories based on
whether the copper product transacted is derived from primary or
secondary streams. Second, once refined, there is no physical
difference between primary and secondary refined copper. Third,
the major primary producers do often smelt and refine scrap in their
operations, mostly for technological reasons, while at least one
major secondary smelter/refiner has processed some blister from virgin
ore. Further, there exist merchants, importers or firms which perform
a combination of functions involving scrap, refined scrap or toll
smelting/refining of mined copper.
We have hence segmented the domestic copper industry into "primary"
and "outside" market segments for analytical purposes, on^he basis
of the pricing behavior of the firms on the sellers' side . By this
criterion, the primary sector consists of firms which sell the bulk
of their refined copper output (mostly from mined copper but also
including some refined from scrap) on the basis of a commonly-followed
domestic producers price. Firms participating on the "outside"
market, on the other hand, are those which sell their copper output
regardless of its form (i.e., whether refined or scrap) and regardless
of its origin (i.e., whether processed from mined copper—from domestic
or foreign source—or refined from scrap) on the basis of one of
several "outside market" prices. A detailed discussion of the pricing
behavior of the firms in the copper industry is given in Chapter VIII-
Prices.
Within the "outside" market, two broad segments can be distinguished.
The first comprises a small number of firms processing mainly scrap
into refined copper. The remainder of the secondary industry is
comprised of a large number of firms—mostly small and individually
owned—engaged in the collection, processing and consumption of
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unrefined scrap as well as in the trading of refined copper. These
include scrap dealers, ingot makers, semifabricators, and merchants.
Firms in this segment of the secondary market buy or sell unrefined
scrap directly on the basis of quoted scrap prices.
These two segments of the "outside" market comprise two "workably
competitive" markets which together represent a competitive fringe
to the domestic primary producer market.
It should be noted, in this connection, that a "neat" definition of
copper markets in terms of an unambiguously clear classification
of the participating firms is extremely difficult. The "primary"
and "outside" market designations used here for defining the structure
of domestic copper markets, on the basis of the pricing behavior of
the participating firms, should hence be taken as largely suggestive
and not as definitive.
2. Firms in the Primary Copper Sector
The primary sector consists principally of the following firms which
are vertically integrated to different degrees from mining to refining
and further into semifabricating:
• Kennecott Copper Corporation;
• Fhelps Dodge;
• The Anaconda Company (now a wholly-owned subsidiary of Atlantic
Richfield Company—ARCO);
• Newmont Mining Corporation (of which Magma Copper Company is a
wholly-owned subsidiary);
• Duval Corporation (a wholly-owned subsidiary of Pennzoil Company);
• Cyprus Mines, of which Cyprus Bagdad Copper Company, Cyprus Pima
Mining Copper Company, Cyprus Bruce Copper and Zinc Company and
Cyprus Johnson Copper Company are wholly-owned subsidiaries;
• Asarco Incorporated;
• The Copper Range Company, of which the White Pine Copper Company
is a wholly-owned subsidiary;
• Inspiration Consolidated Copper Company;
• Cities Service Company;
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• Ranchers Exploration and Development Corporation;
• Hecla Mining Company (in partnership with El Paso Natural Gas
Company);
• Plus the following independent mining firms (among others): UV
Industries, Inc.; Earth Resources Company; McAlester Fuel Company;
Federal Resources Corporation; Eagle-Picher Industries, Inc.;
Keystone Wallace Resources; and Micro Copper Corporation.
Detailed information on the primary producers is given in Tables III-3,
III-4, and III-5 which respectively show mine production of recoverable
copper (in 1973 and 1974), smelter capacity (year-end 1975), and refinery
capacity (year-end 1974, 1975 and 1976) by firm.
The mine production of recoverable copper was the principal product
of nearly 200 mines in 1972, as shown in Table III-l. In addition,
copper is produced as a byproduct or coproduct by mostly lead and
zinc mines. As indicated in Table III-3, the top six domestic copper
mines are the Bingham Canyon (Kennecott, in Utah), Morenci (Phelps
Dodge, Arizona), Tyrone (Phelps Dodge, New Mexico), the Berkeley Pit
(Anaconda, Montana), and Superior (Magma, Arizona). In 1973, a peak
year, each of these mines produced more than 100,000 short tons of
copper (contained metal). The ore is beneficlated (crushed, ground
and metal sulfides recovered by flotation) in mills that are located
near the mines.
Most of the domestically mined copper is produced in five western
states—Arizona, Utah, New Mexico, Montana and Nevada (refer to
Table III-6). Over 80 percent of total United States mine production
is located in Arizona, Utah and New Mexico taken together. Arizona
alone accounts for well over half the total United States mine
production of recoverable copper (about 63 percent in 1976).
As noted in the last chapter, mills are almost always located close
to the mines to minimize transportation costs. The value of the
concentrates is high enough to allow some flexibility in smelter
location. With the major copper mines centered in the Western states,
most of the smelting capacity is in that region. Still, most smelters
are located near the mills which supply them or on tide water or rail
head in order to receive concentrates from distant mills. Refineries
can be located anywhere between smelters and fabricators, since the
transportation costs for blister and.refined copper are about the same.
Since Asarco, which is both a major primary producer and a large
custom/toll smelter and refiner , has in the past held a somewhat
anomalous position in the domestic copper industry, a brief digression
may prove helpful in clarifying our treatment of it for analytical
purposes.
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TABLE III-3
RODUCTION OF RECOVERABLE COPPER IN THE UNITED STATES, 1973 and
Amount
Company and Mine
Kennecott Copper Corporation
Chlno
Nevada
Ray Mines
Utah
Phelps Dodge Corporation
Morenci
Tyrone
AJo (New Cornelia)
Blabee (Copper Queen)
Lavender Fit
Underground Mines
The Anaconda Company
Twin Buttea (Anamax Mining
Co. , under equal partner-
ship with Anax Inc.)
Berkeley Pit
Anaconda Vein Nlnea (Leonard,
Load Haul Dump, Mountain
Con, Steward Hlnea)
Continental East Pit
Yerlngton
Hewmont Mining Corporation
Magma Copper Co.
San Manuel
Superior
Idarado Mining Co.e
Idarado Mine
Duval Corporation
(Subsidiary of Pennzoll Co.)
Battle Mountain,
Esperanza, Mineral Park
Sierrlta
Cyprus Mines Corporation
Cyprus Pima Mining Co. ,
Plma Mine
Cyprus Bagdad Copper Company,
Bagdad Mine
Cyprus Bruce Copper and
Zinc Co.
Asarco Incorporated
Mission
Sliver Bell
San Xavier
Saeaton
Hhite Pine Copper Company
(Subsidiary of Copper Range Co.)
White Pine
Inspiration Consolidated Copper
Company
Christmas
Inspiration (Thornton, Live
Oak, Red Hill)
Ox Hide
Copperhlll
Mlanl (Copper Cities, Diamond H,
Pinto valley)
Anax
(Anamax Mining Co., under
Location
New Mexico
Arizona
Arizona
Utah
Arizona
New Mexico
Arizona
Arizona
Arizona
Montana
Montana
Montana
Nevada
Arizona
Arizona
Colorado
Nevada .
Arizona
Arizona
Arizona
Arizona
Arizona
Arizona
Arizona
Arizona
Arizona
Michigan
Arizona
Arizona
Arizona
Tennessee
Arizona
Mine
Tvp.
OP
OP
OP
OP
OP
OP
OP
OP
UG
OF
OP
UG
OP
OP
uc
UG
UG
OP
OP
OP
OP
UG
OP
OF
OP
OP
UC
OP
OP
OF
UG
OP
(Short tons)
1973
471.721
67,836
50,012
98,908
254,965
319.358
119,535
104,011
53,797
19,387
22,628
200.454
36,824C
104,474
21,674
1.647
35,835
160.381
22,474
135,789
2,118
131.214
55,619
75,595
110.390
88,140
19,152
3,098
73.100
46,600
23,800
2,700
-
78.506
65.196
9,508
51.332
4,356
33.280
4.025
29,255
1974
402.213
60,557
37,562
74,764
229,330
280.211
112,790
97,030
43,501
11,833
15,057
190.059
20,071C
98,889
17,454
15.676
37,969
151.826
29,437
120,208
2.181
131.843
52,249
79.594
103.353
81,889
18,379
3,085
79.200
40,300
23,500
5,900
9.500
66.898
61.238
6.698
49,700
4,840
33.855
970
32,885
K
Composition (I)
1973
27.46
3.95
2.91
5.76
14.84
18.59
6.96
6.05
3.13
1.13
1.32
11.67
2.14
6.08
1.26
0.01
2 09
9.34
1.31
7.90
0.12
7.64
3.24
4.40
6.43
5.13
1.12
0.18
_4.26
2.71
1.39
0.16
-
*•"
3. BO
0.55
2.99
0.25
1.94
. . -"
0.24
1.70
1974
25.19
3.79
2.35
4.68
14.36
17.55
7.06
6.08
2.72
0.74
0.94
11.90
1.26
6.19
1.09
0.98
2.38
9.51
1.84
7.53
0.14
8.26
3.27
4.98
6.47
5.13
1.15
0.19
.4.96
2.52
1.47
0.37
0.59
.4.19
_3J3
0.42
3.11
0.30
2.12
0.06
2.06
equal partnership with Anaconda)
Twin Buttea
UV Industries. Incorporated
Eayard Operations
SUBTOTAL (of ABOVE COMPANIES) -
OTHERS (Calculated Resldually)
TOTAL8
Arizona
New Mexico
OP
OP
36.824C
24.240
1,704,664
13.276
1.717.940
20.071C
24.167
1,544,934
52.068
1.597.002
2-14
!•«!
99.23
0-"
100.00
-1*26
1.51
96.74
3.26
100.00
,a
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Arthur DLittklnc
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NOTES AND SOURCES; ACCOMPANYING TABLE III-3
•j
Individual company data have been obtained from the 1973 and 1974 corporate annual reports
and from American Bureau of Metal Statistics, Inc. (ABMS), Nonferrous Metal Data 1974 and
1975.
Sum of the components may slightly differ from the totals given due to rounding-off.
One-half of total Anamax production.
100.0% owned by Newmont Mining Corporation.
80.1% owned by Newmont Mining Corporation.
The "Other" category was calculated as the residual of the total less the subtotal for the
individual companies reported above. This category includes, for example, Rancher's
Exploration and Development Corporation, Earth Resources Company, El Paso Natural Gas
Company—Hecla Mining Company, McAlester Fuel Company, Federal Resources Corporation,
Eagle-Picher Industries Incorporated, Keystone Wallace Resources, Micro Copper Corporation
and others.
8The total is obtained from U.S. Bureau of Mines, Mineral Industry Surveys. "Copper in 1974"
(April 8, 1975) for 1973 data (p. 3) and "Copper in 1975" (March 26, 1976) for 1974 data
(P. 3).
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TABLE III-4
COPPER SMELTERS IN THE UNITED STATES AT THE END OF 1975
Annual.Capacity
Company
Asarco, Inc.
Asarco, Inc.
Asarco, Inc.
The Anaconda Company
Cities Service Company,
Copperhill Operations
Inspiration Consolidated
Copper Company
Magma Copper Company
(subsidiary of Newmont
Copper Co.), San Manuel
Division
Kennecott Copper Corporation
Nevada Mines Division
Chlno Mines Division
Ray Mines Division
Utah Copper Division
Phelps Dodge Corporation
Douglas Smelter
Horencl Branch
New Cornelia Branch
Short tons of
Location material8
El Paso, Texas
Hayden, Arizona "J&JUteA 01-
Tacoma, Washington
Anaconda, Montana CJtv&i*Q(
Copperhill, Tennessee C/dfl^9V
Miami, Arizona t/tfr^*^"
«
San Manuel, Arizona
McGill, Nevada J *
Hurley, New Mexico dhflMW'
Hayden, Arizona
Gar field, Utah 1
Douglas, Arizona ~) ,J)O>V
Morencl, Arizona £&M40*'
AJo, Arizona ~>
576,000
960,000
600,000
750,000
75,000
450,000
800,000
400,000
400,000
420,000
,000,000
700,000
900.000
250,000
Short tons of
product
100,000
180.000
100,000
198,000C
16.000
150,000
200,000
78,000
80,000 \,Pte>
80,000.
280,000°
90.000
196.000
77,000
SUBTOTAL
White Pine Copper Co.
(subsidiary of Copper
Range Company)
TOTAL
White Pine. Michigan
8.281.000
NA
1.825.000
85,000
1.910.000
NOTES AND SOURCES:
aAmerican Bureau of Metal Statistics. Inc. (ABMS), Nonferroua Metal Data 1975. p. 29. Figures given represent
short tons of "change" (I.e., material intake or "feed" for processing).
bEstimated, based on individual company annual reports. 10-K forms, telephone conversations with individual
company/plant representatives, and data given in Engineering and Mining Journal (E/MJ), 1976 International
Directory of Mining and Mineral Processing Operations. The figures given here represent annual productive
capacity defined in terms of production or output (copper content).
cUpon completion of Anaconda's smelter modification program, this is expected to rise to 216.000 short tons
per year (18.000 short tons per month).
These figures are exclusive of Anaconda's new Arbiter plant near Anaconda, Montana. At this plant, production
commenced in October, 1974; it was temporarily shut down in July, 1975 and was reopened in August, 1976.
The Arbiter plant is expected to have a capacity of approximately 36,000 short tons of cathode copper
production per year.
See The Anaconda Company, Proxy Statement for a Special Meeting of Shareholders to be Held October 20. 1976.
p. 71.
dExcluslve of modifications underway expected to expand the existing capacity.
elhe figures given here for Phelps Dodge Corporation are exclusive of the company's new Hidalgo smelter, at
Playas in Hidalgo County. New Mexico, which Is the first copper smelter In the United States to use flash
smelting process developed In Finland. The Hidalgo smelter, which started operations on July 1, 1976 and
produced 37,944 short tons of copper anodes in 1976, Is expected to have a productive capacity of 100,000
short tons per year.
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TABLE III-5
UNITED STATES COPPER REFINERY CAPACITY AT YEAR-END 1974. 1975 AMD 1976
(annual capacity, short tons of refined copper production)
a
Company. Location Type"
PRIMARY PRODUCERS
Anaconda
Great Falls, Montana
Rarltan Copper Works,
Perth Amboy, N.J.C
Asarco
Baltimore, Maryland
Perth Amboy, N.J.e
Tacoma, Washington
Amarlllo, Texas
Kennecott
Gar field, near Magna,
Utah
Anne Arimdel County,
Maryland
Hurley, New Mexico
Fhelps Dodge
El Faao, Texas
El Paio, Texas
Laurel Hill, L.I.. N.T.
Laurel Hill. L.I., N.Y.
Magma (subsidiary of
Nevmont)
San Manuel, Arizona
White Pine (subsidiary of
Copper Range)
White Pine, Michigan
Inspiration
Inapiratlon, Arizona
SUBTOTAL
B
E
E
B
E
E
E
B
LF
E
LF
E
LF
E
LF
E
At end of 1974
295.000
180,000
115,000 CM*
M2.000 -..St
318.000 vW^
168.000 (£tf»4
156,000 (fatf>&
565.000
186.000
276.000
103.000
537.000
420.000
25.000
72.000
20.000
200.000
200,000
90.000
90,000
70.000
2.399.000
At end of 1975
252.000
252,000
744.000
| 168,000
- 156,000
420,000
565.000
186,000
276.000
103,000
537.000
25IOOO
72,000
20.000
mm
90.000
90,000
70.000
70,000
2.458.000
At end of 1976
252.000
252.000
576.000
156,000
420,000
565.000
186.000
276.000
103.000
537.000
420,000
25.000
72.000
20.000
200.000
200.000
90.000
90.000
70.000
70.000
2.290.000
SECONDARY REFINERS
United States Metala
Refining Co. (a sub-
sidiary of AMAX, Inc.)
Carteret, N.J.
Cerro Copper and Brass,
Dlv. of Cerro Corp.,
B. LF*
260,000
260,000
260.000
St. Louis, Mo.
Chemetco, Inc., Alton,
Illinois
Reeding Industries, Inc.,
Reading, Penn.
Southwire Co., Carroll ton,
Ga.
SUBTOTAL
TOTAL
E
E
E
B
44,000
40,000
40,000*
65.000h
449.000
2.848.000
44.000
40,000
40.0008
65.000h
449.000
2.907 .000
44,000
40,000
40.000s
65.000b
449.000
2.739.000
NOTES AMD SOURCES;
'Except otherwise noted, data for 1974 and 1975 are based on American Bureau of Metal Statistics, Inc.. (ABMS),
Honterrous Metal Data for 1974 and 1975; data for 1976 ere estimates baaed on miscellaneous sources, including
Individual company annual reports and 10-K forms filed with the Securities and Exchange Commission.
bE: Electrolytic; LF: Lake and fire refining.
'Permanently closed in May, 1975.
'Permanently closed in December, 1975.
Permanently closed in March, 1976.
fElectrolytic: 175.000 short tons/yr.; Lake and fire refining: 85.000 short tons/yr.
Brheae figures differ aubstantlally from those listed In ABMS (eee Note "a" above); baaed on data given in
Reading Industries, Inc., Form 10-K. for the fiscal year ended December 31, 1975, p. 6.
Nhese figures differ somewhat from those listed in ABMS (see Note "a" above); based on dsta given In
Southwire Co.. 1975 Annual Report, p. 12.
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TABLE III-6
MINE PRODUCTION OF RECOVERABLE COPPER IN THE UNITED STATES, BY PRODUCING STATES, 1974-1976
(short tons; copper content)
State
Arizona
California
Colorado
Idaho
Maine
Michigan
Missouri
Montana
Nevada
New Mexico
Tennessee
Utah
Other States8
Total
1974
Amount
852,650
200
3,003
3,108
1,525
67,297
12,473
133,675
83,725
197,374
6,231
230,088
2.241
1,593,590
Rank
1
13
10
9
12
6
7
4
5
3
8
2
11
Percent
53.5
-
0.2
0.2
0.1
4.2
0.8
8.4
5.3
12.4
0.4
14.4
0.1
100.0
1975
Amount
813,211
344
3,560
3,192
2,024
73,690
14,258
87,959
81,210
146,263
10,041
177,155
459
1,413,366
Rank
1
13
9
10
11
6
7
4
5
3
8
2
12
Percent
57.5
-
0.3
0.2
0.1
5.2
1.0
6.2
5.8
10.4
0.7
12.5
_
100.0
1976
Amount
1,012,660
366
2,450
3,200
1,890
45,230
10,705
105,525
57,480
175,245
10,830
185,760
_
1,611,341
Rank
1
12
10
9
11
6
8
4
5
3
7
2
_
Percent
62.8
-
0.2
0.2
0.1
2.8
0.7
6.5
3.6
10.9
0.7
11.5
_
100.0
M
M
M
q
NOTES; Includes Alaska, Oklahoma, Oregon, and
SOURCES; U.S. Bureau of Mines, Mineral Industry
and "Copper in 1976" (April 15, 1977), p. 3.
Washington.
Surveys. "Copper in 1974"
(April 8, 1975), p. 3
-------
Until recently, Asarco differed from other primary producers in four
respects:
• The firm was historically not backward integrated into domestic
mining and milling operations;
• Asarco processed a large amount of concentrate and/or blister
on a toll basis;
• The company frequently used large volumes of scrap as inputs to
its refinery operations;
• Asarco*s output until 1967 was reportedly sold on the basis of its
own "custom smelter" price, an outside market price which frequently
deviated from the domestic producers price, the basis on which the
primary producers marketed their output.
In recent years, however, Asarco has made significant expansions
backward into mining and milling. Moreover, as far as the processing
of concentrate or blister on a toll basis is concerned, Phelps Dodge
and other producers have also carried out this function for independent
producers. Asarco, in addition, has significantly increased the
proportion of mined copper from its own mines used in its smelting
and refining operations. Finally, and perhaps most importantly, since
1967 Asarco has followed the producers price quotations in setting
the selling price for its own output. For all of these reasons,
Asarco is included with the other primary producers.
3. Firms in the "Outside" Market Segment
The firms in the "outside" market segment, as defined by us in this
report, consist of the secondary refiners plus many small, individually-
owned firms (scrap dealers, ingot makers, semifabricators engaged in
scrap processing for own-consumption and merchants who generally buy and
sell copper outside the principal producer-consumer channels). The
classification of these firms in terms of whether they sell refined
copper (mostly from scrap, some from mined copper, imports) or
unrefined scrap is difficult because of the diversity or multiplicity
or functions performed by the latter group of firms.
While there are a number of secondary copper refiners, several of them
integrated forward into captive fabricating facilities. Amax and Cerro
(Cerro-Marmon Corporation, since its merger with The Harmon Group,
Inc., on February 24, 1976) have been the two most important of these
111-18
Arthur DLittklnc
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during most of the postwar period. These secondary refiners sell their
product at prices (explicit prices if in the open market or implicit
prices if intra-company transfers are involved) which are more reflective
of current market prices for scrap than of refined copper prices quoted
by the primary producers. They have been responsible for an average
of 12 percent of total refined copper supplied in the United States each
year between 1950-1974 and have held about 11 percent of domestic
refinery capacity during this same period. Since 1971 three other
refiners, Chemetco, Southwire, and Reading Industries, have gradually
come on-stream with substantial secondary refining, and, in the case
of Southwire, smelting capacity (refer to Table III-5 for data on
secondary refinery capacity levels).
Amax is considered a secondary refiner because most of its copper
refinery inputs are in the form of scrap and because it sells its
output on the basis of its own individually-determined price
which basically reflects prevailing prices on the outside market.
Amax, similar to Asarco, has integrated backward into domestic mining
in recent years, and currently produces copper concentrates and
electrowon copper at the Twin Buttes (Arizona) project through Anamax
Mining Company, an equal partnership with The Anaconda Company.
Also, Anamax and Asarco have entered into a general partnership known
as the Eisenhower Mining Company to develop the Palo Verde copper
deposit near Twin Buttes.
Cerro-Marmon and the other newer secondary refiners are all so
classified on the basis that their inputs are mostly in the form of
scrap, and imported blister in some cases. Although most, if not
all, of their refined copper output is consumed in their own captive
fabricating facilities rather than being sold on the outside market,
they, in effect, must charge their own fabricating facilities an
imputed price for their refined output reflecting the scrap price(s)
prevailing on the "outside" market plus the incremental cost of
refining . In other words, similar to Amax, they are price-takers
in an essentially competitive market.
It should be noted that not all of the output of these firms, for
whomever produced, is necessarily marketed on the "outside" market
prices. At the same time, their combined output does not necessarily
cover all of the transactions on the "outside" market (i.e., the
"outside" market also includes imports other than the sales of Noranda,
a Canadian company, in the United States, as well as sales by merchants,
scrap dealers, ingot makers and others—e.g., sales by semifabricators
engaged in scrap processing and/or "secondary plants" which are
numerous small smelters of scrap copper).
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Arthur DLittklnc
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Further discussion of the participants on the "outside" market and
their roles is given in Chapter Vlll-Prices.
4. Domestic Copper Output by Primary and Secondary Producers
A fairly close approximation of how much of the domestically produced
refined copper in a given year is transacted on the market at
producers' prices can be made by performing a simple, four-step
calculation (ignoring inventories): (a) estimate total refined copper
output in the United States, in a given year, from all sources by all
firms (e.g., 2,151.6 thousand short tons in 1974); (b) estimate total
secondary refined copper output in the United States (e.g., 496.9
thousand short tons in 1974); (c) estimate how much of the total
secondary refined output is produced by the primary producers and
how much by the secondary smelters/refiners, respectively (e.g., in
1974, it is estimated that of the 496.9 thousand short tons, 382.1
thousand short tons produced by the secondary smelters/refiners and
the remaining 114.9 thousand short tons by the primary producers);
(d) subtract the secondary refined output of the secondary
smelters/refiners from total domestic refined copper output (e.g.,
2,151.6 thousand short tons minus 382.1 thousand short tons equals
1,769.5 thousand short tons), which yields an estimate of total primary
refined copper output in the United States sold at producers' prices.
The results of such an analysis, based on a number of simplifying
assumptions, are given in Tables II1-7 and II1-8.
Finally, Table III-9 shows estimates to total secondary copper produced
in the United States which is directly consumed.
E. CONCENTRATION. INTEGRATION. ENTRY CONDITIONS AND STRUCTURAL
CHANGES
The degree of concentration and vertical integration in an industry,
as well as the existence of barriers to entry, are important
considerations in analyzing pricing behavior of firms. Where con-
centration is low, there will normally be such a large number of firms
and each individual firm's share of the market will be so small that
no individual firm would be able to influence prices significantly
(i.e., firms are entirely price-takers). Where concentration is high,
the pricing and production decisions of any one firm will have some
effect on the pricing and output of other firms in the relevant
market; consequently, price-output determination by the firms will
be interdependent.
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TABLE III-7
ESTIMATED SECONDARY REFINED COPPER PRODUCED BY PRIMARY PRODUCERS
AND SECONDARY PRODUCERS. 1960-1974
(thousands of short tons)
Year
I
c?
Total
Production of
Refined Copper
from Scrap
Copper Refined
from Scrap by
Secondary
Producers
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
SOURCE:
291.7
270.4
289.7
302.0
351.1
445.1
491.3
436. 6
416.6
499.1
511.6
400.7
423.2
465.1
496.9
U.S. Bureau of Mines,
229.3
190.0
195.1
235.5
240.1
263.2
277.5
271.4
273.6
263.1
251.7
214.8
252.2
348.8
382.1
Minerals Year Book
Copper Industry in December 1975, (March
Copper Refined
from Scrap
by Primary
Producers
Percentage of
Copper Refined
from Scrap by
Secondary
Producers (%)
62.4
80.4
94.6
66.4
111.0
176.9
213.8
135.2
143.0
236.0
259.9
185.9
171.0
116.3
114.9
0-1973; Mineral
78.6%
70.3
67.4
78.0
68.4
60.3
56.5
66.8
65.7
52.7
49.2
53.6
59.6
75.0
76.9
Industry Surveys ,
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TABLE III-8
REFINED COPPER PRODUCTION IN THE UNITED STATES. BY
PRIMARY AND SECONDARY PRODUCERS. 1950-1974
(thousands of short tons)
Year
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Total
Refined
Production
1446.4
.5
.5
1362.
1320.
1504.0
1418.4
1562.8
1687.8
1676.1
1579.5
1331.5
1794.6
1813.
1884.
1884.4
1990.4
2214.8
2183.3
1526.6
1839.0
2214.
2242.
,9
.5
,9
,7
1962.4
2258.5
2312.6
2151.6
Primary
Producer
Refined
1300.8
1247.2
1220.2
1345.6
1249.1
1355.4
1501.3
1467.4
1389.3
1087.9
1565.3
1623.9
1689.4
1648.9
1750.3
1946.6
1905.8
1255.2
1565.4
1951.8
1991.0
1747.6
2006.3
1963.8
1769.5
Secondary
Producer
Refined
145.6
115.3
100.
158.
169.
207.
186.
208.
190.
.3
.4
.3
.4
.5
.7
.2
243.6
229.3
190.0
,1
.5
.1
,2
.5
195.
235.
240.
268.
277.
271.4
273.6
263.1
251.7
214.8
252.2
348.8
382.1
SOURCES; Based on Copper Development Association, Inc., Annual Data
1975. Copper Supply and Consumption. 1955-1974; Table III-2
(for 1974).
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D
CT
{L
8
TABLE III-9
PRODUCTION OF SECONDARY COPPER IN THE UNITED STATES, REFINED AND UNREFINED
RECOVERED FROM PURCHASED SCRAP. 1974-1976
(thousands of short tons of copper content)
1974 1975 1976
Total secondary copper produced in the United States8 1.344,320 971,965 1,106,000
recovered as unalloyed copper 513,308 355,512 374,000
recovered as alloysb 831,012 616,453 732,000
Less;
Total refined copper produced from scrap in the United States0 496,908 344,486 374,480
Equals;
Total secondary copper produced in the United States which is
used directly 847,412 627,479 731,520
NOTES AND SOURCES;
aU.S. Bureau of Mines, Mineral Industry Surveys, "Copper in 1976" (April 15, 1977), p. 4. Includes
copper recovered from both copper-base scrap and other than copper-base scrap.
Includes copper in chemicals, as follows:
1974: 2,649
1975: 2,480
1976: Not available, estimate included.
Source; Ibid.
°Refer to Table III-2.
-------
Next, the degree of vertical integration is important for two reasons.
First, in an industry which is highly integrated, producers' material
costs are somewhat insulated from the forces of market demand at
intermediate stages of production. This does not mean that producers,
in making pricing and output decisions, can ignore market forces, but
rather than the relevant demand forces emanate from downstream markets.
Second, economies of vertical integration or the existence of a high
degree of integration in a particular market can constitute an
effective barrier to entry into the industry.
The existence of barriers to entry into the industry is important
since the absence of barriers to entry can mitigate the effect that
a high degree of concentration would normally have on pricing and
production behavior of the existing producers.
1. Industry Concentration
The United States copper industry is highly concentrated. In 1974,
four firms—Kennecott, Fhelps Dodge, Anaconda, and Newmont—accounted
for 64 percent of total United States mine production. Eight firms,
including these four plus Duval, Cyprus, Asarco and Copper Range,
accounted for 88 percent of the total. Seven firms—Asarco, Kennecott,
Phelps Dodge, Magma, Anaconda, Inspiration, and Copper Range—together
represent virtually all of total United States smelter and primary
refinery capacity.
2. Vertical Integration
Several of the domestic primary producers participate either directly
or through subsidiaries in all five stages of production: mining,
milling, smelting, refining and fabrication. The productive capacities,
however, are not always matched between the different stages of pro-
duction. Kennecott, the largest United States producer, is vertically
integrated from mining through refining and, to a very small extent,
further integrated downstream into fabricating through its wholly
owned subsidiary, Chase Brass and Copper, which reportedly purchased
25 percent of its copper requirements in 1976 from Kennecott (consti-
tuting about 6.6 percent of Kennecott's copper sales in that year).
Anaconda participates in fabrication through Anaconda American Brass
and Anaconda Wire and Cable. These subsidiaries consume more copper
than is produced by Anaconda. Phelps Dodge produces wire, wire rod
and copper tube. These fabricating facilities consume about 30 percent
more copper than the primary production of Phelps Dodge. Similarly,
Cities Service owns New Haven Copper and Chester Cable; Copper Range
owns Hussey Metals; Cyprus owns Cyprus Wire and Cable and El Paso
Natural Gas (participant with Hecla Mining in the Lakeshore project)
owns Narragansett Wire. While Asarco does not own fabricating capacity
directly, it owns 33 percent of Revere.
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Other producers are vertically Integrated from mining through refining.
These include producers of refined metal using smelting techniques
(Magma/Newmont); using hydrometallurgical techniques (Ranchers) or
both (Inspiration). Magma and Inspiration also produce semifabricated
shapes.
The other producers do not participate fully in all stages of production.
While Cities Service in Tennessee is integrated through smelting, its
more significant production in Arizona is treated by Inspiration.
Cyprus and Duval, except for experimental hydrometallurgical plants,
use custom/toll smelters and refineries. Cyprus uses Fhelps Dodge
and Magma, and Duval uses Asarco. Similarly, Amax does not possess
primary smelting and refining capacity. Amax's smelter and refinery
in New Jersey treats mainly secondary materials. Its primary
production is from Anamax, operated under equal partnership with
Anaconda, by hydrometallurgical means. In addition, there are smaller
independent mining firms, such as UV Industries, Earth Resources,
Hecla Mining, McAlester Fuel, Federal Resources, Eagle-Picher, Key-
stone Wallace Resources, and Micro Copper, who use custom or toll
smelting and refining services. The major custom and toll smelters
and refiners are Asarco, Phelps Dodge, Inspiration and Anaconda.
Others, such as Magma, process only minimal quantities.
3. Entry Conditions
Ease of entry into an industry is typically taken as a yardstick of the
degree of competition prevailing in that industry. When entry into an
industry (market) is free and easy, such an industry or market is
defined as perfectly competitive. In a monopolistic market, entry
is blockaded. In an oligopolistic market, characterized by relatively
few sellers who'are conscious of their interdependence, entry is not
as easy as under perfect competition and not as insurmountable as
under monopoly.
In his study Barriers to New Competition, J. S. Bain argued that the
major barrier to entry into the copper industry was the high absolute
cost of obtaining a sufficiently large ore body, although the
existence of scale economies as well as high capital costs were
important factors as well4.
The importance of ore reserves as a barrier to entry is in part related
to the competitive advantage derived from vertically integrated
operations. A firm contemplating entry at the smelter and/or refinery
stage must find some sources of concentrate supplies. A new entrant
must either rely on the purchase of concentrate from a number of
independent miners as has been done by the Japanese smelters or must
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bear the costs of discovering new ore reserves of sufficient size to
support integrated operations which has been the experience in the
United States.
Once having discovered new ore reserves, a new entrant would still
be faced with extremely high capital costs for development of an
Integrated mine-through-refinery operation. We estimate that minimum
efficient scale for an integrated operation would be a plant with a
productive capacity of approximately 100,000 short tons of copper
(metal content) on an annual basis. Assuming an estimated capital
cost of $5,000-$6,000 per annual short, tons of capacity (in constant
1974 dollars) to develop an Integrated operation, the total minimum
capital cost of an integrated operation would be in the neighborhood
of $500-$600 million. Projects of this magnitude almost certainly
will be undertaken only by large, well-established firms, or jointly
by a group of such firms.
Entry into the copper indsutry has not been as difficult, however,
at the mining and milling level; many smaller independent mining
and milling facilities have been operating in the industry for years,
supporting themselves through factors such as regional markets, lower
processing costs due to richer ore bodies, or the use of regional
smelters and refineries owned by the major producers for toll or
custom smelting and refining of their output.
However, the significance of the entry by smaller mines in terms of
their influence on primary producer behavior is difficult to assess.
The output of these individual mines is usually an extremely small
part of total supplies, and the life of such mines is frequently
short. More importantly, the overall size of the independent mining
sector relative to mining production by the primary producers has not
significantly increased in the recent past, although the output of
some of these smaller mines has gradually increased to an extent
such that these mines have joined the ranks of the primary producers
(e.g., Duval and Cyprus).
4. Major Structural Changes
A discussion of industry concentration, vertical integration and entry
conditions should not mask the fact that the United States copper
industry has recorded significant structural changes during the last
thirty years. In 1950, Kennecott, Phelps Dodge and Anaconda produced,
within the United States, 713,000 short tons or 78 percent of the
country's total mine output of 915,000 short tons. In 1973, a peak
year, these same three firms accounted for 58 percent of total United
States mine output of recoverable copper. Magma, which operated a
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small mine in Arizona in 1950 has developed into a major domestic
producer. Duval, which mined no copper in 1950, is similarly now
an important producer. Further, Asarco had operated no United
States copper mines in 1950, later became a significant domestic
producer.
In 1950, Anaconda and Phelps Dodge were the only two integrated United
States producers with mines, smelters and refineries. By 1973,
Kennecott had become an integrated producer through the construction
or purchase of smelters and refineries. Asarco had integrated backward
through the development of copper mines. Inspiration had become an
integrated producer by purchasing a smelter and building a refinery.
Magma had become an integrated producer by building a second smelter
and by later building a refinery. The White Pine operation in Michigan
became completely integrated from mining through refined production.
Amax, meanwhile, has taken firm steps to integrate backward into mining
In recent years, as already noted above.
Consequently, the United States copper industry appears decidedly
more diverse and less concentrated today than it was thirty years
ago. It is also quite likely far more interdependent or complex
today in terms of custom/toll smelting/refining arrangements, as
well as domestic and foreign joint investment arrangements.
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CHAPTER III
NOTES
1. In the case of a few firms, there is some ambiguity concerning
the type of copper input (e.g., mined copper or scrap) predominantly
processed by these firms over the past three decades. Moreover,
where firms process inputs of both blister and scrap, the specific
proportions have often reportedly changed over time. In all such
ambiguous cases, we have used pricing behavior as the overriding
yardstick for classifying firms into either the primary or the
"outside" market segments.
2. Custom smelting/refining: purchasing ores or concentrates from
other producers for own-account smelting and refining. Toll
smelting/refining: smelting and/or refining (ores, concentrates)
for a fee and then returning the resulting metal to the mining
company for marketing.
3. In terms of microeconomic theory, as price-takers the secondary
refiners will maximize profit by producing refined copper until
their marginal cost of producing an additional unit of output is
just equal to the prevailing price in the market, in this case
the outside market. If they charge their captive fabricators
an imputed price less than the full market price, they will be
foregoing revenues (by absorbing costs) which they could obtain
by selling the copper on the outside.
A. See J. S. Bain, Barriers to New Competition (Cambridge, Massa-
chusetts: Harvard University Press, 1956) and 0. C. Herfindahl,
Copper Costs and Prices; 1870-1957, Published for Resources
for the Future (Baltimore: Johns Hopkins Press, 1959).
5. See Simon D. Strauss, Executive Vice President of Asarco, Inc.,
"Competition in the Nonferrous Metal Markets", presentation
before the Annual Meeting of the American Institute of Mining,
Metallurgical and Petroleum Engineers, Atlanta, Georgia,
March 9, 1977.
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IV. FINANCIAL CHARACTERISTICS OF THE
UNITED STATES COPPER INDUSTRY AND THE PRINCIPAL COMPANIES
A. INTRODUCTION
In this chapter we present data on the operations of the principal
companies which account for most of the primary copper production in
the United States. We have in certain cases assembled data covering
the decade 1964 through 1974, and in other cases have chosen the year
1974 for comparisons. Full data for later years were not available
during the course of our work but became available after the report
was finalized in draft form. We incorporate later information as
appropriate and to the extent it was feasible to do so. In any event,
the use of 1974 as the base and/or last year for much of the analysis
is consistent with the calculations and perspective employed elsewhere
throughout this study.
The remainder of this chapter is organized as follows: Section B
contains an overview of the financial performance of the principal
firms in the industry, based on comparisons of company financial
and operating data. This is followed, in Section C, by an analysis
of the significance of domestic sales and earnings in comparison with*
sales and earnings derived from foreign holdings, and some indication
of those holdings. Next, Section D presents a review of the capital
needs of the major firms in the industry and sources of capital.
Finally, Section E contains a detailed examination of trends in debt
and debt-equity ratios, the term structure of debt, and the extent
of pollution control financing.
A detailed description of the activities of each of the major
producing companies is provided in Appendix A which has been prepared
for further reference.
In recent years, the United States copper industry has experienced
modest growth in sales, low return on invested capital, eroding profit
margins and higher debt, reflecting the combined pressure of inflation,
higher cost of capital, increased capital requirements for environ-
mental control and the worst recession during the postwar period.
Overall profitability for the copper producers, in terms of operating
margin on sales, declined from about 23 percent in 1967 to 19 percent
in 1974. Over the same period, profit margins for large industrial
companies and manufacturers in general were rather stable. In terms
of after-tax return on stockholders' equity, copper produders have
shown a rate of return equal to the Federal Trade Commission (FTC)
IV-1
Arthur DLittklnc
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average for all manufacturing. However, the copper industry has been
characterized by much greater volatility in its rate of return. This,
in turn, stems from the cyclicality of the industry and fluctuations
in copper prices. The financial performance of the companies suggests
that firms in the industry are typically long-term profit maximizers,
with an operative target rate of return on investment. Their pricing
behavior, as discussed in Chapter VHI-Prices, is influenced by long-
term competition from aluminum.
Capital expenditures by most companies increased sharply in recent
years. A significant portion (i.e., about 25 percent) of the total
industry capital expenditures over the period 1972-1975 has been for
pollution abatement, mostly associated with S0£ controls at smelters.
About 60 percent of the total, however, represents investment in mining
and milling capacity.
With capital expenditures increasing faster than internal cash generation
(from earnings, depreciation, and deferred taxes), the cash-flow position
of the companies deteriorated. Consequently, there has occurred in
recent years a sharp increase in external financing. Over the last
five years, overall debt has approximately doubled, while equity has
increased significantly. Indeed, some companies are believed to have
temporarily reached prudent limits to debt in their capital structure
and await higher earnings and stock prices to restore balance and
financing flexibility.
Domestic copper producers also participate in the production of other
metals, both domestically and internationally, as a means of long-term
diversification. While some copper companies are engaged in primary
aluminum production and/or fabrication, others are normally involved
in the production of lead and zinc. A few producers participate jointly
in foreign copper mining companies, notably in Africa, Canada, and
South America; these companies derive 20-25 percent of total sales and
a higher percentage of their after-tax earnings from foreign operations.
By-product recovery operations, especially for precious metals, and
coproducts such as molybdenum, have been at times relatively significant
to several companies; however, they appear to play a minor role in long-
term investment decisions regarding industry growth and new copper
production capacity, and at best play an imperceptible role in short-run
price-output decisions.
Given access to ore bodies, the major barrier to entry into the industry
is the size of capital requirements, where the long-term investment is
highly risky in the face of a great deal of uncertainty surrounding
copper prices. Because ore bodies frequently involve lead, zinc,
IV-2
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silver and/or other metals of potential interest in addition to copper,
and because of the riskiness of massive investments, the interests
of the companies in nonferrous metals projects are frequently inter-
twined. Joint ventures, which constitute a means of diversification
and pooling of risks, have consequently become quite common in the
industry. Several major oil companies, which have considerable cash
flow for investment, and which have been diversifying their own
holdings of mineral resources, have, not surprisingly, recently taken
an interest in developing copper properties or have made investments
in some of the principal producing companies.
B. FINANCIAL PERFORMANCE
1. General
Table IV-1 presents a financial overview of the United States primary
nonferrous metals industries for the most recent six-year period,
based on Federal Trade Commission data compiled for Enterprise Standard
Industry Classification Number 33. The picture has been one of modest
growth in sales, low return on invested capital, eroding profit margins,
and higher debt. Of course, this composite is the net effect of
aluminum, copper, lead and zinc combined. Aluminum and lead-zinc
subindustries have to be analyzed separately but in general the
composite accurately reflects the pressures of the last five years
of inflation, higher costs of capital, increased capital requirements
for environmental controls and new capacity, and the worst recession
in many years.
2. Copper Companies
a. Summary Comparisons
Tables IV-2 and IV-3 present selected financial statistics for the
principal United States copper producers. These tables compare para-
meters which are believed to be particularly Important from the
standpoint of the impact analysis. More detailed summary financial
data for each company are presented in Appendix A.
Table IV-2 indicates that:
• The industry is capital intensive, with typically more than one
dollar of assets behind each dollar of annual sales.
• Inventory turnover is high.
• By-product gold and silver production can be quite important to
the earnings of Asarco, Amax and Copper Range (silver); Kennecott
and Newmont (gold). By the same token, industry joint-cost allocation
and custom smelter contract practices can obscure the economics at
various levels of production.
IV-3
Arthur Dbttklnc
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TABLE IV-1
FINANCIAL STATISTICS—PRIMARY I
inNFFRHOHS MFTAT.S mPPORATTnUR .
1969-1974
(in billions
Sales
Net Before Federal Income
Taxes
Net Income
% Net Income to Sales
Rate of Profit on Stock-
holders' Equity %
Before Federal Income Taxes
After Federal Income Taxes
Cash Dividends
% Dividend to Net Income
Balance Sheet Data
Cash and Government Securities
Receivables
Inventories
Total Current Assets
Bank Loans
Total Current Liabilities
Current Ratio
Cash Ratio
Long-term Debt
1969
21.45
2.24
1.42
6.6
20.7
13.0
0.57
40
1.08
2.94
4.29
9.02
0.64
3.86
2.3-1
0.3-1
5.48
SOURCE: Federal Trade Commission and
of dollars)
1970
21.00
1.87
1.29
6.1
10.3
7.6
0.61
47
0.99
2.83
4.59
9.04
0.73
4.13
2.2-1
0.2-1
6.14
Standard and
1971
18.61
0.88
0.62
3.3
4.8
3.8
0.51
82
0.91
2.32
4.10
7.85
0.53
3.28
2.4-1
0.3-1
5.91
Poor's.
1972
18.82
1.05
0.69
3.7
9.0
5.6
0.37
54
0.92
2.88
4.27
8.66
0.64
3.69
2.4-1
0.3-1
5.99
1973
24.77
2.11
1.34
6.9
21.6
15.3
0.54
40
1.15
3.27
3.75
8.59
0.38
3.77
2.4-1
0.3-1
5.54
1974
28.98
2.67
2.04
7.0
12.7
8.6
0.48
24
1.27
3.14
4.84
9.57
0.59
4.62
2.1-1
0.3-1
5.79
IV-4
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TABLE IV-2
SELECTED FINANCIAL STATISTICS FOR PRINCIPAL UNITED STATES
COPPER PRODUCERS—-1974 BASE
I
D
c:
COMPANY
(in order of
copper
production 1974)
Kennecott
Phelps Dodge
Anaconda
Newmont Mining
Pennzoil (Duval)
Cyprus Mines
Amax
Asarco
Copper Range
Inspiration
Consolidated
Cities Service
CO
iH
iH
O
•o
b 0)
0) U
e. 01
CO CO
o) a
tH
en o
0.77
0.69
0.86
0.49
0.6C
1.0
0.66
1.0
0.91
0.63
1.0
CO *-*
01 01 01
113
DD rH
•H 3 O
,00-0
O U OH
S N^ 0
1,664
1,026
1,673
548
942
424
1,164
1,344
169
97
2,806
m
c $
&5 -o1
5 w -o
lit M
b -e o
"•8 ..
u o
36
41
17
41
21
35
13*
9
60
87
2
1
0 "a
4J
g ^rf
33.2
20.6
22.0
24.6
32.1
10.5
23.9
26.7
2.34
2.42
26.9
CO
00
3
If
o> B
b U
CO
pH 0)
-1 b
o a
•a £
CO
5 S.
5.08
5.47
4.83
4.55
3.67
5.06
5.61
4.71
7.66
3.92
7.58
&
O s-
U IB
II
3i
•gii
?>
o
" 2
11.0
5.1
7.0
4.0
7.5C
6.0
8.2
6.0
5.6
7.0
10.0
.
o ^
b v^*
a) o> /—
CbiH 0)
oox
•H a
• 4J
-------
ACCOMPANYING TABLE IV-2
NOTES: aAs computed by Value Line Investment Survey (February 27, 1976), for the metals and mining companies and as
computed by ADL for Cities Service and PennzoiL. Growth in earnings/share over the period 1964-1974 for the
Fortune 500 largest industrial companies averaged 9.5%/year.
Share of Conalco production.
cExcludes United Gas Pipe Line Company, which was spun off.
Includes minority shares of Pima's production.
eBefore effects of expropriation by Peru of Marcona subsidiary assets.
Mostly refined under toll agreements. Asarco equity in mine production amounts to 0.3 oz. per share.
850% share of Alumax production.
Amax now reports sales on a restated basis to include Alumax, Inc. (1974 sales of $464 million) on an equity
basis.
.
ttefined copper for own account, approximately 25% of which is derived from U.S. mines, 75% from scrap and/or
foreign material.
^Actually 17% of 1974 sales, due to sale at higher prices.
T?he figures presented here on a pre-tax basis, ceteris paribus, exclude foreign price change effects which
could be important in some cases.
SOURCE; Arthur D. Little, Inc. estimates.
The information presented above has been obtained from company annual reports and SEC filings, statistical
services, financial manuals, and other sources believed to be reliable, but its accuracy and completeness
are not guaranteed.
While reasonable care has been taken in data compilation and presentation, we cannot guarantee absolute
comparability from one company to the next, due to differences in the nature of earnings, and differences
in accounting. However, to the best of our knowledge, the above data present an accurate and meaningful
basis for selective comparisons.
I
D
r+
**
-------
TABLE IV-3
SUMMARY OF SALIENT FINANCIAL ASPECTS OF UNITED STATES COMPANIES
Company
Amax
Anaconda
Asarco
Cities Service
Copper Range
Cyprus Mines
Inspiration Consolidated
Kennecott
Newmont
Pennzoil (Duval)
Phelps Dodge
Value of 1974
Production of
Primary Copper
@ 75C/lb.
(millions of
dollars)
$149
285
159£
61
101
150
113b
603
225
197
421
1971-1974
Average
Operating
Margin on
Total Company
Sales
(percent)
15. 1Z
10.2
6.7
17. 5B
13.4
31.7
24.4
19.0
29.9
15.9
20.4
Total Average
Capital Spending
1972-1974
(million of
dollars)
$ 227
145
101
370
6
43
29
187
48
267
182
Level of
Operating Profit
@ 75c/lb.
Copper, Co.
Average Margin
Only on Primary
(millions of
dollars)
22.5
29.1
10.7f
10.7
13.5
47.6
27.6
114.6
67.3
31.3
85.9
Employment
Levels0
Mining,
Milling,
Smelting
and Refining
1.500
5.500
3.400
2.000
2.800
2.000
2.200
11,000
4,400
2.600
7,500
Long Term Dept
(12/31/75)
as Percent of
Total
Capitalization
27Z
28d
28
32
23
23e
26
21d
27e
55e
37
Common Stock
Book
Value
$/Share
42.7
54.8
32.2
60.5
44.9
29.4
35.1
42.2
26.4
15.5
43.4
at 12/31/75
Market
Value
Z Book
111
31
41
64
41
74
59
73
87
125
84
f
-si
NOTES; SFigure used in Standard and Poor's Capper Composite Average.
Figure used is 1973 deliveries basis; 1974 figure not representative due to production difficulties.
cThe employment level in U.S. primary copper production totals 45,000 for the above companies.
Total capitalization includes capitalized lease obligations.
eTotal capitalization includes minority Interests.
Based on total Asarco mine production, of which the domestic U.S. share accounts for 78 percent. Average earnings from primary
metals sales were $44 million pre-tax. If prorated based on sales, copper would have accounted for $12.8 million.
SOURCE; Arthur D. Little, Inc. estimates.
The information presented above has been obtained from company annual reports and SEC filings, statistical services,
financial manuals, and other sources believed to be reliable, but its accuracy and completeness are not guaranteed.
/
While reasonable care has been taken in data compilation and presents' ion, we cannot guarantee absolute comparability
from one company to the next, due to differences in the nature of eariings, and differences in accounting. Hovever,
to the besc of our knowledge, the above data present an accurate and Meaningful basis for selective comparisons.
-------
• A 5c/per pound change in the price of copper has a major impact
on Copper Range and Inspiration earnings per share. These two
companies have the highest percentage refined copper sales to
total company sales.
• Aluminum production is a major factor in Anaconda's and Phelps
Dodge's earnings outlook.
Table IV-3 presents a company-by-company comparison of copper revenues,
total company capital spending, normalized level of profit on primary
copper production, employment, debt in total capitalization, and the
common stock valuation. At year-end 1975, debt averaged about 30 percent
of total capitalization, and equity was typically at a market price below
book value.
b. Profitability
Table IV-4 presents a 10-year record of return on stockholders' equity
by company. Table IV-5 compares the company data to the FTC average for
all manufacturing companies. Because the FTC data and the company data
are not necessarily on the same accounting basis (e.g., the latter are
likely to be inflated by inventory profits to a lesser degree) and
cover a period when wage and price control anomalies existed, it cannot
be asserted that differences in the average rates of return observed
are statistically significant. However, the indications are that the
volatility of returns has been greater over the period for the copper
companies—i.e., their business would appear to be riskier than the
FTC average.
Table IV-6 indicates furthermore that profitability in the copper
industry, in terms of operating margins on sales, has declined over
the last ten years whereas that for industrials generally has been
maintained.
3. Considerations Regarding Integrated Operations
a. Smelting and Refining
Eight of the eleven primary producers are integrated forward into
smelting, eight have refineries, and seven are integrated through both
smelting and refining stages of production. Table IV-7 presents the
smelting and/or refining capacity for the principal companies. This
represents nearly all of the United States capacity, except for secondary
refined capacity as represented by Cerro Corporation, and other inde-
pendent fabricators.
An Important aspect of the primary copper (and also lead and zinc)
industries is that traditionally the cost of smelting and refining has
been small compared to the price of copper, and furthermore, these
operations have been at a fixed and relatively low margin which is not
very sensitive to the price of the finished product. This, in turn,
means that the smelting and refining plants have been operated mainly
IV-8
Arthur D Little Inc
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TABLE IV-4
f
vo
Company
AMAX
(Tax Rate)
Anaconda
(Tax Rate)
Asarco
(Tax Rate)
Copper Range
(Tax Rate)
Cyprus Mines
(Tax Rate)
Inspiration Consolidated
(Tax Rate)
Kennecott
(Tax Rate)
Newmont
(Tax Rate)
Phelps Dodge
(Tax Rate)
Averages;
Pre-Tax Returns
After Tax Returns
Tax Rate
OVERALL RATE OF RETURN: NET
INCOME
AS PERCENT OF
NET WORTH
(percent)
1965
18.9
(25)
7.2
(50)
14.6
(NA)
12.4
(24)
10.9
(30)
dated 13.3
(22)
12.3
(50)
*
14.6
(38)
19.7
13.0
34
1966
16.9
(21)
11.2
(49)
17.7
(30)
11.4
(22)
12.6
(27)
12.1
(25)
13.6
(52)
*
16.4
(41)
20.9
14.0
33
1967
13.0
(19)
8.8
(57)
13.3
(23)
0.8
(45)
13.1
(17)
6.0
(10)
7.9
(36)
*
9.9
(34)
13.0
9.1
30
1968
13.1
(22)
8.0
(54)
12.5
(15)
11.5
(21)
13.7
(23)
11.6
(14)
10.9
(26)
*
11.9
(33)
17.2
11.7
32
1969
12.5
(28)
8.5
(54)
15.5
(21)
15.9
(19)
13.6
(31)
24.1
(43)
14.9
(28)
17.4
(34)
15.2
(32)
22.5
15.3
32
1970
13.7
(23)
5.7
(11)
13.1
(22)
8.9
(29)
14.4
(26)
27.1
(33)
15.8
(30)
18.1
(32)
16.4
(37)
20.3
14.8
27
1971
8.9
(20)
-30
(Credit)
6.8
(11)
- 3.4
(Credit)
13.4
(35)
12.5
(28)
7.3
(15)
12.3
(19)
10.4
(35)
5.5
4.2
23
1972
10.1
(27)
13.6
(4)
7.2
(17)
- 2.5
(Credit)
12.8
(20)
15.8
(27)
7.3
(16)
9.8
(22)
11.0
(35)
12.0
9.5
21
1973
12.5
(30)
8.3
(24)
14.7
(17)
10.0
(37)
15.4
(31)
16.7
( 4)
12.2
(26)
18.3
(27)
13.4
(38)
18.2
13.5
26
1974
15.8
(27)
19.5
(34)
14.6
(21)
15.0
(28)
17.2
(36)
10.4
(14)
11.7
(29)
17.8
(27)
12.6
(25)
18.9
13.8
27
D
NOTES; NA: Not Available.
*Newmont became an operating company with the merger of Magma Copper in 1969.
-------
TABLE IV-5
RATES OF RETURN ON STOCKHOLDERS' EQUITY
(percent)
FTC Average of Major
All Manufacturing Copper Companies
Years Pre-Tax After Tax
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Averages
Standard
Deviation
«)
21.9
22.5
19.3
20.8
20.1
15.7
16.5
18.4
21.8
23.4
20.0
2.6(13)
13.0
13.5
11.7
12.1
11.5
9.3
9.7
10.6
13. la
14. 9a
11.9
1.8(15)
Inflation Rate
19.7 13.0 1.8
20.9 14.0 2.7
13.0 9.1 3.5
17.2 11.7 3.3
22.5 15.3 4.9
20.3 14.8 5.5
5.5 4.2 4.4
12.0 9.5 3.6
18.2 13.5 5.5
18.9 13.8 10.4
16.8 11.9 NA
5.2(31) 3.4(29) NA
NOTES: aFortune 500 all-industry median was 12.4% in 1973 and 13.6%
in 1974.
bGNP Implicit Deflatory, (1958 = 100).
NA: Not Available.
SOURCES; Federal Trade Commission, Division of Financial Statistics,
Quarterly Financial Report for Manufacturing, Mining, and
Trade Corporations, 1975 eds.; and Arthur D. Little, Inc.
IV-10
Arthur D Little Inc
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TABLE IV-6
TRENDS
IN OPERATING
PROFIT MARGIN
(percent of sales)
Year
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Large
Industrial
a
Companies
15.9
16.2
16.4
15.5
15.8
15.4
14.5
14.6
15.0
15.8
15.4
NOTES AND SOURCES: Standard and Poor
Major
Copper .
Companies
22.7
26.5
29.3
23.9
22.9
27.8
23.4
15.5
16.6
19.1
18.7
1 s composite da
Standard and Poor's composite data, based on
Anaconda, Copper Range, Inspiration Consolidated,
Kennecott Copper, Newmont Mining, and Phelps Dodge.
IV-11
Arthur DLittklnc
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TABLE IV-7
Company
Anaconda
Asarco
Inspiration
Consolidated
Kennecott
Newmont (Magma)
Phelps Dodge
Copper Range6
AMAXf
Cities Service
CIPAL UNITED STATES COPPER SMEL
Smelter Capacity
Thousand
Tons
210
380
150
508
200
402C
85
-
15
1,950
Percent
of Total
11
19
8
26
10
21
4
-
1
100%
Rank
(4)
(3)
(6)
(1)
(5)
(2)
(7)
(9)
(8)
Refining Capacities
Thousand Percent
Tons of Total
295a
630b
72
639
200
544
90
250d
2,720
11
23
3
23
7
20
3
9
200%
Rank
(4)
(2)
(8)
(1)
(6)
(3)
(7)
(5)
(9)
NOTES: aNew Jersey facility shut down in 1975, when Montana facility expanded
capacity by38%.
Baltimore refinery closed down in December 1975. Perth Amboy, New
Jersey facility was scheduled to close down in 1976. New refinery
in Amarillo, Texas came on-stream in mid-1975 with rated year-end
capacity of approximately 215,000 short tons/year (50% of planned
total for Amarillo).
New smelter at Hidalgo, New Mexico, which was scheduled for operation
in 1976, is expected to add capacity estimated at 100 thousand short
tons/year or more, assuming continued operation of the three existing
smelters.
Smelter-refinery complex as estimated by ADL.
eLake and fire-refined.
Oriented to custom, foreign blister scrap.
IV-12
Arthur D Little; Inc
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as service operations in the conversion of concentrate into usable
metal and alloys. In smelter and refinery contracts, changes in price
of the primary metal are typically reflected back to the mine and hence
affect directly the value of the concentrate. Any increase in smelting
or refining costs generally cannot be "absorbed" by the smelter or re-
finery for this reason but has to be largely passed backward to the mines.
In the case of producers integrated from mining through smelting and
refining, a cathode or wirebar may be the first product that is
actually sold. The internal transfer price of the concentrates is
usually calculated on the basis of the primary metal price, thus, any
fluctuations in the primary metal price are again reflected back to
the mine and have a major influence on the mine profitability!. Any
change in wirebar price affects the concentrate value directly in
custom smelting contracts, and the smelter and refinery margins remain
unchanged.
b. The "Struggle Between Integrated and Independent Fabricators"
Although this study extends only through the refined copper stage of
production, we cannot overlook the fact that several large primary
producers are vertically integrated into fabricated products (wire
and cable, tubing, sheet, and brass mill products), and there is an
interplay in the market place between supply and price of new refined
copper and the role of copper scrap in the fabricating industries.
Refined copper is fabricated into higher value, intermediate, and
finished products by wire mills and brass mills, the former accounting
for about 46 percent of United States consumption, and the latter about
40 percent. As stated elsewhere, the balance of consumption is accounted
for by foundries, ingot-makers, and powdered metal usage. Overall, 40
percent or more of the brass mills' copper requirements are typically
supplied by scrap materials.
The manufacturing divisions, subsidiaries, and affiliates of the major
primary copper producers are belived to account for roughly 35 to 55
percent of total fabricating capacity. Of the three major producers,
Anaconda appears to consume the highest percentage of its own copper,
Phelps Dodge the next highest and Kennecott the least. Some individual
company data are provided in Appendix A. The vagaries of the market
from year-to-year, and the fact that the companies buy and sell to and
from each other, complicates the picture. From a financial standpoint,
the conventional distinction made between the integrated producers and
the independent fabricators2 such as Cerro Corporation, General Cable,
Reading Industries, and Triangle Industries is best expressed by the
following comments from Standard and Poor's Corporation in its 1975
Nonferrous Metals Survey:
"For—integrated companies, this final production stage
has traditionally served as an outlet for the primary copper
produced. Thus, such companies have typically endeavored to
maintain low prices on fabricated products, relying on the sale
of primary metal for the bulk of their profits".
IV-13
Arthur D Little Inc
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The largest expense for most independent fabriactors is the cost of
copper; thus profitability depends substantially on the fabricators'
mark-up or spread. As a result, again quoting Standard & Poor's,
"there is often a struggle occurring the market—The
integrated producers seek to keep product prices on fabri-
cations low enough to boost demand and provide an expanding
market for more profitable primary and refined output, while
the independent fabricators strive to raise product prices
and margins".
Both groups generally prospered in the demand crunch—high price environ-
ment of 1974; but the independents suffered less in the recession—low
price environment of 1975, benefiting from the lower raw material costs.
The integrated producers, with high fixed costs, suffered reduced
operating rates as well as reduced prices, and reported substantial
sales and earnings declines.
The subject of integrated versus independent producers is, we believe,
quite a bit more involved than this, as might be inferred from various
legal actions which have occurred or have been underway now for some-
time, and which appear to relate at least in part to the operation of
the United States two-price system (see Chapter VIII)3.
More specifically, as has been stated in the "Notes to the Financial
Statements" of the major producers, in 1970, Triangle Industries, Inc.,
instituted an action in the United States District Court for the
Eastern District of Pennsylvania against Asarco, Anaconda, Cerro
Corporation, Kennecott, and Phelps Dodge, alleging various violations
of the Federal antitrust laws and seeking treble damages and
divestiture by these producers of their copper fabricating facilities,
and other relief. Reading Industries, Inc. subsequently filed a
similar suit, and these actions were transferred to the United States
District Court for the Southern District of New York, and have been in
pre-trial discovery stage. Counterclaims were filed by some of the
defendants. Cerro filed briefs and motions for dismissal, claiming
it was not a United States producer. Asarco and Triangle subsequently
agreed to have Asarco supply Triangle with copper under long-term
contract, and Triangle withdrew its complaint against Asarco.
Over the period 1972-1975, the Antitrust Division of the United
States Department of Justice was conducting a grand jury investigation
of the copper industry in the United States generally. The primary
producers were served with subpoenas requiring production of documents
and information relating to copper prices since 1951; and exploration,
development, smelting and refining activities since 1955. In 1974,
the jurisdiction of this investigation was also transferred to the
United States District Court for the Southern District of New York;
we understand that the term of this Grand Jury expired in 1975.
IV-14
Arthur D Little Inc
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The outcome of these actions should clarify the status of vertical
integration in the copper industry. However, because of the nature and
extent of our study, further treatment of these issues was beyond our
scope, and would at best be speculative. Our analyses then necessarily
have been based on the industry "as is", and as we and others outside
may observe it.
C. DOMESTIC VERSUS FOREIGN SALES AND EARNINGS OF NONFERROUS METALS
COMPANIES
1. General
Estimates of foreign and domestic sales and earnings from nonferrous
metals operations are exhibited in Table IV-8. Notes and comments are
provided in the table. This information is based on or computed from
1974 data presented in company annual reports and reports to the SEC.
Very few companies reported foreign earnings in a straightforward
manner, and even where information was given, it was often somewhat
ambiguous. Thus, while reasonable care was taken in compiling this
data and presenting it in a consistent fashion, we do not guarantee
its absolute accuracy or comparability because of variations in
accounting from company-to-company. The reader is referred to Appendix
A for more details on each company.
Of the nine major primary copper producers listed, there Is considerable
variation in the percentage of earnings accounted for by foreign
operations:
• Copper Range has a very small percentage of foreign sales revenues
and earnings. Inspiration did not report any at all.
• Anaconda did not indicate net foreign sales, but reported $115
million in 1974 sales from Anaconda Canada Ltd. The net equity
of nonconsolidated foreign affiliates abroad contributed to 13.5
percent of its total after-tax earnings.
• Kennecott indicated that 16 percent of sales were derived from
customers abroad, producing 16 percent of earnings after tax.
• Phelps Dodge had foreign sales as percent of total sales revenue
equal to 2 percent or less and foreign earnings after tax equal
to 4 percent or less of total earnings.
• Amax's, Asarco's and Newmont's foreign sales are 20 to 25 percent
of total sales, and their foreign after-tax earnings as percent
of total after tax earnings ranges from about 30 percent for Newmont
and Amax to over 60 percent in the case of Asarco.
IV-15
Arthur D Little Inc
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2. Principal Participation and Joint Holdings
Foreign operations of United States copper companies often involve
participation with others in ventures and joint holdings of foreign
producers' companies.
The following tabulation indicates the principal participations in
Joint holdings of the major United States companies in copper production
as of 1975.
Producer and Loaction
1974 Copper
Production
(tons)
Participations
Southern Peru Copper
Corporation (Peru)
133,000 Asarco—51 percent
Cerro Corporation—22.3 percent
Phelps Dodge~16 percent
Hewmont—10.3 percent
ROAN Consolidated
Mines (Zambia)
304,000 Amax—-20 percent
Zambian Government—51 percent
Granduc
(British Columbia,
Canada)
31,900 Leased 50 percent each by
Asarco and Newmont* with
Newmont operating
O'okiep Copper Company
(South Africa) 35,600
Amax—17.0 percent
Newmont—57.5 percent
Mount Isa Mines
(Australia)
175.000 Asarco—49 percent
Tsumeb Corporation Ltd.
(South West Africa) 24,700
Amax—29.6 percent
Newmont—29.2 percent
Subtotal above
(Outside U.S.A.)
Anamax Mining
(Arizona)
Amax—50 percent
Anaconda—50 percent
The results of the operations of nonconsolidated foreign affiliates
and associated companies are typically reported in terms of equity in
such companies' earnings, which includes any cash dividends paid to
the United States owners.
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Arthur D Little lt>
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3. The Hazards of Foreign Investments
Extraordinary losses, as discussed in the financial reports of the
major nonferrous metals mining companies, illustrate the risk of
foreign holdings today. Indeed, the last several years would suggest
the related write-offs are "ordinary" and not "extraordinary" losses in
the course of business—as the panorama of nationalizations in Chile,
Peru, Mexico, and Africa unfolds. In most cases, Overseas Private
Investment Corporation insurance was available to cover much of the
loss. But this is phasing out.
While foreign sales are considered subject to greater uncertainties—
depending on the location of foreign subsidiaries and/or affiliates,
expropriation, currency fluctuations, export and import restrictions,
exchange restrictions, and other factors—the percentage of income
before taxes on income from foreign sales revenues has generally been
greater than that realized on consolidated total sales and operating
revenues and hence on domestic operations. When the companies' share
of dividends and/or equity in foreign affiliates' earnings is added
to earnings from direct foreign operations, the fraction of foreign
after tax earnings to total after tax earnings rises significantly.
The greater profitability of foreign operations in 1974, on an after-
tax basis, is indicated in Table IV-8. A higher return of course, is
consistent with the notion of higher risk.
D. INDUSTRY FINANCING—CAPITAL NEEDS AND CAPITAL SOURCES
1. Ownership Patterns
The subject of industry financing logically should begin with an
examination of the nature of the producing firms and their historical
record with respect to capital spending, internal cash generation,
and their pattern of external financing. The principal producers of
copper are publicly-owned companies whose shares are traded on the
New York Stock Exchange (and some on the regional exchanges). The
aggregate book value of their total corporate assets was approximately
$17 billion, and the market value of their common stocks totalled
approximately half this (i.e., $8 billion) at year-end 1975.
We have not made a detailed study to determine the major shareholders
of these companies. However, in view of several major recent proposed
changes in ownership which have been widely publicized, we shall review
briefly the pattern which has emerged and offer such comments as seem
appropriate.
IV-17
Arthur D Little Inc
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TABLE IV-8
Company
Asarco
Amax
Anaconda
Cyprus Mines
Copper Range
Inspiration
Consolidated
Kennecott
Newmont
Fhelps Dodge
NOTES:
1974 DOMESTIC SALES AND EARNINGS FROM NONFERROUS
METAL
OPERATIONS AND FOREIGN SALES AND EARNINGS— AS COMPARED
TO TOTAL EARNINGS
Sales from
Domestic
Nonferrous
Metals Plants
$ (millions)
$1,260.1
607.0
1,567.3d
279. O1
Earnings
From
Domestic NFM
Operations
$ (millions)
$ 89.7
95.0b
173. Oe
82. 7^
Foreign
Sales as
Percent of
Total Sales
Revenues
23.2%
18.0
11.0 Est.
28.0
Foreign Earnings
(After Tax)
As
Percent
$ (millions) of Total
$ 93.4 67%
62.07a'C 30.6a'C
14.4s 13. 5h
52. 7a 37a
423
166.6
97. lk
999.56]
301.2
1,026.1
28.3
10.0
N.A.
N.A.
9. 91"
248. 81
70.7
138.3
nil
16.0
25.0
<1.0
nil
27. Om
37.8
1.524n
nil
16°
30
1.4
Indicates before taxes.
Includes $19 million equity in Alumax.
CTwenty percent of Amax earnings from operations before income taxes, exploration and
unallocated corporate expenses were derived from its operations outside of the United
States, primarily in Australia, Western Europe, Japan, Zambia, and Canada. In addition,
approximately 9% of its income before taxes and extraordinary items was derived from
dividends from foreign investments, primarily in Africa.
Applicable foreign earnings from operations, excluding exploration and unallocated
corporate expenses were $43.5 million in 1974; $6.45 million of foreign exchange gains
were included in 1974 earnings. Trading income, consisting primarily of profits on
copper and silver transactions, was $12.5 million in 1974 (based on sales of $32
million, and pre-tax of $20 million) and is included in earnings from operations.
dSales 93.7% of net sales—i.e., excludes sales between divisions, uranium oxide sales, etc.
eTotal operating earnings shown.
N.A.: Not available.
8Anaconda"s equity in net income of affiliated companies in Mexico and Brazil accounted
for $14.1 million in 1974. These foreign affiliated companies' contributions, after all
applicable taxes, amounted to $10.8 million or 10.1%. Anaconda also received $5.45
million of Interest from Chilean investments, which after tax of 34% (effective 1974
rate) was $3.6 million.
Based on net after taxes before extraordinary income.
IV-18
Arthur D Little Inc
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There was an extraordinary item which contributed $140.37 million to net income which
involved settlement on the 1971 expropriation loss with the Government of Chile.
If this item is considered, then 62.6% of total 1974 net income—i.e., $247.1 million,
including the extraordinary item, was related to foreign activities.
Includes manufacturing and nonferrous metals. Manufacturing includes copper and
aluminum wire and cable, and some steel conduit and specialty steels.
After tax basis estimated excluding minority interests. See separate material on
Cyprus in statistical appendix.
k
Includes interest income.
Total metal and metal product sales were $1,160.1 million, out of total sales
revenues of $1,664.2 million. Of these metal and metal products sales, $999.56 million
were of nonferrous metals and products. Reports do not state amount attributable to
United States. Earnings show total before tax earnings from metal and metal products
operations, including items that are not nonferrous.
Kennecott income derived from foreign sources before extraordinary credit represented
about 16% of 1974 consolidated income before extraordinary credit. In addition to this
$27 million, the company had an extraordinary credit (net of tax effect) of $42.3
million related to compensation from Chile for a 1971 expropriation of property. If
the credit and net foreign sources ($69.3 million) are considered as percent of net
income after tax and the extraordinary item, the percent from foreign sources was about
one-third of 1974 total net income.
"Reported $1.52 million dividends included in reported earnings from foreign manufacturing
interests abroad.
IV-19
Arthur D Little Inc
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a. Asarco, Kennecott. Newmont and Phelps Dodge
Shares are widely held, as are Cities Service and Pennzoil.
b. Amax-Copper Range-Lousiana Land
For a number of years Amax held a 20 percent equity position in Copper
Range. In late 1974, an agreement in principle was reached between
the companies to merge Copper Range into Amax. In 1975, the Department
of Justice sued to block the merger on antitrust grounds. Also in
1975, Amax sold a block of its stock to Standard Oil of California,
which now holds approximately 20 percent interest in Amax. An
additional 12 percent is held by Selection Trust Ltd. (Selection
Trust Ltd., a diversified mining and financing company primarily
concerned with minerals development, is affiliated with Charter
Consolidated, Ltd., in London, which in turn is prominently identified
with such companies as Rio Tinto Zinc Corporation, Ltd., and Anglo-
American Group companies).
Amax stated that if consummated, the proposed acquisition would enable
Amax to develop a portion of the Michigan copper deposits it had under
lease near the Copper Range holdings. The proven ore reserves in
Michigan that would have been mineable upon the acquisition would
have totaled 121 million tons with an average grade, fully diluted,
of 1.20 percent copper. Of this total, 18 million tons were under
lease by Amax.
Subsequently, shareholders of Copper Range approved, over the opposition
of Amax, the merger of their company into Louisiana Land and Exploration
Company, in an exchange of stock valuing Copper Range stock at $21.45
per share. (This was well below its book value and substantially
below asset replacement costs).
c. Cyprus Mines—Plma
A major shareholder block in the case of Cyprus Mines is the family of
H. Mudd, who, together with associates, represent about 31.5 percent
of the voting power.
Cyprus consolidates the operations of Pima Mining Company—the 7th.
largest United States copper producer—in its financial statements.
Cyprus owns 50.04 percent of Pima'3 stock. The balance is split between
Union Oil and Utah International (now a part of General Electric Company).
d. Pennzoil—Duval
Duval is now a wholly-owned subsidiary of Pennzoil Company. Pennzoil
got into the copper business via its 1968 merger with United Gas
Corporation, of which Duval was a subsidiary. Duval is the fifth
largest producer.
IV-20
Arthur D Little Inc
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e. Inspiration Consolidated—Anaconda—Crane et. al.
In early 1975, Crane Company, through a subsidiary, acquired 5.5 percent
of Inspiration's stock, and subsequently made a bid to obtain control
of Inspiration. Anaconda had for some time held 27.6 percent of
Inspiration's common stock and was its largest stockholder. Anaconda
did not exercise control over Inspiration, but, agreeing with the
management of Inspiration, voted to permit the sale of a substantial
block to the Anglo-American Group of South Africa (Hudson Bay Mining,
Anglo-American Corporation, et. al.) thus precluding Crane's attempt
to take control. Anaconda now owns 20.4 percent, and the Anglo-
American Group 30 percent of Inspiration's stock.
Later in 1975, Crane made a tender offer for 23 percent of Anaconda's
shares. Anaconda's management was opposed to the offer. Shortly
thereafter, Tenneco proposed a merger of Anaconda through an exchange
of securities, and Anaconda's Board approved. But, in early 1976,
Atlantic Richfield (ARCO) made a cash offer for 27 percent: of Anaconda,
with an agreement with Crane Company, giving ARCO a right of first
refusal on Crane's holdings (then actually about 19 percent) for a
stipulated period. ARCO and Anaconda subsequently agreed to merge
Anaconda with ARCO and the merger has now been consummated.
f. Participation of Oil Companies
The recent Louisiana Land interest in Copper Range marks the sixth4*^
significant oil company venture into United States primary copper
production, via acquisition of operating interests. The others were,
as indicated above, ARCO (1976), Union Oil, Cities Service, (1963),
Pennzoil (1968), and Standard Oil of California (1975). The latter
was indirectly, through Amax, and appeared to be focused on Amax's
substantial interests in coal. (It is the fourth largest producer).
We believe it is not yet appropriate to attempt generalization from
the foregoing. There are many other examples of oil companies
diversifying their interests in natural resources-based businesses,
just as there are many examples of nonferrous metals companies
diversifying into coal, oil, and gas. We would expect that in at
least several important cases, the provisions of the United States
tax laws were an incentive.
2. Capital Needs versus Internal Sources
In its 1975 Survey of capital requirements at nonfinancial corporations,
Business Week concluded that United States corporations in general
were in the throes of a capital crunch which showed no signs of abating.
(Those conclusions were based on data supplied by another McGraw-Hill
group, the IMS subsidiary of Standard & Poor's Corporation). New
outlays for the plant and equipment grew nearly twice as fast as
IV-21
Arthur D Little Inc
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common equity over the period 1969-1974, and internal cash generation
fell far short of requirements (including dividends to shareholders).
On average, 78 percent of the growth needs of large United States
companies during the 1969-1974 period were satisfied through internal
cash flow generation, with increased short-term and long-term debt
sale of new equity making up the difference.
Table IV-9 compares the data for the major copper-producing companies.
Table IV-10 shows actual average capital expenditures, the typically
higher 1974 levels, and the expenditure rate in comparison to depreci-
ation charges. Table IV-11 summarizes the estimated capital
expenditures made on primary copper production only; and the amount
of this for pollution control. Copper Range and Cyprus Mines covered
most of their requirements from internally-generated funds. In fact,
Copper Range's and Cyrpus1 debt was only slightly higher at the end
of 1974 than five years earlier, and debt-to-equity ratio remained
about the same.
Among the other companies, debt-to-equity ratio typically increased.
However, it is difficult to generalize; and the analysis must proceed
on a specific, case-by-case basis, since the accounting for foreign
government interventions in company operations (noticeably in Chile,
Peru, and Zambia), and the effect of acquisitions and spin-offs on
consolidated financial statements must be evaluated.
3. Equity Capital
a. Stock Prices
Figure IV-1 indicates the pattern of stock price changes for the major
copper producers versus other metals stock groups and the Standard &
Poor's Industrial Stock Composite. The extreme volatility over the
recent period has important implications in regard to incremental
cost of capital, suggesting that investors would normally demand a
substantial risk premium on new equity offerings.
b. Price-to-Earnings Ratios (P/E's)
In general, P/E ratios of Industrial issues have declined over the
last ten years (1965-1975), from an average of about seventeen, to
about ten recently. Analysts think of the copper industry as
cyclical. For analytical purposes, their condition may be approximated
by a model where earnings have zero growth or near-zero growth, e.g.,
a mature durable goods industry demand function and high payout of real
earnings as dividends to stockholders. For a firm with zero or nearly
IV-22
Arthur DLittklnc
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TABLE IV-9
INDICATORS OF THE NEED FOR CAPITAL FUNDS
Company
5-Yr Growth in
Plant Equipment
5-Yr Cash Flow
as % of Total
Growth Needs
Amax
Asarco
Anaconda
Cities Service
Copper Range
Cyprus Mines
Inspiration
Consolidated
Kennecott
Newmont Mining
Phelps Dodge
Pennzoil Co.
102%
97
43
30*
38*
a
192*
47
b
92
15
53%
78
61
72
94*
96
64*
83
76
62
57C
NOTES; aNot available for purposes of comparison. The 442% indicated
reflects IMS/Cyprus method of reporting, accounting, and
restating for consolidation of subsidiaries over the period
in question.
Not meaningful for purposes of comparison, due to large
investment holdings.
CCapital Expenditures net of retirement and disposals in
some years.
*SOURCE: Arthur D. Little, Inc. All other figures are as presented
by Business Week's Capital Survey, September 22, 1975.
IV-23
Arthur DLittklnc
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TABLE IV-10
THE PATTERN OF CAPITAL EXPENDITURES AND DEPRECIATION CHARGES
Company
Amax
Anaconda
Asarco
Copper Range
Cities Service
Cyprus Mines
Inspiration
Kennecott
Newmont
Pennzoil
Phelps Dodge
Reported
Capital Expendi-
tures — Gross
$MM
1970-74 Average
Capital Expendi-
tures as Percent
Gross Plant
Average
1972-74
227
144
101
6
370
43
29
187
48
267
182
1974
338
194
138
7.5
447
67
18.8
218
56
279
275
17.8%
7.4
13.7
4.8
10.8
11.6
13.7
9.7
12.1
11.0
11.9
Depreciation Rate
1974-% Gross Plant
3.3%
2.8
4.6
4.4
3.9
5.9
5.7
4.3
4.2
5.4
2.4
Average 11 • 3%
Standard Deviation 3.4
4.3%
1.3
SOURCE: Arthur D. Little, Inc., based on Standard & Poor's Corporation,
Value Line, and Company reports.
IV-24
Arthur DLittklnc
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TABLE IV-11
ESTIMATED CAPITAL EXPENDITURES FOR THE
DOMESTIC PRIMARY COPPER INDUSTRY
1972
1973
1974
1975
Mining and Milling
Smelting Capacity
Refining Capacity
Pollution Control
Smelters
Other
TOTALS3>e
Millions of Dollars
233C 420 465 430
18 45 70 74
6 34 56 44
3
365
150
5
654
180
_8
779
142
18
708
NOTES; Includes capitalized mine development expenses and interest
.during construction.
1973-1975 refinery expenditures dominated by Asarco's new
Amarillo refinery.
.Reasonable agreement with 1972 Census.
Cf. MA-200(73)-2, Expenditures for Pollution Abatement, U.S.
Department of Commerce Report, 1973.
eCf. Census Reports for Ore Mining and for Copper Smelting and
Refining (SIC 33).
SOURCE; Arthur D. Little, Inc. estimates.
IV-25
Arthur D Little Inc
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FIGURE IV-1
BEHAVIOR OF COMMON STOCK PRICES
to
,- S &P I ndex
SOURCE: Standard & Poor's
COPPER
ALUMINUM
METAL FABRICATING
INDUSTRIAL STOCK COMPOSITE
ISTOCR PRICE INDEXES
1941-1943-10
51 ! 52 '53 '54 '55 56
59 '60 '61 '62 '63 '64 '65 '66 T67 ; '68 '69 '70 ! '71 '72 I '73
'76 '77 '78 '79
D
CT
r^
-------
zero growth in earnings, one model of the cost of equity capital is the
reciprocal of the price-to-earnings ratio.
Copper issues sold at about ten times earnings in 1965 (or 60 percent
of the Industrial's P/E), and at about 6.2 times 1974 earnings (65 per-
cent of the Industrial's P/E); for 1975 the comparison was not easy
to establish because of several complicating developments with respect
to the copper companies, including consolidations, acquisitions, and
losses on operations for some companies.
In current dollar terms, these P/E relationships suggest a cost of new
equity capital in the range of 15 to 19 percent, consistent with data
and estimates of the cost of capital made by Pogue, and our own
estimates as explained formally in the Technical Appendix to this
report •
4. Lone-Term Debt and Trend in Debt-to-Equity Ratios
a. Term Structure of Debt for the Primary Nonferrous Metals Companies
The debt structure of the primary copper producers was studied along
with that of the primary lead and zinc companies, using data published
in the annual reports of the subject companies. This includes all
nine primary copper producers except the major oil companies Cities
Service and Pennzoil.
The long-term obligations of each company and its consolidated
subsidiaries are reviewed below in tables breaking debt down by
maturity and rate of interest. Wherever rates were not specified,
the amounts were placed in an interest category labeled "Other",
by year of maturity. Pollution control-related debt was identified.
Capitalized leases are included, as are sinking fund payments.
It should be noted that while reasonable care was taken in compiling
this data and presenting it in as consistent a fashion as possible,
we cannot guarantee absolute comparability from one company to the
next, due to differences in the nature of their debt, differences
in their accounting for certain balance sheet items, etc. To the
best of our knowledge, the data herein present a meaningful basis
for study and comparison.
Table IV-12—Total Debt of Primary Copper, Lead and Zinc Producers,
shows the debt and the debt repayment schedule as of December 31,
1974, for each of the companies and their consolidated subsidiaries.
IV-27
Arthur DLittldnc
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TABLE IV-12
TOTAL DEBT OF PRIMARY COPPER, LEAD AND ZINC PRODUCTS1
00
D
rV
^»
E
8
(millions
of dollars)
Repayment
Company
Asarco
Anaconda
Cyprus Mines
Copper Range
Inspiration
Kennecott
Phelps Dodge
Newmont
Amax
Gulf Resources
St. Joe
Engelhard
Total Long-Term Debt
NOTES AND SOURCES:
1975
18.2
16.8
1.5
1.4
5.9
8.8
2.4
13.0
2.3
8.4
2.9
1976
6.7
59.4
6.7
1.4
5.7
7.2
2.5
17.4
30.4
2.2
5.9
7.1
152.6
1977
4.7
8.4
11.5
2.7
5.7
6.4
27.5
20.8
13.8
2.1
4.1
4.7
112.4
Schedule
1978
8.4
19.6
10.9
2.7
6.2
4.2
52.5
24.8
63.7
6.8
2.7
3.4
205.9
1979
9.2
16.7
10.7
2.7
5.3
2.4
13.0
27.2
43.3
5.8
1.0
5.5
142.8
1980 &
Beyond
237.4
301.6
70.5
23.2
23.4
206.2
301.6
119.2
249.7
72.2
22.0
93.2
1,670.2
Sum=Total
Long-Term
Debt
12/31/74
266. 4d
405. 7C
110. 3e
32.7
46.3
226.4
397. lf
209.4
400.9
89.1
35.7
113.9
2,333.9b
Long-Term
Debt
6/30/758
285.3
476.4
115.0
32.7
43.3
443.6
525.4
256. Oh
545.2
72.4
35.6
113.6
2,944.5
Source: 1974 Annual Reports, SEC Form 10-K reports, and Arthur D. Little, Inc.
Does not include 1975 current installment of $81.6 million.
Capitalized leases account for $131.9 million of LTD.
Includes notes and debentures issued in January 1975 for $150 million.
Includes notes issued in January 1975 for $100 million.
Includes $70 million of indebtedness to finance air quality control facilities, incurred in January, 1975.
8Source; Company 1975 reports and Arthur D. Little, Inc.
*"irst quarter data.
Information used to prepare this table uas taken from sources believed to be reliable, but its accuracy and
completeness are not guaranteed.
-------
Table IV-13—Debt of Primary Copper, Lead and Zinc Producers by
Period of Maturity and Interest Rate (Percent), shows the total
debt by period within certain interest ranges. The "Other" category
was used for debt which rate of interest was unidentified.
Figure IV-2—Term Structure of Debt for Primary Nonferrous Metals
Companies, is a bar chart showing the amount of debt by interest
rate and the maturity periods for the companies listed.
Total long-term debt at year-end 1974 exceeded $2 billion, and debt-
equity ratios were approaching 30/70. The overall average for the
550 companies studied by Business Week showed a capital structure with
60 percent equity and 40 percent debt (long-term and short-term), as
of the end of March 31, 1975.
b. Review of Pollution Control Debt Issues
Table IV-14—Debt Allocated for Pollution Control Purposes, Including
Certain Capitalized Lease Obligations, shows the debt allocated to
pollution control by the subject companies. In 1974, about 14% of
the total debt was specifically earmarked for pollution control.
Variability in how companies report may understate the total debt
issues committed to pollution control. In any case, the total amount
has grown significantly since 1974.
• Inspiration Consolidated Copper Company carried long-term debt
of $33.2 million at December 31, 1974, used to finance construction
of pollution control facilities. Funds were obtained for this loan
from the sale by an Industrial Development Authority of tax-exempt
Pollution Control Revenue Bonds. The company has guaranteed the
Authority's payment of principal and interest on these bonds.
Interest is at 75 percent of the prime rate charged by The Chase
Manhattan Bank. As discussed in Appendix A, repayment was
scheduled in 36 quarterly installments of $900,000 and a final
payment of $800,000 on February 15, 1984.
• St. Joe Minerals Corporation and its consolidated subsidiaries
had a liability of $18.361 million as of December 31, 1974, with
respect to pollution control revenue bonds and entered into
agreements with the State Environmental Improvement Authority
(Missouri) and Beaver County (Pennsylvania) Industrial Development
Authority to make payments to trustees under installment sales
agreements sufficient (together with other available funds) to
pay all amounts due on the bonds. The bonds are subject to optional
redemption commencing in 1982 and mandatory redemption in 1988.
The proceeds from the sale of the bonds were to provide funds for
IV-29
Arthur DLittklnc
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TABLE IV-13
TOTAL DEBT OF PRIMARY COPPER. LEAD AND ZINC PRODUCERS8
BY PERIOD OF MATURITY AND INTEREST RATE (PERCENT)
(Millions of dollars)
Matures
1975-1979
1980-1984
1985-1989
1990-1999
2000 and
Beyond
Unknown
NOTES AND SOURCES:
4 - 5-7/8
$100.2
117.4
86.4
49.6
$353.6
6 - 7-7/8
$ 384.8
320.2
167.5
227.2
55.7
$1,155.4
8 - 9-7/8
$ 127.8
260.8
172.5
155.3
16.0
$ 732.4
10 and
Over
$ 82.5
19.4
$101.9
71.7
3.9
$2,415.5°
aSource: Arthur D. Little, Inc. estimates based on company 1974 annual reports
and SEC 10-Ks.
Other = Interest rate not indicated and, in some cases, final repayment date
not given.
CIncludes debt through January 1975, as given in annual reports.
Information used to prepare this table was taken from sources believed to be
reliable, but its accuracy and completeness are not guaranteed.
IV-30
Arthur D Little Inc
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<
700
600
500
400
300 u
200
100
FIGURE IV-2
TERM STRUCTURE OF DEBT'" FOR
PRIMARY NONFERROUS METALS
COMPANIES. INCLUDING ALLOWANCE FOR
SINKING FUND PAYMENTS. CAPITALIZED LEASES
- -(1) -tncludtng current
maturities of
$J78.5 million.
2000 & beyond
~>ebt Matures In: 1975-1979
Total ($ millions) $692
:'CRB ($ millions) 68
-------
TABLE IV-14
DEBT ALLOCATED BY PRIMARY COPPER. LEAD AND ZINC PRODUCERS FOR
POLLUTION CONTROL PURPOSES. INCLUDING CERTAIN LEASE OBLIGATIONS
(millions of dollars)
Period
1975 - 1979
1980 - 1984
1985 - 1989
1990 - 1999
2000 and Beyond
$317.9a
NOTES AND SOURCES:
ihe pollution control obligations of the copper, lead and zinc
companies was equal to about 14.0% of total debt at year-end 1974.
Information used to prepare this table was taken from sources believed
to be reliable but its accuracy and completeness are not guaranteed.
IV-32
Arthur D Little Inc
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the construction of pollution control facilities at St. Joe
Minerals' lead and zinc smelters. The debt at December 31,
1974, represents the amount of proceeds from the sale of bonds
applied to construction payments; the balance of the proceeds
is held and invested by the trustees pending disbursements and,
if not applied toward construction payments, is available to
service the bonds or to repay them in part.
• Newmont Mining's subsidiary, Magma Copper Company, had $30 million
of air pollution control bonds outstanding as of December 31, 1974,
payable at 3.67 percent + 50 percent of the difference between
prime rate and 5 percent payable 1975 to 1982.
• Asarco sold $10 million of Gila County, Arizona, pollution control
bonds in 1974, and indicated that it would seek additional pollution
control revenue bond financing. As of December 31, 1974, there
was $8.4 million of this long-term debt issue, with interest at
75 percent of prime, due in quarterly installments to August 31,
1982. The company's prospectus dated May 7, 1975, stated that it
was negotiating additional revenue bond financing for qualified
pollution control facilities. (By mid-1976 the amount so financed
was $50 million).
• Phelps Dodge as of December 31, 1974, had $135.782 million in
tax-exempt air quality control obligations due after one year.
In January, 1975, the Corporation also incurred $70 million of
indebtedness to finance the air quality control facilities at
its new Hidalgo smelter. The indebtedness bears interest at a
rate of 7.25 percent per annum. Principal payments are due in
1979 (15 percent), 1980 (15 percent), 1981 (30 percent), and 1982
(40 percent).
• Kennecott—see Appendix A.
• Anaconda financed the first stage of the installation of an acid
plant and related equipment at the copper smelter at Anaconda,
Montana, which was completed in 1973 at a cost of approximately
$21.1 million, by a leasing arrangement under which the County
of Deer Lodge, Montana, issued $17 million in tax-exempt bonds
and a third party invested the balance. The second stage, which
involves installation of an electric furnace and related control
equipment, is nearing completion7. Use of an electric furnace
is expected to substantially eliminate air pollution. Construction
funds for this stage are beind made available, up to an expected
IV-33
Arthur D Little Inc
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total of approximately $31.5 million, from working capital
and bank loans. Anaconda also installed a major pollution
control system in the course of construction of its aluminum
smelter at Sebree, Kentucky. Funds totaling $10.6 million
were made available for this project through a lease financing
with several large institutional investors.
c. Trends in Debt Ratio for Leading Nonferrous Metals Companies
The debt ratios computed for 12 primary copper, lead and zinc companies,
expressed as percent, were computed as follows:
D1 - Debt ratio (percent) = ( -., ) x 100, where
— Irrii
D = total long-term debt, excluding current installments
a
E = total shareholders' equity
Long-term debt for most of the companies whose financial results were
reviewed peaked in 1971 to 1973. By the end of 1974 the long-term
debt of nine of the 12 companies hit a three-year low, but by mid-1975,
several of these companies had large increases in their long-term
debt (Amax, Anaconda, Asarco, Cyprus Mines, Kennecott, Newmont, and
Phelps Dodge). Six of these companies each had long-term debt of
$250 million or more outstanding on June 30, 1975. The seventh,
Cyprus Mines, which in January, 1975, increased its debt by $100
million, had $115 million.
The long-term debt of the 12 companies increased from $1,224 million
at the end of 1970 to $2,014 million by December 31, 1974, and then
sharply rose to $2,944.5 million by June 30, 1975. In January, 1975,
three large debt offerings were made. Asarco issued $150 million in
notes and debentures, Phelps Dodge added $70 million to its long-term
debt, and Cyprus Mines issued $100 million of notes; of these new
additions, the $70 million was for Pollution Control Revenue Bonds.
Shareholders' equity rose from $5,665 million to $7,347 million from
December 31, 1970 through December 31, 1974 (30 percent), and by
June 30, 1975 was $7,458.9 million, up 1.6 percent from the December
amount.
The debt ratios of the companies studied appear in Table IV-15. The
percentage stayed fairly constant for some companies between 1970-1974.
The larger, Integrated companies showed more stable ratios than the
others. As we have shown in the footnotes to Table IV-15, Asarco's,
Cyprus Mines', and Phelps Dodge's ratios increased sharply in January,
1975.
IV-34
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TABLE IV-15
LONG-TERM DEBT OF TWELVE COPPER. LEAD. ZINC PRODUCERS5
1974
Amax, Inc. 261.5 392.0 457.4 440.7 400.9
Asarco 23.7 38.1 51.0 91.7 266.4b
Anaconda 366.5 391.5 388.9 379.3 405.9
32.7
110.3C
Engelhard 80.4 77.2 117.7 115.5 113.9
89.1
46.3
Kennecott 177.9 314.6 269.0 220.8 226.4
209.4
397.ld
35.7
1C.
I
lange
lines
•d
iources
;ion Consolidated
:t
Mining
lodge
Minerals
(millions of
1970
261.5
23.7
366.5
24.3
40.4
80.4
42.0
1.26
177.9
108.4
86.1
11.7
dollars)
1971
392.0
38.1
391.5
36.3
34.9
77.2
48.6
1.14
314.6
201.6
166.0
10.7
1972
457.4
51.0
388.9
35.0
22.4
117.7
53.1
19.1
269.0
224.0
181.3
34.7
1973
440.7
91.7
379.3
33.6
17.1
115.5
73.6
49.8
220.8
218.1
281.9
50.3
Total 1,224.2 1,712.6 1,853.6 1,972.4 2,334.1b'c'd
2,014.1 (year-end)
NOTES AND SOURCES;
3Source: Annual Reports, SEC 10-K's, S&P report, and Arthur D, Little, Inc.
Includes capitalized leases, convertible subordinated debentures, and
sinking fund debentures. Does not include current installment.
Includes $150 million notes and sinking fund debentures issued in early
1975.
cIncludes $100 million of notes issued in January 1975.
Includes $70 million of indebtedness to finance air quality control
facilities incurred in January 1975.
Information used to prepare this table was taken from sources believed to
be reliable, but its accuracy and completeness are not guaranteed.
IV-35
Arthur D Little Inc
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5. Indicators of the Ability to Attract Additional Capital
Table IV-16 presents long-term debt, long-term debt as percent of
invested capital, and shareholders' equity for leading nonferrous
metals producing companies, including aluminum producers, as of
June 30, 1975. Also shown are some indicators of ability to attract
additional capital.
Only four of the 16 companies had a capital structure that was
leveraged about equal to, or greater than, the overall average for
the 550 companies reported in the Business Week study mentioned
earlier.
Several nonferrous metals companies showed a decline in their pre-tax
interest coverage ratios from the average interest coverage ratio
pre-tax, 1965-1974. By March 31, 1975, Kennecott, Asarco, Anaconda,
and Fhelps Dodge each declined by about 80 percent of their previous
coverage as expressed by the ten-year average. Business Week reported
that interest-coverage ratio for the overall average of 550 companies
had slipped to 9.9, and that in the ten years past it was 18.5.
Only five of the twelve companies in the Table IV-16 had ratios of
ten or more.
During the first part of 1975, much of the United States economy, and
the nonferrous metals business, was still in the grips of the severe
recession which began in late 1973. Very few of the primary
nonferrous metals producers' share prices were selling above the
book value of the equity. This is shown in Table IV-16 and specifically
for the copper companies in Summary Table IV-3. Even if it had been
feasible during the generally poor business climate of 1975, equity
financing would have been painful when stocks were selling below book
value. On the other hand, given substantial discounts on productive
long lived assets with much greater replacement cost than their book
value, the shares of such companies have been sought in several cases
by acquisition/diversification-minded firms outside the industry.
The entrance of oil companies, mentioned earlier, is an example.
As far as financing new or incremental plant and equipment related
to copper production, then, these "outside" firms become new sources
of capital at a cost which is reflective of their own opportunity
costs or hurdle rates.
E. DESCRIPTION OF THE BUSINESS OF THE MAJOR COPPER PRODUCERS
Appendix A was prepared in conjunction with this section to highlight
the nature of each company's business and describe some of the pertinent
features of its operations. Additional information, in the form of
statistical data for the last five (or ten) years, is also presented.
The eleven companies described herein account for typically 95 percent
or more of United States mine output and refinery production.
IV-3 6
Arthur D Little Inc
-------
TABLE IV-16
LJ
NONFERROUS METALS
COMPANIES COMPARISONS
Long-Term Debt, Shareholders' Equity, and Indicators of
Aluminum Co. of America
Amax , Inc .
Anaconda
Asarco
Copper Range
Cyprus Mines
Engelhard
Gulf Resources
Inspiration Consolidated
Kaiser Aluminum
Kennecott Copper
Martin Marietta
Newmont Mining
Phelps Dodge
Reynolds Metals
St. Joe Minerals
12 Copper, Lead, Zinc
Companies
4 Aluminum Company s
Total
Long-Term
Debt
6/30/75
1,179.9
545.2
476.4
285.3
32.7
115.0
113.6
72.4
43.4
684.7
443.5
279.4
256.0
525 .4*
816.4°
35.6
2,944.5
2,960.4
$5,904.9
Long-Term
Debt as %
of Invstd.
Capital
6/30/75
42.7
36.1
27.8
24.8
27.7
26.2
20.0
39.9
26.3
46.1
23.6
32.2
28.7
37.0
50.2
9.7
MM
Share-
holders '
Equity
6/30/75
1,585.2
965.5
1,234.4
863.9
117.9
324.0
454.3
109.0
90.1
799.3
1,436.4
589.3
637.4
893.9
809.3
332.1
7,458.9
3,783.1
Ability to Attract Additional Capital
Stock
Price as
% of Book
Value,
Mid-1975
1.0
1.3
0.3
0.4
0.8
1.5
1.8
0.7
0.8
0.7
0.7
0.8
0.8
0.5
1.9
Av . Int .
Covge .
Ratio
Pre-tax
3/31/75
5.4
9.6
4.8
11.3
10. 7C
26.0
7.6
2.7
1.1°
4.4
10.4
6.8
8.0
5.3
3'3d
33. 9G
Av . Int .
Covge .
Ratio
Pre-tax
1965-74
5.4
9.1
20.5
48.9
28.5
5.4
-
-
3.2
75.4
8.3
-
18.7
2.9
40.9
S&P
Bond
Rating
A
A
A
A
A
BBBe
-
-
-
A
BBB
—
A+
B6
—
$11,242.0 MM
NOTES:
SOURCE:
"Includes $125M of offered notes in 1975.
Reflects restructure of the company's investment in a primary aluminum smelter and rolling
mill in Hamburg.
CDecember 1974 data.
Based on company's fiscal year end.
Subordinate debt rating.
Business Week Survey September 22, 1975; and Arthur D. Little, Inc.
-------
In general, with respect to primary copper production, Phelps Dodge
Is thought to be the lowest cost producer; Copper Range and Anaconda
the highest cost producers.
These three companies plus Inspiration Consolidated have a heavy
dependence on domestic production of copper In their operations, and
In terms of sales and earnings. On the other hand, Amax, Asarco,
Cities Service, Cyprus Mines, Newmont and Pennzoll are more diversi-
fied by lines of business and/or derive significant earnings from
Investment holdings In other companies, Including foreign mining
ventures.
Except for Cities Service and Pennzoil, the major influences on
sales and earnings, from the companies' viewpoints, are nonferrous
metals facilities operating rates and metal prices. These fluctuate
much more than annual consumption or demand. Metal prices reflect
the nature of the commodity markets, and the profitability of all
producers is most sensitive to changes in refined metal prices.
IV-38
Arthur D Little Inc
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CHAPTER IV
NOTES
1. Internal Revenue Code regulations governing the calculation
of the depletion allowance from mining operations are Involved
here: There is a provision for cost/profit allocation when
there is no established field or market price for captive
concentrates shipped from an area to a company's smelter. In
practice, there is considerable flow of concentrates (e.g.,
between one company's mines and another company's smelter),
and hence the field or market price may be easily established.
2. Cerro has a gross fabrication capacity for tubing, wire and cable,
and brass mills products of 350,000 tons/year (nearly 15 percent
of the total). General Cable was spun off from Asarco in 1967,
in connection with a consent decree arising from an antitrust
action. Other large independent capacity is represented by that
owned and utilized captively by General Electric Company and
the Western Electric subsidiary of American Telephone and
Telegraph Company.
3. See also, for example, U.S. vs. Kennecott Copper, in which
Kennecott was required to divest Okonite Company, an independent
wire and cable producer acquired in 1958; and "Dual Distribution",
Hearings before the Senate Subcommittee on Antitrust and Monopoly,
Committee on the Judiciary, September 15-17, 1965.
A. In 1975-1976, Continental Oil Company was considering a large
new copper mining development, with annual production on the order
of 100,000 tons per year. Conoco would have been the sixth
major oil company producer, although its entry would be as a
new producing firm, increasing the number of competitors.
Reportedly, weak copper prices have tabled this project.
5. Exxon also recently announced its direct interest in a large
ore body in Wisconsin, containing significant amounts of copper
and other mineral values. Exxon is studying the opportunity
to exploit this property.
6. See Arthur D. Little, Inc. (ADL), Econometric Simulation and
Impact Analysis Model of the U.S. Copper Industry. Technical
Appendix to Economic Impact of Environmental Regulations on the
U.S. Copper Industry (1976), Supporting Paper 3: "Analysis
of the Cost of Capital for the Primary Producers".
7. A major additional pollution control revenue bond financing
was completed by Anaconda more recently.
8. Note that if D' - _?_ , then Debt : Equity = -=-
- D+E ' ' 1J1*"-ujr E (1-D1)
IV-39
Arthur D Little Inc
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V. RELATIONSHIP TO THE WORLD INDUSTRY
A. INTRODUCTION
Although the United States is virtually self-sufficient in copper, the
United States copper industry does not exist in isolation from the rest
of the world. This chapter presents an overview of the United States
copper industry in world perspective, by reviewing comparative United
States and world pattern of copper consumption, production, capacity
and ore reserves, examining the structure of the United States and
world trade flows, and describing basic changes in the structure of
the world copper industry during the postwar period.
The United States, despite its declining share of total world con-
sumption and production, still accounts for 24 percent of total world
consumption and production, and over 18 percent of total world mine
output (22 percent of world refined copper output). The United States
also contains one-fifth of the world's copper reserves and other
resources, the distribution of which approximates the regional pattern
of present production, with two exceptions: South America has a larger
proportion of world copper reserves than of production, while the
opposite is true for Europe (defined more broadly to include U.S.S.R.
and Poland). Developing countries account for nearly 60 percent of
world copper reserves—more than 1.5 times their share of world output.
The United States, which has been nearly self-sufficient in copper
except in certain years coinciding with military developments or
unusual "demand-crunch" periods, is both a leading importer and
exporter of copper. Even after accounting for increased United States
import-dependence in the future, the United States is not likely to
be as vulnerable to international supply interruptions (via
cartelization, etc.) as would be Western Europe and Japan which are
highly import-dependent.
During the postwar period, significant changes have occurred in the
structure of the world copper industry. These changes are relevant
in examining the long-term economic implications of United States
environmental regulations affecting the copper industry. These changes
have taken two basic directions. First, the copper industry has become
not only more diversified geographically with the emergence of new
producing countries but also relatively less concentrated, as new firms
have entered the industry to expand the industry's production
significantly during this period. Second, the nationalization of
copper mining and processing operations in major copper exporting
V-l
Arthur D Little Inc
-------
developing countries has brought about a significant shift in ownership
patterns in the world copper industry in recent years. We believe this
has at least three major implications.
First, it could, over the long-run, lead to increased vertical
integration of copper production in the copper exporting developing
countries.
Second, it could strengthen the position of these countries in moving
towards the establishment of an International commodity agreement on
copper, based on a buffer stock arrangement, which would mean higher
but less volatile (i.e., more stable) world copper prices. A necessary
but not sufficient condition favoring such a development would be
healthy macroeconomic recovery and growth in the industrialized
countries, including the United States, combined perhaps with higher
production costs and a possible smelter capacity bottleneck in the
United States over particularly the period 1978-1983 brought about
both by environmental regulations (past and in the future) and by
the adverse macroeconomic conditions experienced in recent years which
have discouraged domestic capacity expansion.
Third, if worldwide macroeconomic recovery and growth—especially in
the OECD-European countries—continues at a relatively slow pace
during the next few years, such a shift in ownership patterns could
mean the continuation into the future of the currently prevailing
two-price system in the world copper market, the chief characteristic
of which is that the LME prices are below the United States primary
producers' prices. As noted in Chapter Vlll-Prices, this could
mean relatively low worldwide copper prices brought about by
continued high levels of production in the copper exporting developing
countries to meet their growing foreign exchange requirements. The
result would be much higher United States imports and a financially
precarious domestic copper industry during at least the next few
years, until self-correcting economic forces cause a reversal.
B. COMPARATIVE UNITED STATES AND WORLD TRENDS IN COPPER CONSUMPTION.
PRODUCTION. CAPACITY AND ORE RESERVES
The United States, despite its declining share of total world consumption
and production, still accounts for about 24 percent of total world
consumption and production, and over 18 percent of total world mine
output (22 percent of refined copper output). The United States also
contains one-fifth of the world's copper reserves. Copper production
worldwide is highly concentrated in a few countries. While the degree
V-2
Arthur DLiUtelnc
-------
of concentration in smelting is quite similar to that in mining,
concentration by country in refining displays a different pattern
where several leading industrial countries with very little or
no mine production, or even with very little smelter production, are
large copper refiners.
1. Comparative United States and World Consumption Trends
World consumption of refined copper was about 8.3 million metric tons
in 19741. Of this, United States consumption accounted for nearly
2.0 million metric tons or 23.5 percent. The United States share
of world consumption of refined copper dropped from 28.8 percent in
1963 to 23.5 percent in 1974, reflecting a relatively higher growth
in demand for copper in the rest of the world (Table V-l). Accordingly,
while refined copper consumption in the United States has increased by
only 1.90 percent per year during the 1963-1974 period (1.47 percent/
year over 1964-1974 and 3.39 percent/year over 1963-1974), world
consumption has recorded a substantially higher rate of growth at
3.81 percent per year over the sample period (3.34 percent/year
over 1964-1974 and 4.77 percent/year over 1963-1973).
As shown in Table V-2, fifteen countries accounted for 88.1 percent
of total world refined copper consumption in 1974, while these countries
produced only 53.6 percent of total world mine output of copper. When
the United States and the U.S.S.R. (two virtually self-suffient
countries) as well as Canada (a major exporter), are excluded, the
picture becomes substantially different: while the remaining twelve
largest consumers together account for 47.3 percent of total world
consumption of refined copper, their combined mine output amounts
to only 9.6 percent of the world total.
Although not shown in the accompanying tables, annual copper consumption
reported by Individual countries tends to be quite cyclical, particularly
in the United Kingdom, the United States, and West Germany. Year-to-year
changes of plus or minus ten percent are common and changes exceeding
20 percent have not been unusual. Cyclical downturns in some countries
tend to be offset by upswings in others. Even though this may serve
to smooth the trend in total consumption, copper production generally
tends to be more stable over time than overall copper consumption.
2. United States and World Production Trends
Analysis of world copper production trends in somewhat complicated by
the role of secondary copper and the difficulty of separating copper
of primary origin from that originating from scrap, especially after
the latter has been re-refined.
V-3
Arthur D Little Inc
-------
TABLE V-l
UNITED STATES AND
REFINED COPPER
WORLD COMPARATIVE
TRENDS IN
CONSUMPTION. 1963-1974
(thousand metric tons)
Years
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
U.S.
1590.0
1690.0
1845.6
2157.8
1797.5
1701.4
1944.3
1854.3
1830.5
2028.6
2218.6
1956.4
World
5519.3
5995.4
6193.2
6444.8
6194.8
6523.3
7148.0
7283.4
7309.9
7944.5
8791.6
8325.4
U.S. as
percent
of world
28.8
28.2
29.8
33.5
29.0
26.1
27.2
25.5
25.0
25.5
25.2
23.5
Average Annual
Compound Growth
Rate (Percent)
1963-1973
1964-1974
3.39
1.47
4.77
3.34
SOURCE; Metallgesellschaft Aktiengesellschaft, Metal Statistics
1963-1973 and 1964-1974. pp. 32-33.
V-4
Arthur DLittklnc
-------
TABLE V-2
REFINED COPPER CONSUMPTION AND MINE PRODUCTION OF COPPER.
Country
United States
Canada
Japan
Germany, FR
Belgium-Luxembourg
France
Italy
United Kingdom
Spain
Brazil
Australia
U.S.S.R.
Germany, DR
Poland
China, PR and North
Korea
Subtotal
World Total
NOTES: aCompone
BY FIFTEEN LARGEST CONSUMING
Consumption of
Amount
(thousand metric
tons)
1,956.4
270.1
831.0
731.0
; 178.2
414.2
308.0
496.9
143.9
162.0
121.6
1,170.0
105.0
150.0
h 300.0
7,338.3
8,325.4
Refined Copper
Percent (%)
23.5
3.2
10.0
8.8
2.1
5.0
3.7
6.0
1.8
1.9
1.5
14.1
1.3
1.8
3.6
88.1
100.0
COUNTRIES, 1974
Mine Production
Amount
(Copper content,
thousand metric
tons)
1,445.7
826.2
82.1
1.7
-
0.4
0.8
-
44.5
6.0
255.6
1,200.0
18.0
198.0
150.0
4,229.0
7,885.6
of Copper3
Percent (%)
18.3
10.5
1.0
-
-
-
-
-
0.6
0.1
3.2
15.2
0.2
2.5
1.9
53.6
100.0
ts may not sum up to the totals given due to rounding.
ellschaft Aktiengesellschaft, Metal
Statistics, 1964-1974,
62nd.
Edition, (Frankfurt am Main, 1975), various pages.
V-5
Arthur DLittklnc
-------
World production of refined copper in 1974 was approximately 8.9 metric
tons (smelter production about 7.7 million metric tons and mine
output about 7.9 million metric tons), as shown in Table V-3. The
United States accounted for 18.3 percent of mine output, 18.4 percent
of smelter output and 21.9 percent of refined production. The share
of the United States in world refined copper production dropped from
31.7 percent in 1964 to 21.9 percent in 1974 (Table V-4). During
the same period, United States smelter output share dropped from
25.4 percent to 18.4 percent, while United States mine output share
dropped from 23.8 percent to 18.3 percent. United States mine output
has grown at 2.48 percent per year over the 1964-1974 period (compared to
world average of 5.09 percent per year) and 3.54 percent per year over
the 1963-1973 period (compared to world average of 5.08 percent per year).
3. Distribution of Production and Capacity
At the mining level, copper output and productive capacity are highly
concentrated in a relatively few countries, with the United States
still as the largest single producer (Tables V-5 and V-6). The
United States has been the leading copper-producing country since
1883, except for 1934 when economic conditions adversely affected
domestic production. In 1974 the next five principal copper-producing
countries, in ranked order, were Chile, Canada, the U.S.S.R., Zambia
and Zaire. These countries, together with the United States, accounted
for 71.2 percent of total world mine output (1974). This reflects
only a slight downward shift in geographical concentration over the
previous decade, with the same six countries having accounted for
78.3 percent of total world mine output of copper in 1964. Chile,
Zambia, Peru and Zaire, which in 1968 formed the Conseil
Intergouvernemental des Fays Exportateurs de Cuivre (CIPEC), also
known as the Intergovernmental Council of Copper Exporting Countries ,
together account for about 30 percent of total world and mine production
in copper (Table V-6).
Among the more striking conclusions that can be drawn here are the
following:
• United States mine productive capacity (i.e., mine/mill capacity)
only slightly exceeds the estimated combined capacity of the
Sino-Soviet Block countries as a whole,
• about 80 percent of world mine productive capacity is located
outside the Sino-Soviet Block countries,
• Chile, Peru, Zambia and Zaire, original founders of CIPEC,
together account for about 30 percent of world capacity and
36 percent of total Free World capacity.
V-6
Arthur DLittklnc
-------
TABLE V-3
WORLD PRODUCTION OF COPPER, 1974*
(thousand metric tons)
Mine production Production of
Country Groups (copper content) Smelter Production refined copper
Amount
Total World 7,885.6
United States 1,445.7
Other America 2,042.6
Europe 322.1
f Asia 447.7
Africa 1,519.1
Australia and Oceania 439.7
Communist Block Countries 1,668.7
a
NOTES; Components may not sum up
Percent (%)
100.0
18.3
25.9
4.1
5.7
19.3
5.6
21.2
to the totals
Amount
7,733.6
1,424.2
1,518.6
538.1
970.4
1,411.7
195.6
1,675.0
given due to
Percent (%) Amount Percent (%)
100.0 8,851.5
18.4 1,938.3
19.6 1,241.7
7.0 1,447.4
12.5 1,608.2
18.3 1,051.8
2.5 189.6
21.7 1,914.5
rounding.
100.0
21.9
14.0
16.4
12.1
11.9
2.1
21.6
SOURCE: Metallgesellschaft Aktiengesellschaft, Metal Statistics 1964-1974, 62nd. Edition
(Frankfurt am Main, 1975),
-n
D
C
pp. 26-31.
-------
TABLE V-A
00
-n
c
r~
»•»
.t
R"
UNITED STATES
Years
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Mine
U.S.
1100.
1131.
1226.
1296.
865.
1092.
1401.
1560.
1380.
1510.
1558.
1445.
Aim WORLD COMPARATIVE TRENDS IN COPPER PRODUCTION: 1963-1974
(thousand of metric tons)
Production of Copper
(copper content) Smelter Production of Copper Production of Refined Copper
World
6
1
3
5
5
8
2
0
9
3
5
7
4624
4798
4962
5215
5057
5456
5951
6387
6473
7071
7591
7885
.3
.6
.7
.9
.6
.5
.2
.3
.9
.5
.4
.6
U.S. as
percent
of world
23.8
23.6
24.7
24.9
17.1
20.0
23.5
24.4
21.3
21.4
20.5
18.3
U.S.
1176.3
1214.2
1300.9
1330.3
782.3
1148.9
1438.3
1489.0
1360.8
1533.5
1582.1
1424.2
U.S. as
percent
World of world
4634.8
4851.4
5024.4
5167.0
4891.0
5507.8
5972.9
6309.5
6380.0
7003.2
7445.5
7933.6
25.4
25.0
25.9
25.7
16.0
20.9
24.1
23.6
21.3
21.9
21.2
18.4
U.S.
1709.5
1805.7
1942.1
1980.7
1384.9
1668.3
2009.3
2034.5
1780.3
2048.9
2098.0
1938.3
World
5399.7
5739.0
6058.5
6322.2
6000.5
6658.6
7199.8
7577.8
7377.8
8068.0
8497.3
8851.5
U.S. as
percent
of world
31.7
31.5
32.1
31.3
23.1
25.1
27.9
26.8
24.1
25.4
24.7
21.9
Average Annual
Compound Growth
Rate (Percent)
1963-1973
1964-1974
NOTES : a
SOURCE :
3.
2.
54
5
48 5
One metric ton (1,000
avoirdupois, where one
.08
-
3.01
4.85
.09 - 1.61 4.77'
kilograms) equals 1.102311 short tons (907.185
pound avoirdupois equals 0.453592 kilogram or
Metallgesellschaft Aktiengesellschaft
am Main, 1974), pp. 26-31; and Metal
2.07
4.64
•0.71 4.43
kilograms = 2000
453.5924 grams).
-
pounds
, Metal Statistics 1963-1973, 61st Edition (Frankfurt
Statistics
1964-1974
, 62nd Edir.
ion (Frankfurt am
Main,
1975), pp. 26-31.
-------
TABLE V-5
WORLD COPPER MINE PRODUCTIVE CAPACITY.
BY AREA AND
COUNTRY, 1974 AND 1975
Estimated Capacity
(thousands of short tons)
Area/Country
North America
United States
Canada
Mexico
Other
Total
South America
Chile
Peru
Other
Total
Africa
Zambia
Zaire
South Africa
South West Africa
Other
Total
Asia
Philippines
Japan
Indonesia
Iran
Other
Total
Oceania
Australia
Papua New Guinea
Total
Europe
TOTAL FREE WORLD
CAPACITY
SINO-SOVIET BLOCK
COUNTRIES
TOTAL
Dec. 31, 1974
1,920
1,020
95
10
3,045
1,000
245
15
1,260
850
625
200
35
80
1,790
265
85
80
5
100
535
285
200
485
365
7,480
l,836a
9,316
Dec. 31, 1975
2,050
980
100
10
3,140
1,000
245
15
1,260
850
625
200
35
120
1,830
280
75
80
5
110
550
275
200
475
375
7,630
l,880a
9,510
NOTES; a Actual mine production, from World Bureau
Commodities Research Unit Ltd. (1975), as
Mining Journal (March, 1976), p. 89.
Percent
(
Dec. 31, 1974
20.6
11.0
1.0
0.1
32.7
10.7
2.6
0.2
13.5
9.1
6.7
2.1
0.4
0.9
19.2
2.8
0.9
0.9
0.1
1.1
5.7
3.1
2.1
5.2
3.9
80.3
19.7
100.0
Breakdown
%)
Dec. 31, 1975
21.6
10.0
1.1
0.1
33.0
10.5
2.6
0.2
13.2
8.9
6.6
2.1
0.2
1.3
19.2
2.9
0.8
0.8
0.1
1.2
5.8
2.9
2.1
5.0
3.9
80.2
19.8
100.0
of Metal Statistics (1974) ai
reported in Enginnering and
Components may not sum up to the totals given due to rounding.
SOURCE; Phelps Dodge Corporation^ Arthur D. Little, Inc.
v_9 Arthur DLittklnc
-------
TABLE V-6
WORLD MINE PRODUCTION OF COPPER; FIFTEEN LARGEST
PRODUCING COUNTRIES. 1964 and 1974
(copper content)
Amount
(thousand metric tons)
Percent Composition
Country
United States
Canada
Chile
Peru
Zaire
Zambia
Republic of South
Africa
Japan
Philippines
Australia
Papua-New Guinea
Yugoslavia
USSR3
Poland
China, PR and North
Korea8
Subtotal
World Total
1964
1,131.1
441.7
621.7
176.4
276.6
632.3
61.3
106.2
60.5
106.3
-
63.2
650.0
13.4
83.0
4,423.7
4,798.6
1974
1,445.7
826.2
902.1
213.2
544.1
698.0
179.1
82.1
209.7
255.6
184.1
155.2
1,200.0
198.0
150.0
7,243.1
7,885.6
1964
23.6
9.2
13.0
3.7
5.8
13.2
1.3
2.2
1.3
2.2
-
1.3
13.5
0.3
1.7
92.2
100.0
1974
18.3
10.5
11.4
2.7
6.9
8.9
2.3
1.0
2.7
3.2
2.3
2.0
15.2
2.5
1.9
91.9
100.0
NOTES; aEstimates.
Components may not sum up to the totals given due to rounding.
SOURCE; Metallgesellschaft Aktiengesellschaft, Metal Statistics 1964-1974.
62nd. Edition (Frankfurt am Main, 1975), pp. 26-27.
V-10
Arthur D Little Inc
-------
• World capacity has remained practically constant during 1974-1975,
reflecting adverse market conditions.
Table V-7 gives a consolidated set of estimates of mine, smelter, and
refinery capacities compared with production for principal producing
countries. Mine production of copper for the United States and the
world in 1973 was at approximately 86 percent and 90 percent of the
respective estimated capacities. Values for operation of smelter
capacity were 87 percent for the United States and 89 percent for the
world. Capacity and production data for refineries are not strictly
comparable .
Most major copper mining countries are also major smelters and their
shares of smelter output (capacity) are broadly comparable to their
shares of mine output (capacity). However, Canada and to a much lesser
extent, Peru, and Australia have lower share of world smelter production,
compared to their shares of world mine production, while the reverse is
true for Japan and West Germany in particular (Tables V-7 and V-8).
Both of these countries significantly increased their percentage share
of world smelter capacity and production between 1964 and 1974. The
Philippines exports all of its production in the form of concentrates.
However, the degree of concentration in smelting by country is very
similar to that in mining, and, as was true for the latter, concentration
in copper changed very little over the 1967-1974 period, with the
exception of a significant increase in smelter production in Japan.
Concentration by country in copper refining, by contrast, displays a
different pattern, as shown in Tables V-7 and V-9. For example, several
leading industrial countries with little or no mine production, and
in many cases very little smelter production, are large copper refiners
based on imported smelted copper and scrap. The leading examples are
West Germany, Belgium-Luxembourg, and the United Kingdom, none of which
has either mine production or large smelter production. The United
States is the leading producer at all three stages. Japan, which
accounts for only 1.0 percent of world mine output, not only accounts
for 11.6 percent of world smelter output but also a similarly
significant 11.8 percent of world refined copper output. Unlike
Western European countries, Japan both smelts and refines most of
its copper imports.
4. The World's Copper Resources and Distribution of Ore Reserves
Whether the world's finite copper resources will soon be exhausted
is a question increasingly being raised as part of a general public
debate on whether the world is "running out" of both energy and non-
energy natural resources. In the case of copper, the question has
more recently taken a more serious tone in the light of the finding,
reported in the recent Leontief-United Nations study on the future of
the world economy, that the world demand for copper is expected to
V-ll
Arthur D Little Inc
-------
TABLE V-7
WORLD COPPER CAPACITY AND PRODUCTION. 1973
(thousand short tons)
Mine
Smelter
Refinery
Capacity Production Capacity Production Capacity Production
North America
Canada
United States
Other
Total
South America
Chile
Peru
Other
Total
1,000
2,000
100
3,100
900
270
30
1,200
899
1,718
97.
2,714
819
241
18
1,078
640
2,000
100
2,740
546
1,744£
2,371
650
148
5
803
660
50
40
750
548
1,868
58
2,474
457
43
32
532
Europe
U.S.S.R.
Other
Total
Africa
Zaire
Zambia
Other
Total
Asia: Total
Oceania: Total
World Total
800
640
1.440
550
870
360
1,780
680
490
8,690
772
611
1,383
530
840
290
1,660
1,300
220
772
991
,763
508
759
262
7,857
800
1.800
2,600
270
770
140
1,180
1,340
200
9,670
246
704
134
1,084
1,244
159
7.974
NOTES;aCapacity for many plants includes capacity for processing scrap, tabulated production, to the
.extent possible, is for primary materials only.
Includes equivalent capacity of direct-electrowinning plants bypassing smelting operations.
°Primary materials only.
SOURCE; U.S. Bureau of Mines, Copper, A Chapter from Mineral Facts and Problems, 1975 Edition, Preprint
from Bulletin 667 (1976), p. 4.
-------
TABLE V-8
WORLD SMELTER PRODUCTION OF COPPER:
PRODUCING COUNTRIES. 1964
Country
United States
Canada
Chile
Peru
Zaire
Zambia
Republic of South
Africa
Japan
Australia
Germany, FR
Spain
Yugoslavia
USSRa
Poland
China, PR and North
Korea3
Subtotal
World Total
NOTES: Estimates.
Amount
(thousand metric tons)
1964 1974
1,214.2 1,424.2
365.9 537.0
586.7 724.3
152.1 179.8
276.6 469.9
638.8 709.3
56.3 147.8
280.9 900.0
81.9 195.6
68.3 174.0
21.4 79.0
49.4 142.2
650.0 1,200.0
23.8 190.0
83.0 150.0
4,549.3 7,223.1
FIFTEEN
AND 1974
LARGEST
Percent Composition0
1964
25.0
7.0
12.1
3.1
5.7
13.2
1.2
5.8
1.7
1.4
0.4
1.0
13.4
0.5
1.7
93.8
1974
18.4
6.9
9.4
2.3
6.1
9.2
1.9
11.6
2.5
2.3
1.0
1.8
15.5
2.5
1.9
93.4
4,851.4 7,733.6 100.0 100.0
Primary copper only.
Components may not sum up to the totals given due to rounding.
SOURCE: Metallgesellschaft Akiengesellschaf t , Metal Statistics 1964-1974
62nd. Edition (Frankfurt am Main, 1975), pp. 28-29.
V-13
Arthur DLittklnc
-------
TABLE V-9
WORLD PRODUCTION OF REFINED COPPER: FIFTEEN LARGEST
PRODUCING COUNTRIES, 1964 AND 1974
Amount Percent Composition
(thousand metric tons) (%)
Country
United States
Canada
Chile
Zaire
Zambia
Japan
Australia
Germany, FR
Spain
Belgium-Luxembourg
United Kingdom
Yugoslavia
USSR3
Poland
China, RP and North
Korea
Subtotal
World Total
1964
1,805.7
370.1
277.9
140.2
497.1
341.7
101.7
324.7
46.7
275.0
224.9
51.9
750.0
36.6
110.1
5,354.2
5,739.0
1974
1,938.3
559.1
538.1
254.5
678.8
996.0
189.6
423.6
123.5
378.7
160.1
150.6
1,350.0
194.5
200.0
8,133.4
8,851.5
1964
31.5
6.4
4.8
2.4
8.7
6.0
1.8
5.7
0.8
4.8
3.9
0.9
13.1
0.6
1.9
93.3
100.0
1974
21.9
6.3
6.1
2.9
7.6
11.3
2.1
4.8
1.4
4.3
1.8
1.7
15.3
2.2
2.3
91.9
100.0
NOTES ; aEst imates .
Components may not sum up to the totals given due to rounding.
SOURCE: Metallgesellschaft Aktiengesellschaft, Metal Statistics 1964-1974
62nd. Edition (Frankfurt am Main, 1975), pp. 30-31.
V-14
Arthur DLittklnc
-------
increase by 4.8 times between 1970 and 20005. This same study, while
it points to the uncertainties of estimating both future stocks of
mineral resources and of future demands for minerals, asserts that
known world resources of metallic minerals and fossil fuels are generally
sufficient to supply world requirements through the remaining decades
of this century and probably into the early part of the next century".
A number of distinctions are necessary in discussing reserves .and resources
of a given metallic mineral. Reserves are discovered or undiscovered.
Discovered resources, in turn, consist of reserves, subeconomlc
resources, and resources that are not currently usable or recoverable
(i.e., mineral occurrences).
Copper resources, which comprise all the deposits from which a useable
mineral commodity can be extracted at present or will be in the future,
are present on all continents and on the ocean floor. Estimates of
both are invariably uncertain and rely on several complex assumptions
that cannot be discussed here. Based on available information the
world reserves of copper in ore have been estimated by the United
States Bureau of Mines at 450 million short tons of copper (Table V-10).
In addition, an estimated 1,600 million tons of copper is available
in other global resources, including copper contained in oceanic
manganese nodules. The United States accounts for 20 percent of known
copper reserves and of other copper resources. The reserve classification
includes all economically recoverable material in identified deposits.
The other resource classification applies on an approximately equal
division of deposits not yet discovered and to deposits from which
the copper is not now economically recoverable^.
Excluding deep sea resources, estimated at 400 million short tons of
copper , the amount of copper estimated to exist in the rest of the
world (i.e., outside the United States) comprises reserves of 360
million short tons and other resources of 880 million short tons.
Six countries—in order of quantity, Chile, Canada, the U.S.S.R.,
Peru, Zambia, and Zaire—account for 69 percent of the rest of the
world's reserves and 56 percent of other resources. Remaining reserves
are divided among many other countries including Australia and Papua
New Guinea, Finland, Iran, Japan, Panama, the People's Republic of
China, the Philippines, Poland, the Republic of South Africa, Sweden
and Yugoslavia.
The geographical distribution of reserves approximates the regional
pattern of present production, with two exceptions. South America has
a larger proportion of world copper reserves than of production, while
the opposite is true for Europe, defined more broadly to include U.S.S.R.
and Poland. Developing countries account for nearly 60 percent of world
copper reserves—more than 1.5 times their share of world output.
V-15
Arthur DLittleJnc
-------
TABLE V-10
WORLD COPPER RESERVES-RESOURCES
(millions of short tons of copper)
Reserves Other Total
North America:
United States 90 320 410
Canada 40 130 170
Other 20 30 50
Total 150 480 630
South America:
Chile 90 130 220
Peru 30 40 70
Other 10 70 80
Total 130 240 370
Europe:
U.S.S.R. 40 90 130
Other 20 40 60
Total 60 130 190
Africa:
Zaire 20 30 50
Zambia 30 70 100
Other 10 20 30
Total 60 120 180
Asia: Total 30 170 200
Oceania: Total 20 60 80
Sea nodules ™ 400 400
World Total 450 1,600 2,050
NOTES;"includes undiscovered (hypothetical and speculative) deposits.
SOURCE; U.S. Bureau of Mines, Copper, A Chapter from Mineral Facts
and Problems, 1975 Edition, Preprint from Bulletin 667
(1976) p. 5.
V-16
Arthur D Little Inc
-------
It has been estimated that about 67 percent of the reserves are in
currently producing mines, 13 percent in projects under construction,
and 20 percent in other deposits for which sufficient information
is available to assume with reasonable assurance that exploitation
is feasible under present conditions . The average grade is about
1 percent copper, although it ranges from 0.2 percent to almost 6
percent copper in individual deposits. The results also indicate
that the average ore grade of producing mines is likely to decrease
only slightly in the next 10-15 yearsl°.
It is extremely important to understand that reserves are not static
but change over time as a function of prices, amount of exploration
activity and technology. Prices, for example, directly affect the
stock of reserves, since the lower the grade of the ore and the higher
the cost of extraction, the higher must be the price for its recovery
to be profitable.
C. UNITED STATES AND WORLD TRADE PATTERNS IN COPPER
There is considerable International trade in copper in all forms: ores,
concentrates, blister, refined and fabricated products. Overall,
the exporting countries have increased their degree of vertical inte-
gration and now export refined copper. The entry of Japan as an
important importer (of concentrates, blister, and refined) has
resulted in great diversification of trading patterns in recent years
and a gradual decline in the absolute importance of trade in unrefined
compared with refined metal.
1. Main Directions of World Trade
The bulk of the world's copper exports is from the developing countries
to Europe, Japan and the United States, with smaller amounts from
Canada, South Africa and Australia. The United States and Western
Europe also export refined copper, but are net importers of copper
overall. About 25 percent of world copper exports in 1974 was in
the form of concentrates, 16 percent in blister copper and 59 percent
in refined copper^.
Trade in smelted copper has traditionally been mainly from Africa to
Western Europe and from Latin America to the United States.
Tables V-ll through V-13 convey a summary of world trade patterns in
copper.
Trade in concentrates flows mainly from the Philippines, Canada, Chile,
and Indonesia, to Japan. Many other small producing countries also
export to Japan. Most of the remainder flows from Chile, and several
small exporters to West Germany. Both Japan and Western Europe have
V-17
Arthur D Little; Inc
-------
TABLE V-ll
WORLD BUREAU OF METAL STATISTICS; WORLD FLOW OF UNWROUGHT COPPER—1974—MINE PRODUCTION
Thousand metric tons
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-------
TABLE V-12
WORLD BUREAU OF METAL STATISTICS: WORLD FLOW OF UHWROUGHT COPPER—1974—SMELTER PRODUCTION
Thousand metric tons
E U ROPE
AMERICA
ASIA
AFRICA
43 J
11
uv
tl
ai
»m
I
6
-------
TABLE V-13
WORLD BUREAU OF METAL STATISTICS; WORLD FLOW OF UNWROUGHT COPPER—1974—REFINED PRODUCTION
Thousand metric ton*
<
o
EUROPE
AMERICA
ASIA
AFRICA
• net
i mi
£',
TOTAL
1Q1M
W
*^>
IT
-------
smelting and refining capacity several times their mine output, and
import substantial amounts of concentrates and blister. In the past,
a significant portion of the output of the mines owned by private
international firms was sold to parent companies or affiliates of
the mining firms. However, this pattern has been changing with the
nationalization of the private firms in the CIPEC countries and the
assumption of the marketing function by the governments of these
countries.
The leading exporters of unrefined blister copper are Germany, (FR),
Chile, Peru, Zaire, and S.W. Africa.
The list of leading exporters of refined copper includes such countries
as Canada, Chile, United States, Zaire, Zambia, Germany, (FR), Belgium-
Luxembourg, Australia, the United Kingdom and Japan.
The leading exporters of refined copper all have diversified markets
but Belgium and Zaire export mainly to members of the EEC. Zambia's
major markets are the United Kingdom, countries in Continental Europe,
and since the mid-19601s, Japan. Canada's most important markets
are the United Kingdom and the United States, while Chile exports
mainly to Continental Europe. United States exports are highly
diversified but sales to Europe predominate.
West Germany imports all of its primary copper needs, a majority in
refined form. It is also one of the leading importers of scrap.
Neither Belgium nor the United Kingdom has very large smelter outputs
but the former is a large refiner based on imported blister and some
scrap, while the latter is also a large refiner based mainly on scrap
plus some imported blister. Belgium, however, exports much of its
refinery output while the United Kingdom requires large net imports
of refined copper. Refined imports supply three quarters or more
of the United Kingdom's primary copper consumption (smelted imports
supply the remainder), and slightly more than half of total copper
usage.
Other leading consuming countries in Europe, including France, Italy
and the Netherlands, import most of their refined copper requirements
in that form, supplemented by small local refined production from
scrap. Sweden is an important primary producer but also imports
refined metal.
Most of the copper exported by the developing countries is sold under
contract to smelters, refineries, or fabricators in the developed
countries. The pattern of world trade in concentrates tends to be
governed by long-term contracts which may call for deliveries over
V-21
Arthur D Little Inc
-------
periods up to 15 or 20 years, financial arrangements providing for
repayment of loans in concentrates, and ownership ties between the
mining and processing companies. Also, smelters are frequently
geared to processing particular concentrates.
Long-term contracts for the sale of concentrates or blister have
important advantages for both the mines and the smelters or refineries
with which they are negotiated. Smelters and refineries in Japan and
Europe which lack domestic sources of raw materials want to be assured
of raw material supplies; in the case of private or nationalized mines
that are not vertically integrated, long-term contracts for the sale
of concentrates are frequently important factors in the decision to
construct the
By contrast, trade in refined copper is for the most part based on
short-term contracts of one-to-twelve month duration. While more
competitive, it is also influenced by nonprice factors such as
ownership ties, technical assistance and marketing contracts, such
as that between Belgium and Zaire, and long standing buyer-seller
relationships. Ownership ties between producing and consuming
countries have been declining, and, even where they exist, governments
of producing countries have taken a more active role in marketing
and are attempting to diversify their markets. Other nonprice factors,
such as strikes, transportation problems, natural disasters in the
producing countries, and recessions in the consuming countries,
frequently affect the pattern of trade in refined copper. The bulk
of the world's refined copper is sold directly by the producers to
fabricators and semifabricators; only marginal amounts are sold through
the London Metal Exchange (LME) and the New York Commodity Exchange
(COMEX) J. The price for these transactions, however, is related by
some formula to a market price, usually the LME price.
Fabricators and semifabricators also tend to buy additional refined
copper from dealers or merchants. Merchants, in turn, deal extensively
with independent refineries which are not associated with large
integrated firms. They may buy scrap for sale to refineries and
purchase output from refineries not committed under contract for sale
to fabricators or for them to hold as stocks^.
Since the United States copper industry is generally more integrated
than in the rest of the world, merchants are somewhat less important
in the United States than abroad15.
V-22
Arthur D Little Inc
-------
It is difficult to measure the extent of vertical integration of primary
copper producers forward into copper fabricating. As a generalization,
primary producers in North America and Japan have important fabricating
operations, refiners in Europe are partially integrated forward, and
those in other producing countries have very little fabricating capacity.
Further, in general the structure of the copper consuming industries
appears to be broadly similar in all larger industrial countries.
In each major copper-using sector (rolling or brass mills, wire mills,
and foundries), national industries are characterized by a small number
of large firms and a much larger number of medium to small firms. The
larger firms in the United States and Japan are in many cases affiliated
with primary producers while some fabricators in the United Kingdom and
Continental Europe are affiliated with domestic refineries. The majority
of smaller fabricators in all countries appear to be independent or
primary producers. The Important point here is that a substantial
market for refined copper which exists in most industrial countries is
not captive to primary producers.
2. United States Trade Patterns
The United States is virtually or nearly self-sufficient in copper.
As shown in Table V-14, the United States has experienced a heavy
dependence on foreign sources of copper only in such years as 1950,
a Korean build-up year, or 1972, and extreme "demand-crunch" year.
Otherwise, net United States imports have remained well.,under ten
percent of total domestic consumption of refined copper
Nearly half of United States copper imports are in the form of refined
copper as shown in Table V-15 (from mainly Canada, Japan and Chile)
with smaller amounts Imported in the form of blister and cement
copper, or in the form of ore and concentrates .
Similarly, the bulk of United States exports is in the form of refined
copper (Table V-16). For example, in 1974 most of the United States
exports was destined to such.countries as Brazil, France, West Germany,
Italy and the United Kingdom .
In summary, although the United States has been nearly self-sufficient
in copper, except in certain years coinciding with military developments
or unusual "demand-crunch" periods, the United States is both a leading
importer and exporter qf copper. The impact of domestic environmental
regulations on the United States copper industry should therefore be
examined with close attention to their international economic impli-
cations, affecting the structure of the world copper industry,
international trade patterns, and the role of the United States in
the world copper industry.
V-23
Arthur D Little Inc
-------
TABLE V-14
TRENDS IN UNITED STATES COPPER CONSUMPTION AND TRADE. 1950-1975
D
ET
ro
Years
1950
1960
1970
1971
1972
1973
1974
1975
NOTES:
Total refined
consumption
1,424,434
1,599,700
2,043,303
2,019,507
2,238,867
2,437,048
2,194,168
1,536,694
Total imports of
refined and
unrefined copper
(copper content)
690,389
524,344
392,480
359,479
415,618
417,434
607,992
324,126
a Includes refined copper, ore and
(short tons)
Total exports of
refined and
unrefined copper
(copper content)
154,622
503,733
299,304
214,215
225,165
262,552
189,851
227,273
concentrate, blister
Net
Trade
(net imports)
535,767
20,611
93,176
145,264
190,453
154,882
418,141
Net trade as
Percent of total
refined consumption
37.6
1.3
4.6
7.2
8.5
6.4
19.1
96,853 6.3
and cement copper, matte and scrap.
Includes only refined copper, ore and concentrate, etc. (unrefined copper), and scrap; exclusive
of copper semimanufactures or manufactured copper products (e.g., plates, sheets, strips, wire, etc.).
SOURCES: U.S. Bureau of Mines: 1950: Minerals Yearbook. Vol. I, Metals and Minerals (Except Fuels). 1952,
pp. 360-371;
1960: Minerals Yearbook, Vol. I, Metals and Minerals (Except Fuels), 1962.
pp. 499-509;
1970: Minerals Yearbook. Vol. I, Metals. Minerals and Fuels, 1971, pp. 485-491;
1971-1975: Mineral Industry Surveys. Copper, in 1972, 1973, 1974 and 1975
(separate reports).
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TABLE V-15
UNITED STATES IMPORTS OF COPPER. BY TYPE, 1971-1975
(copper content, short tons)
1971 1972 1973 1974 1975
Refined
Ore and
Concentrate
Blister and
Cement copper
Matte
Scrap
TOTAL
SOURCE: U.S.
163,988
30,848
156,744
440
7,459
359,479
Bureau of
192,380
53,653
157,430
1,367
10,788
415,618
Mines, Mineral
201,513
42,135
154,104
746
18,936
417,434
Industry
313,568
53,422
207,828
1,944
31,230
146,807
64,879
88,949
9,093
14,398
607,992 324,126
Surveys, Copper in
1972, 1973, 1974 and 1975 (separate reports).
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TABLE V-16
UNITED STATES EXPORTS OF COPPER. BY TYPE. 1971-1975
(short tons)
Type 1971 1972 1973 1974 1975
Refined Copper 187,654 181,494 189,396 126,526 172,419
Ore, concentrates, etc.
(copper content) 8,126 26,231 30,870 21,983 9,853
Old and scrap 18,435 17,440 42,286 41,342 45,001
Ash and residues - 9,381 15,087 8,233 6,601
Pipes and tubes 1,249 1,142 7,744 6,738 2,200
Plates, sheets and
strips 287 279 474 793 186
Semi-fabricated forms
n.e.c. 7,746 6,299 7,431 8,332 9,517
Wire: Bare 1,925 2,767 5,196 5,632 3,720
Insulated 24,590 28,660 40,046 62,514 79,631
SOURCE; U.S. Bureau of Mines, Mineral Industry Surveys. Copper in 1972, 1973,
1974 and 1975 (separate reports).
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D. CHANGES IN THE STRUCTURE OF THE WORLD COPPER INDUSTRY
Significant changes in the structure of the world copper industry
have occurred during the postwar period. First, the copper industry
has become not only more diversified geographically with the emergence
of new producing countries but also relatively less concentrated, as
new firms have entered the industry to expand the industry's production
significantly during this period. World mine production of copper in
1973/1974 included substantial output from countries—such as Peru,
the Philippines, the Republic of South Africa, Australia, Papua-New
Guinea and Indonesia—which were not major sources in 1950. Further,
these new sources are not controlled by any of the major companies
which dominated the industry in 1950 (e.g., Anaconda, operating in
the United States, Mexclo and Chile; Kennecott, operating in the
United States and Chile; Phelps Dodge, operating in the United
States alone; Rhodesian Selection Trust, operating in what was then
known as Northern Rhodesia; Rhodesian Anglo-American, also operating
in Northern Rhodesia; Union Miniere, operating in what was then
known as the Belgian Congo; and International Nickel, operating in
Canada). Despite these changes, however, the industry remains
highly concentrated in the individual copper producing countries.
Second, the nationalization of copper mining and processing operations
in major copper exporting developing countries has brought about a
significant shift in ownership patterns in the world copper industry
in recent years. As the governments of these countries have exerted
increasing control over, and participation in, the production and
marketing of copper, the role of the international mining companies
in exploration and development has declined. This realignment in
ownership patterns has significant potential implications for the
future, involving prospects for cartelization and international commodity
stabilization agreements.
1. Changes in Ownership Patterns
Orris Herfindahl estimated that in 1947 four mining firms accounted
for about 60 percent of world output (excluding the U.S.S.R.) and eight
firms accounted for 77 percent of world output. By 1956 these percentages
had declined to 49 and 70 percent respectively^. All of these companies'
were privately owned and most of the stock was held by residents of the
United States, Canada and the principal Western European countries.
In 1974 the four largest private copper producers—Kennecott, Phelps
Dodge, Newmont and Anaconda—had majority ownership interest in 17 percent
of the free world mine copper output, and eight privately-owned companies
had a major Interest in about 28 percent of the free world mine copper
output . Ten other privately-owned companies are majority owners
of an additional 12.5 percent of the free world copper output
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The majority of wholly-owned government mining enterprises (e.g., in
Chile, Peru, Zaire, Zambia, Turkey, India, Uganda) accounted for
about 34 percent of the free world mine output in 1974. According
to Sir Ronald Prain, in 1970 about 43 percent of copper producing
capacity in the non-Communist world was owned in whole or in part by
governments^. Moreover, governmental ownership of the copper
industry is heavily concentrated in the copper exporting countries—
mainly the CIPEC countries. In some countries, including Zambia,
Mexico and Australia (Mt. Isa), large international mining companies
have reduced their equity holdings from a majority to a minority
position in recent years.
Mines in Chile, Zambia, Peru and Zaire were initially developed by
large foreign companies. In recent years, the governments involved
have exerted increasing control over, and participation in ownership
of, these mines. Nationalization of United States interests in Chile
began in 1967 when the Chilean Government took over a 51-percent
interest in the El Teniente mine of the Braden Copper Company, a
wholly owned subsidiary of the Kennecott Copper Corporation. In
1969 an agreement was reached between The Anaconda Company and the
Chilean Government whereby Chile acquired 51 percent of Anaconda's
Chuquicamata and El Salvador properties in 1970. Complete nationalization
of United States copper investments in Chile was a proclaimed objective
of President Allende, who was inaugurated in November 1970. He met
this objective during 1971, and nationalization continued to be the
policy of the military junta that took power in September 1973 .
Effective January 1, 1970, the Zambian Government acquired a 51-percent
interest in the Zambian copper industry. Anglo-American Corporation
and Roan Selection Trust, Ltd. (RST), owned the remaining interest and
operated the major copper mines. Over 80 percent of the shares of
RST were owned by United States interests. In 1973 the President of
Zambia announced measures that included the intent for Zambia to
assume complete ownership of the major mines and to establish a
marketing company for the sale of the copper produced. In 1974 the
Zambian government terminated both the management and the sales
contracts with the Anglo-American group and Amax, the former majority
owners (now 49 percent owners). In that same year the Peruvian
government nationalized Cerro de Pasco, the second largest copper
producer after Southern Peru Copper Company (which owns Toquepala
and Cuajone). The new copper refinery at Ilo is wholly government-
owned and operated. Finally, in 1975 the government of Zaire
renegotiated its technical assistance and sales agreements with the
Belgium firm SGM (an affiliate of Union Miniere) so that operations
and sales of Gecamines output are entirely under government control.
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To summarize, 21 private companies have a majority interest in mines
producing about 44 percent of total copper production in the market
economies (including Yugoslavia), and another 34 percent is produced
by majority-owned government enterprises in eight important copper
producing countries. Most of the remaining 22 percent is produced
by a fairly large number of privately-owned companies, some of
which have a minority government participation. Among the Sino-Soviet
Block countries, which account for slightly over 20 percent of total
world mine production (see Table V-6), 75 percent is produced in the
U.S.S.R. and most of the remainder in Poland, China and Bulgaria.
Majority private ownership in copper mines does not carry with it
full control over production and marketing. For example, although
the majority of Peruvian output is produced by a foreign-owned firm,
Southern Peru Copper Corporation (SPCC), Peru's mineral output is
marketed by MINPECO, a government agency. In all of the CIPEC
member countries—Chile, Indonesia, Peru, Zaire and Zambia—the
government exercises control over marketing and production in
accordance with CIPEC guidelines. Indonesia became a full member
in November 1975. (Australia and PNG are Associate Members of CIPEC
and are not bound by CIPEC's decisions). In 1974 the original CIPEC
members accounted for 38 percent of world mine copper production and
about 62 percent of world copper exports. If Indonesia and the new
Associate Members of CIPEC are included, these shares rise to 46
and 72 percent respectively.
2. Changes in Industry Concentration by Country25
The copper industry's worldwide geographical concentration is paralleled
by its industrial concentration. Both reflect the fact that most of
the world's copper is produced from low-grade deposits. Such deposits
can be exploited economically only on a large scale. Remarkable
changes have occurred during the postwar period in the structure
and ownership patterns of the world copper industry as described below.
• United States: A large portion of the copper in the United States
is produced by three companies—Anaconda, Kennecott and Phelps
Dodge—who account for 54.6 percent of total United States mine
production in 1974 (57.7 percent in 1973). Nine companies (i.e.,
Kennecott, Anaconda, Phelps Dodge, Magma, Duval, Cyprus, Asarco,
Copper Range and Inspiration) account for 91.5 percent of United
States mine production (87.2 percent in 1973). Most of the nine
companies also smelt all of their own output. Seven primary
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producers in the United States (i.e., Asarco, Kennecott, Phelps
Dodge, Anaconda, Magma and Inspiration) refine copper, accounting
for about 84 percent of United States refining capacity in 1974.
United States smelting and refining companies also process a
limited amount of foreign concentrates and imported blister copper.
As discussed in Chapter III, the structure of the United States
domestic copper industry has changed appreciably during the postwar
period, with the emergence of new companies, the growth of others,
and shifts in the degree of backward or forward integration of
various companies.
Canada: There are about 20 important copper mining companies in
Canada, with seven companies producing about 56 percent of the
total output in 1974. Only about 61 percent of Canada's mine
production was smelted in Canada in that year. However, Canada's
refining capacity was equal to about 75 percent of her mine output
in 1974. Canadian smelting, capacity is owned by four firms—
Falconbridge, Noranda, Hudson Bay and International Nickel (INCO).
Refining capacity is owned by two firms—Canadian Copper and INCO.
The structure of the copper industry in Canada has changed con-
siderably during the postwar period. INCO, whose production in
1955 accounted for 41.1 percent of the national total was
responsible for only 21.8 percent in 1975. Hudson Bay, whose
share of Canada's total mine production was 14.3 percent in 1955
claimed only 8.2 percent in 1975. Canadian companies that produced
no copper in 1950, but that had very substantial production in
1973, included Bethlehem Copper, Craigmont, Texasgulf, Gibralter,
Lornex, and Utah Mines Ltd.
Chile: In Chile the bulk of the copper is produced by mines
nationalized in 1972. Most of Chile's mine output is smelted
in Chile and about 60 percent of Chile's output is refined in
that country.
The Anaconda and Kennecott properties in Chile were taken over
by the Chilean government in two stages, first partially under
President Frei and then completely under President Allende.
Mine production has since been in the hands of the government-owned
Corporacion del Cobre, which thereby became the world's largest
single producer and seller of copper. In addition to the Anaconda
and Kennecott mines it also acquired the Andina mine developed
by Cerro Corporation in the late 1960's.
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Zambia: In Zambia all copper is produced by two mining companies,
Roan Consolidated and Nchanga Consolidated, owned 51 percent by
the government. Zambia has smelting and refining capacity for
nearly all of her mine output.
Zaire: In Zaire the government-owned mining company, Gecamines,
which took over the Union Miniere mines, produced 92 percent of
the mine output in 1974 with a small but growing output produced
by the Japanese firm, godimiza. Sodimiza ships concentrates,
but all of the Gecamines1 output is smelted and 45 percent is
refined in Zaire.
Peru: The Toquepala mine of the Southern Peru Corporation, in
which Asarco is the largest shareholder but in which Cerro-Marmon,
Phelps Dodge and Newmont also hold interests, currently accounts
for over half of mine and smelter production in Peru and this
proportion is expected to rise to 75 percent with the scheduled
full operation of the Cuajone mine in 1977. The remainder is
produced by government-owned mines and several small private mines.
By 1977 about half of Peru's mine and smelter production will be
refined in government-owned refineries. The Peruvian Government
through Centromin now operates the former Cerro properties which
in 1950 accounted for the bulk of Peru's total production.
Australia: In Australia 57 percent of the mine copper output
in 1974 was accounted for by the Mt. Isa mine, which is owned by
M.I.M. Holdings and in which Asarco has 49 percent interest.
Three mines, including Mt. Isa, produced 77 percent of total
output. Australia has smelter and refinery capacity for nearly
80 percent of its mine output.
South Africa: Nearly 85 percent of South Africa's mine copper is
produced by three private firms, owned largely by international
mining companies, Rio Tinto Zinc (RTZ), Newmont and U.S. Steel.
South Africa has smelter capacity for over 80 percent of her
mine output, but has refining capacity for less than half of her
mine output.
The largest South African production is from the Palabora mine,
which is controlled by Rio Tinto Zinc and in which Newmont is a
minority shareholder. Palabora had not been developed in 1950.
O'okiep, controlled by Newmont, the second largest South African
producer in 1973, was the principal source of the country's copper
production in 1950.
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• The Philippines: Philippine mine output is produced by six private
mining companies, one of which, Atlas Consolidated, produces about
40 percent of the total. There are no smelters or refineries
in the Philippines but one is in the planning stage.
9 Papua New Guinea (PNG): PNG's output is produced solely by the
majority foreign-owned firm, Bougainville Copper Ltd. (a subsidiary
of Conzinc Rio-Tinto which, in turn, is a subsidiary of RTZ). All
output is shipped abroad in the form of concentrates.
In addition, Indonesia has since 1972 entered the ranks of the copper
producers. Still further geographical diversification of copper mine
production is in prospect. The Iranian Government is bringing a very
large mine, Sar Chesmeh, into operation in 1977. Mexico's production,
which was 94,000 short tons in 1975, will be substantially increased
when the Carldad mine of Mexicana de Cobre is brought into production
in the course of the next two or three years. Further, a major copper
deposit has been identified in Panama, where the Panamanian Government,
in conjunction with Texasgulf, is now undertaking a feasibility study.
In conclusion, in spite of changes in ownership patterns, industry
growth and geographical diversification, copper mining and processing
in individual countries or areas remains characterized by a relatively
high degree of concentration. However, little can be concluded
a_ priori about possible implications of industry structure for industry
behavior and market competition without consideration of other market
forces that affect industry behavior. Factors of interest include the
extent of vertical integration into fabricating, the importance of
trade barriers and transportation costs as constraints to international
trade, entry conditions facing potential new producers, pricing
constraints imposed by secondary metal and the threat of substitution
away from copper, and government intervention in markets.
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CHAPTER V
NOTES
1. 1974 is the base year used In this study.
2. It should be noted that United States share of world production
in 1974 was affected by strikes. In 1973, when there were not
strikes, United States accounted for 20.5 percent of mine
production, 21.2 percent of smelter production and 24.7 percent
of refinery production.
3. During the November 17-19, 1975 meeting in Lima, Peru, the
four founding members accepted Indonesia as a full member and
Australia and Papua New Guinea as nonvoting associate members
(not subject to CIPEC control directives). The new membership
increases CIPEC participation in internationally traded copper
to more than 72 percent.
4. United States Bureau of Mines, Copper, a chapter from Mineral
Facts and Problems. 1975 Edition, Preprint from Bulletin 667
(1976), p. 4.
5. United Nations, Department of Economic and Social Affairs, The
Future of the World Economy, prepared by a research team led
by Anne P. Carter, Wassily Leontief and Peter Petri, Preliminary
(United Nations, 1974). p. 21.
6. Ibid.
7. United States Bureau of Mines, Copper (Mineral Facts and Problems),
op. cit., p. 6.
8. Ibid. The assigned 400 million short tons of copper in ocean
nodules can only be considered tentative until the data base
for this emerging resource is improved. Ocean nodules occur
in varying concentrations and tenor at many ocean sites. The
most valuable identified deposits are .within a belt in the
Pacific Ocean bounded by the Tropic of Cancer, the Equator,
the International Date Line, and the Central American coast
line. The nodules in this area lie on the bottom sediments in
water depths of about 15,000 feet. Although manganese is the
major metal constituent in the nodules, the principal metals
of economic interest are nickel, copper, and cobalt, which
have been reported to grade 1.3, 1.1, and 0.25 percent, respectively,
in some of the better deposits.
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NOTES
(Continued)
9. United Nations, Centre for Natural Resources, Energy and Transport,
"Recent Global Developments in the Mineral Sector", Natural
Resources and Energy. Vol. 1, No. 5 (April, 1977), p. 4.
10. Ibid.
11. Data are from Statistical Bulletin, 1975, CIPEC, Paris, 1976.
12. For example, the ability of Bougainville Copper Ltd. (BCL) to
negotiate long-term contracts for the sale of concentrates for
foreign smelters in 1969 played an important role in the ability
of the company to mobilize financing for the mine.
This and the following few points made here are drawn from an
unpublished manuscript by Raymond F. Mikesell, entitled "The
Nature of the World Copper Market for Copper" (Eugene, Oregon:
University of Oregon, June, 1974), pp. 5-6.
13. Refer to Chapter VIII for a discussion of the LME and the COMEX.
14. For a discussion of the role of merchants in the copper market,
see Ferdinand E. Banks, The World Copper Market: An Economic
Analysis (Cambridge, Massachusetts: Ballinger Publishing
Company, 1974), pp. 41-43.
15. Ibid.. p. 43.
16. These figures would be even less if we defined domestic copper
consumption to include directly consumed scrap.
17. Figures for 1974 were as follows: from Canada 118,431 short
tons; Japan 73,053 short tons; Chile 66,549 short tons. See
United States Bureau of Mines, Mineral Industry Surveys, Copper
in 1974 (April 8, 1975), p. 6.
18. Although some of this material enters the United States as imports,
it is held in "bond" only to be shipped abroad for further
processing. This historically has applied especially to unrefined
copper "imports" from Chile. Consequently, the import and export
statistics, thus subject to some degree of "noise", should not be
taken too literally.
In 1974 the major sources of United States Imports of copper,
by type, were as follows (copper content, short tons):
Ore and Concentrate: Blister;
(from) Canada 19,917 (from) Chile 65,093
Philippines 14,244 Peru 94,686
Republic of 37,211
South Africa
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NOTES
(Continued)
See United States Bureau of Mines, Mineral Industry Surveys.
Copper in 1974 (April 8, 1975), p. 6.
19. Ibid., p. 7.
20. Orris C. Herfindahl, Copper Costs and Prices; 1870-1957. published
for Resources for the Future, Inc. (Baltimore: The Johns Hopkins
Press, 1959), p. 165.
21. The eight companies are Anaconda, Asarco, International Nickel,
Kennecott, Mt. Isa, Newmont, Phelps Dodge and Rio Tinto Zinc
(RTZ).
22. These ten companies include Atlas, Freeport, Inspiration, Lornex,
rtoranda, Texasgulf, Cyprus, Duval, Palabora, and Copper Range.
23. Sir -P.onald Prain, Copper, The Anatomy of An Industry (London:
Mining Journal Books, 1975).
24. United States Bureau of Mines, Copper (Mineral Facts and Problems),
op. cit., p. 3.
25. This discussion draw, in part, upon Simon D. Strauss, "Competition
in the Nonferrous Metal Markets", Presentation before the Annual
Meeting of the American Institute of Mining, Metallurgical and
Petroleum Engineers, Atlanta, Georgia (March 9, 1977).
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VI. SUPPLY
A. INTRODUCTION
This chapter is devoted to the economics of the supply of copper and
forms the first in a series of three chapters covering, respectively,
copper supply, demand, and prices. This chapter attempts to convey
an understanding of a number of key aspects of the supply response of
primary copper producers and tries to highlight the central analytical
issues in studying the dynamics of copper supply quantitatively.
Accordingly, the remainder of this chapter is organized into four
sections. The first section discusses the sources of copper supply
and gives an overview of the long-run supply behavior of the primary
producers. This section contains a condensed exposition of the
fundamental principles and findings of the economics of exhaustible
resources which, of course, includes copper. The objective of this
section is to provide a general perspective for the following two
sections which are concerned with trends in capacity growth and costs
of production. The final section presents a critical review of
the analytical approaches used in the past in quantitatively studying
the supply side and notes, broadly, the methodological approach employed
in this study.
There are three major sources of copper: sulfide copper, oxide copper,
and scrap. Primary copper is mainly produced through the exploitation
of large, low-grade sulfide deposits. We expect sulfide reserves to
continue to play a dominant role in meeting growing demand in the
foreseeable future. At present, total United States copper reserves
comprise about one-fifth of total world reserves. Current production
is based principally on sulfide deposits.
In theory, the existing reserves will continue to be exploited as long
as the scarcity rent of the resource (i.e., market price minus extraction
cost) will grow at a rate approximating the interest rate (i.e., the
rate of social time-preference). Also, in principle, no high cost
deposit will be used until the low-cost resource is exhausted.
The supply of copper from the available reserves is characterized by
long adjustment periods. Typically, investments are large, have long
productive life-expectancy, and are perceived to be highly risky in
view of cyclical fluctuations in copper prices. Because of the
cyclicality of the copper industry, the threat of long-run substitution
from other materials, competition from both the secondary and foreign
producers plus other factors, investments are made with an expected
long-run target rate of return. This defines the industry's
"incentive price", that is, the price at which the firms would be
willing to stay in business over the long-run, where revenues are
sufficient to cover full costs, including a return on investments high
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enough to attract new capital. This is consistent with the hypothesis
that the long-run price of copper tends to equal the long-run
economic cost of copper or the price sufficient to induce continued
investment at all stages of production.
Of the four stages of primary copper production—mining, milling,
smelting and refining—, the smelting stage is, of course, the major
interest in this study. During the postwar period, domestic smelter
capacity growth has occurred mainly through incremental additions to
existing smelter operations, rather than the construction of new
"grassroots" (or greenfield) smelters.
The domestic copper industry is believed to have experienced sharp
increases in production costs in recent years because of a combination
of factors including declining ore grades, stagnant productivity, and
steep rises in energy and other factor costs, and pollution control
costs.
The quantitative analysis of the supply behavior of primary copper
producers has in the past been studied, such as in econometric models
of the copper industry, typically by taking the "supply curve" approach-
We find such an approach seriously deficient, in terms of its micro-
economic theoretical underpinnings, its ability to explain the adjust-
ment process in supply, through new capacity creation, and in terms
of the econometric difficulties typically encountered in supply function
estimation. In view of our serious reservations about the "supply
curve" approach, this study addresses the problem by simultaneously
considering market conditions, investment for capacity expansion,
production costs, and the industry's financial performance within an
integrated, unified framework. Such an approach captures the evolving
dynamics of supply behavior over time.
B. SOURCES OF COPPER SUPPLY AND LONG-RUN SUPPLY BEHAVIOR IN THE
UNITED STATES COPPER INDUSTRY
This section addresses four areas which provide the broad context for
the next two sections concerned directly with the pattern of smelter/
refinery capacity growth in the past and costs of copper production.
These four areas are the sources of copper supply, copper reserves,
the economic theory of exhaustible resources, and the observed long-run
supply behavior of the United States primary producers. Since,
these topics are not only highly interrelated but also quite broad,
an attempt is made here to touch only upon the most important points.
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1. Sources of Copper Supply
There are three major domestic sources of copper supply: sulfide copper,
oxide copper and scrap. Figure VI-1 depicts these three major supply
channels and the relationships among them.
Sulfide copper minerals form the bulk of the copper reserves in the
United States and are currently the largest source of primary copper
produced domestically. This production is achieved by the exploitation
of large, low-grade deposits on a large scale using the conventional
techniques described in Chapter II through a four-stage production
process, namely mining, milling, smelting and refining. As noted in
Chapter III, we expect sulfide reserves to continue to play a dominant
role in meeting the growing demand for copper.
Oxide mineral deposits represent a far less important source of primary
copper. The oxide copper reserves in the United States are quite small;
individual deposits tend to be spotty and smaller in size than the
sulfide deposits. In spite of this, the production'of copper from oxide
sources has recently increased significantly for two basic reasons.
The first, has been the availability of sulfuric acid in the West as
a consequence of air pollution control measures at the copper smelters
smelting sulfides. In the absence of nearby outlets for sulfuric acid,
the producers have used this acid for leaching available oxide ores,
mine dumps containing oxide minerals, mill tailings, etc. In this
manner, the producers have tried to dispose of the acid via recovering
additional copper. Second, at the same time, the technology of acid
leaching and the understanding of the leaching phenomena has increased
significantly in recent years. Over the next decade, we believe the
acid leaching- of oxides will continue to be practiced principally as
an acid disposal technique and will not represent an important new
source of copper supply. The reserves of oxide copper and the costs
of copper extraction are such that the use of discretionary acid
(produced from elemental sulfur) for the leaching of oxides will not
be economically justified.
Finally, scrap (copper-based and other than copper-based) as noted in
Chapter III, is a significant source of copper supply, accounting
for over 40 percent of domestic copper consumption; this ratio has
remained fairly stable in the past. To recapitulate, there are
two types of scrap: new and old. New scrap is that originating
in the manufacturing process and is recycled promptly. Old
scrap is that recovered from obsolete equipment (e.g., radiators,
wires, etc.). Copper obtained from scrap enters the supply stream
in two forms: as refined copper, in which case it becomes indistinguishable
from primary or mined refined copper, and in the form of scrap, which
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7
Imports
Sulf.de
Deposits
Oxide
Deposits
High-Grade
Scrap
Intermediate-Grade
Scrap
Mining
and
Milling
Leaching
and
Precipitation
Leaching
and
Electrowinnlng
High-Alloy
Scrap
Primary
Smelting
Primary
Refining
Secondary
Refiners
Fire
Refining
Refined
Capper
Directly
Uied
Scrap
Legend:
Main Flows
Minor (Negligible) Flows
Sulfuric Acid Flow
FIGURE VI-1 A SCHEMATIC FLOW DIAGRAM OF MAJOR SOURCES OF
COPPER SUPPLY IN THE UNITED STATES
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is used directly. The composition of the scrap has a major effect on
how it is recycled. High grade scrap can be recycled after only
melting and fire refining. Scrap containing precious metals
(e.g., electronic machinery and equipment) is usually refined electro-
lytically, either by the primary or the secondary refiners. High
alloy scrap (e.g., brass and bronze) is usually recycled back into
the same industry and relatively little of such scrap is refined.
Although the supply of secondary copper is inelastic, it is not
completely unresponsive to changes in price. The supply of new scrap
is particularly inelastic, whereas the supply of old scrap is less so.
If recycling is more broadly defined to include the recycling of the
products containing copper (e.g., auto parts, electric motors, etc.),
the supply of secondary copper may end up being somewhat more price
elastic than generally believed. This proposition, however, has not
been put to a rigorous test.
Other potential sources of copper in the future include native copper
deposits, such as in Michigan, and ocean nodules.
2. Copper Reserves
As noted in Chapter III, reserves are not static but change over time
as a function of prices, exploration activity and technology. Prices,
for example, directly affect the stock of reserves, since, all else re-
maining equal, the lower the grade of ore and the higher the cost of
extraction, the higher must be the price for its recovery to be profitable.
To recapitulate, copper reserves in the United States have been estimated
at about 90 million short tons of copper (metal content), with an
additional 320 million short tons in the form of "other" deposits,
including undiscovered (hypothetical and speculative) deposits. The
United States accounts for about 20 percent of known world copper
reserves and other copper resources. Five states—Arizona, Utah,
New Mexico, Montana, and Michigan—account for more than 90 percent of
the total domestic reserves. The average ore grade of the domestic
reserves held by such major producers as Kennecott, Phelps Dodge,
Anaconda, Magma range in the neighborhood of 0.70 - 0.80 percent
(refer to Table VI-1); the ore grade of the reserves at some currently
producing mines (e.g., Duval-Sierrita, Cyprus-Bagdad, etc.) falls well
below this range.
VI-5
Arthur DLittklnc
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TABLE VI-1
ESTIMATED RESERVES OF MAJOR UNITED STATES COPPER PRODUCERS
(End of 1976,
Company and Mine
Kennecott Copper Corp.
Utah Copper Division
Chino Mines Division
Ray Mines Division
Nevada Mines Division
The Anaconda Company '
Butte Mines
Berkeley Fit
Continental-North
Continental-Bast
Kelley
Steward (below 2,000
foot level)
Steward (additional
deposit)
Leonard (Minnie Healy
Horsetail zone)
Yerrington Mine
Ann Mason
MacArthur (1)
MacArthur (2)
Lyon
Bear
Phelps Dodge Corporation6
Magma Copper Corporation
Cyprus8
Duval Corporation
Esperanza
Mineral Park
Battle Mountain
Copper Canyon
Copper Basin
Sierrita
ASARCO Incorporated
Mission
Saeaton
Open Pit
Underground
San Xavier
Oxide Ore
Sulfide Ore
Silver Bell
White Pine1
Inspiration Consolidated
Copper Company
Inspiration Area Mines
Christmas Mines
Underground
Open Pit
Sanchez Mine
except as
Ore Reserves
(millions of
short tons)
2.759.0
1,573.0
428.0
667.0
91.0
2.754.3
1,597.3
68.4°
497.6
29.2
69.0
97.1
820.0
16.0
1,157.0
495.0
6.5
6.5
32.0
500.0
1.900.0
1.130.0
300.0
522.0
25.8
55.5
6.1
0.8
489.6
377.6
141.2
24.2
16.7
3.3
167.4
24.8
90.3
HA
HA
HA
HA
HA
otherwise noted)
Amount of
Grade of Copper
(I)
_
0.71
0.74
0.79
0.67
_
—
1.23
0.49
0.40
0.87
0.67
0.74
1.90
.
0.40
0.44
0.42
1.22
0.40
0.78
0.76
0.49
_
0.42
0.29
0.59
1.04
0.32
-
0.73
0.70
1.23
1.04
0.52
0.66
1.17
NA
HA
NA
NA
NA
Recoverable
Copper
(thousands of
short tons)
16.200.0*
9,500.0
2,300.0
3,900.0
500.0
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
HA
NA
NA
11.500.0
7.050.0
NA
NA
NA
NA
NA
NA
NA
NA
HA
NA
NA
HA
HA
NA
NA
1.455.9
913.0
283. B
116.2
142.9
Cities Service Company1 350.0
0.44
1.250.0
VI-6
Arthur D Little Inc
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NOTES;
aDoes not include copper producible through leaching of waste dumps.
Subsidiary of Atlantic Richfield Company. The estimates refer to
July 1, 1976 and are obtained from The Anaconda Company, Notice of
Special Meeting of Shareholders (September 15, 1976), pp. 64-70.
°Excludes an additional, almost continguous, 41.1 million short tons
deposit which remains inadequately sampled and the ore grade for
which is not known.
Excludes data for Anamax Mining Co., under equal partnership with
Amax, Inc.
ePhelps Dodge does not give detailed information on its reserves; the
ore grade, not available for 1976, refers to 1974.
Wholly-owned subsidiary of Newmont Mining Corporation; the figures
refer to 1974.
glncludes only the year-end reserves reported for Cyprus Bagdad
Copper Company, a wholly-owned subsidiary of Cyprus.
Wholly-owned subsidiary of Pennzoil Company.
''Wholly-owned subsidiary of The Copper Range Company; the reserves
refer to copper sulphides and native copper ore.
JData refer to 1974.
SOURCES;
Corporate Annual Reports; 10-K forms submitted to Securities and
Exchange Commission; Arthur D. Little, Inc., estimates.
VI-7
Arthur D Little Inc
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3. The Economics of Exhaustible Resources: Copper Supply and Prices
in Theoretical Perspective
We present below a review of the main principles and findings of
the economics of exhaustible resources in order to provide a perspective
in understanding the supply behavior of copper producers.
The fast-growing literature on this subject is traceable to Hotelling's
classic 1931 article*-. In this article, Hotelling presented an
extensive study of the economics of exhaustible resources. Using a
rigorous mathematical framework, he studied the conditions for the
optimal exploitation of a resource and the utilization of the tax
structure in controlling the extraction rate of a resource.
Hotelling's article spurred more recent studies, focusing mainly on
the economics of renewable resources. The last decade has been
particularly productive in the sense that there have been many
significant contributions.
According to the fundamental theory of exhaustible resources as
originally derived by Retelling, the scarcity rent of the resource,
which is the market price of the resource less extraction costs, would
increase at the rate of interest. At the depletion time, the market
price must be equal either to the zero demand price (Herfindahl2) or
the cost of a perfect substitute (Nordhaus3). assuming no adjustment
costs in switching to the substitute (Hanson4). The substitute may
be defined in terms of "backstop technology"—to use a phrase given
prominence by Nordhaus3 to describe the case where, if the society
is willing to pay the price, significantly higher cost deposits can
be tapped to replace the lower cost deposits currently used (e.g.,
the extraction of oil from shale serves as a backstop against the
exhaustion of conventional oil deposits).
The fundamental principle of the economics of exhaustible resources
is, as Solow has argued, simultaneously a condition of flow equilibrium
in the market for the ore (which Hotelling had in mind) and of asset
equilibrium in the market for deposits5. Do these flow and asset
equilibrium conditions have any explanatory value, for example, with
respect to the long-run supply and pricing behavior of the producers?
Even though the answers are quite aggregative (or too general) or
even unclear, they provide instructive insights.
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Arthur D Little Inc
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The flow equilibrium isgthat the net price (or marginal profit) should
be rising exponentially , at a rate approximating the rate of social
time-preference (i.e., the rate at which society would evaluate trade-
offs in consumption between different periods). If the net prices are
considered or expected by the producers to be rising too slowly, mine
owners will conclude that resource deposits are an inferior way to hold
wealth, relative to other assets they could hold, and will pull out.
They may do so by increasing current production and convert ore into
money. This would drive down copper prices, moving down along the
demand curve. If there is an initial disequilibrium (such as there
exists currently), this will be worsened to the extent that expectations
about future price changes are conditioned by today's events. The
market, in other words, is unstable. If, conversely, the producers
believe the rate of net price increase exceeds the interest rate and,
consequently, withhold supplies from the market, this may lead to a
speculative run-up of prices which, like its opposite, is self-
reinforcing. In short, initial disequilibrium, however described,
becomes magnified, with production tilting either toward excessive
current production or toward speculative withholding of supply.
However, to the extent that longer-run prospects have some bearing
on today's events, the instability just alluded to becomes dampened.
Nevertheless, the answer is not clear over the long-run, since many
complicating factors may arise affecting the volume of reserves, 7
competition from new materials or the development of new technologies .
A further point concerns the optimal rate of exploitation of an
exhaustible resource, such as copper. In this respect:, ignoring
details, Solow finds amusing the conclusion emerging from the theory
of extractive resources that a monopolist will exhaust a mine (a
resource) more slowly than will a competitive industry facing the same
demand schedule. The amusing aspect of this is that if a conservationist
is someone who would like to see resources conserved beyond the rate
that is possible under a perfectly competitive market, then the
monopolist is the conservationist's friend8. This is because, in
economic theory, a monopolist restricts output to maximize profits,
which results in lower output and higher prices than would hold under
perfect competition. According to this theory, a monopolist in an
extractive industry would maintain higher prices for virgin materials
than would otherwise occur in a perfectly competitive market and would
thus act as a conservationist, slowing down the depletion of virgin
materials and inducing recycling via the umbrella of his higher prices.
VI-9
Arthur DLittklnc
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This brings up two additional points, the first relating to the
exploitation of a resource with a differential quality of deposits
(i.e., ore grade differences exist). The other has to do with the
supply behavior of the primary producers in the presence of recycling.
Solow and Wan studied the first question through the use of an
aggregative model and concluded that it is not optimal to use any
high-cost resource until the low-cost resource is exhausted. On the
related question of the largest sustainable constant level of
consumption, their striking finding is the suggestion that relatively
large changes in resource availability generate very small changes in
the sustainable level of consumption .
On the second question (i.e., the relationship between production from
a resource pool and recycling) can be cited an analysis by Gaskins of
Alcoa as a monopoly with an inexhaustible supply of mineral deposit
facing competition only from recycling10. Although not applicable to
the copper industry, Gaskins concluded that it would pay the monopolist
to limit production and keep prices high initially and then to expand
production as recycling increased.
4. Long-Run Supply Behavior in the United States Copper Industry:
An Overview
As noted in Chapter IV—Financial Characteristics of the United States
Copper Industry and the Principal Companies, given access to ore
bodies, investments required in the copper industry are quite sizeable,
as this is a rather capital intensive industry. These investments
are long-term in nature; a good-sized copper mine and a corresponding
mill would be developed not for a few years' production but quite
possibly to produce for decades. Investment in a new smelter or
refinery would not take place in isolation but would be linked to
future mine and mill production expectations. Thus, investments are
interrelated in the industry, at different stages of production, both
functionally and temporally. Also, in the face of a great deal of
uncertainty surrounding copper prices stemming mainly from the industry's
cyclicality and the consequent fluctuations in prices, long-term
investments in the copper industry are highly risky. Further, ore
bodies frequently involve lead, zinc, silver and/or other metals of
potential interest in addition to copper. Because of these reasons,
the interests of the companies in the nonferrous metals industries
are frequently intertwined, in terms of buyer-seller relationships
(e.g., smelting/refining services) or joint investments. Joint
ventures, which constitute a means of diversification and pooling of
risks, have consequently become quite common in the industry.
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Arthur D Little Inc
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The scale of investments, the long-term nature of the investments,
the element of risk arising from the industry's cyclicality (not to
mention competition offered by both the secondary and foreign
producers, or the threat of long-run substitution for copper by other
materials, and the pooling of risks through joint ventures all suggest
that the primary producers have basically a long-term orientation
in their pricing and investment decisions. This suggests that their
investment decisions, leading over time to the creation of new pro-
ductive capacity to supply anticipated future consumption levels, are
motivated by an expected long-run target rate of return on investment
defining their ex ante "incentive price" (i.e., the price at which
the firms would find it profitable to stay in business over the long-
run, where the revenues are sufficient to cover full costs, including
a return on investments high enough to attract new capital).
C. CAPACITY GROWTH TRENDS
This section discusses domestic capacity growth tends in copper
industry, with principal emphasis on smelter/refinery capacity growth.
Given this study's overall purpose, primary focus is placed on
patterns of growth in smelter capacity. The important point to note
here is that historically domestic smelter capacity growth has
occurred mainly through incremental additions to existing smelter
operations, rather than the building of new "grassroots" (or green-
field) smelters, i.e., smelters in new locations.
1. Smelter Capacity Growth Trends
Traditionally, smelters have been situated near the mines in order to
minimize transportation charges for concentrates. With the major copper
mines centered in the Western states, most of the smelting capacity is
in that area. In 1974, out of 18 operational smelters (two of these
owned and operated by secondary refiners), 13 were located west of
the Mississippi. The 13 western smelters are operated by five of the
six integrated companies (Kennecott, Fhelps Dodge, Anaconda,
Inspiration, and Magma) who mine a major portion of their respective
smelter input, and by Asarco, a major portion of whose input comes
from ores mined by other companies.
Since 1974, Phelps Dodge has commissioned a new smelter, the Hidalgo
smelter in New Mexico, with an annual capacity of about 400,000 to
500,000 tons of material. In addition, two existing smelters, Anaconda
and GarfieId have undergone substantial process changes.
The capacity of a smelter is normally expressed in terms of the quantity
of material treated, assuming a smelter opration rate of 24 hrs/day 350
days/year at full design capacity. This is because the bottlenecks in
smelting (materials handling, heat input rate, etc.) place an upper bound
on the total quantity of material that can be handled, irrespective of the
copper content of this material. Thus, although the quantity of input
(feed or charge) materials handled and refined-equivalent smelter output
would normally vary linearly, a smelter's output can be increased by
VI-11
Arthur D Li ttklnc
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increasing the copper content of the material smelted. Alternatively,
capacity at an existing smelter can be expanded by the addition of new
equipment to eliminate the bottlenecks.
Tables VI-2 and VI-3 show smelter capacity growth trends over the period
1950-197511 in terms of the quantity of feed materials. So defined,
smelting capacity during the past two and one-half decades has never been
as great as it was at the beginning of the 1950s. In spite of an ex-
pansion of capacity in the late 1950s and early 1960s, by 1967 capacity
had declined to a level only slightly above that existing in 1953. During
the following eight yeras total capacity fluctuated sharply, but by
1975 was only 300,000 tons (or 3.5 percent) greater than that existing
in 1953. During the same period (i.e., 1953-1975) smelter output of
blister copper increased by about 40 percent. This increase was
achieved by improved beneification techniques which increased the copper
content of concentrates and also because of improvements in reverb
smelting technology.
2. Refinery Capacity Growth Trends
The major portion of the smelter output of blister copper is electro-
refined. Copper electrolytic refineries have traditionally been
located near consumers on the Atlantic Coast. More recently, several
refineries have been built in the West and several old East Coast
refineries have been shut down. A smaller portion of smelter output
is fire refined, principally in New Mexico and Michigan.
The capacity of an electrolytic refinery can be changed by altering
operating conditions but there is usually a trade-off involved.
For example, capacity can be increased by increasing current density
but at the cost of higher energy consumption and higher impurity carry
over to the product.
The growth pattern in dome tic refinery capacity over the period 1958-1975
is shown in Table VI-4. Overall, refinery capacity expanded by about
38 percent over the 1958-1975 period. Unlike the fluctuating growth
trend in smelter capacity, net changes in refinery capacity have been
positive with the exception of two years, 1962 and 1972. The figures
in Table VI-4 indicate how responsive producers have been to general
conditions in the business cycle and the demand cycle for copper, with
the bulk of refinery capacity expansion occurring in response to
business expansion and rising copper demand over the period 1964-1970.
Prior to 1971, most of the capacity expansion was in the form of
additions to existing plants; no new plants were built in the United
States during the period 1959-1971. In 1971, however, Magma opened
a new 200,000 annual short ton refinery in San Manuel, Arizona. By
1973, three secondary refiners—Chemetco, Reading, and Southwire—had
VI~12 ArthurDLittlelnc
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TABLE VI-2
GROWTH OF UNITED STATES COPPER SMELTING CAPACITY
1950-1975
(short tons of material; end-of-year figures, as reported
by American Bureau of Metal Statistics, Inc.)
Year
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Smelting
Capacity
9,551,000b
9,653,000b
9,653,000b
8,318,000
8,368,000
8,348,000
8,225,000
8,415,000
8,600,000
8,600,000
8,600,000
8,700,000
8,623,000
8,423,000
8,423,000
8,371,000
8,371,000
8,383,000
9,079,000
8,689,000
8,704,000
8,821,000
8,521,000
8,496,000
8,626,000
8,611,000
Change in
Smelting
Capacity
_
102,000
0
-1,335,000
50,000
-20,000
-123,000
190,000
185, 000 j
0
0
100,000
-77,000
-200,000
0
-52,000
0
12,000
696,000
-390,000
15,000
117,000
-300,000
- 25,000
130,000
- 15,000
Change in
Smelting
Capacity due
to new Plants
-
0
0
0
0
0
70,000B
0
400,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Change in
Smelting
Capacity due
to Expansion
(Contraction)
of Existing Plants
-
102,000C
0
-l,335,000d
50,000e
-20,000f
-193,000h
190,000*
-215 .OOO3
0
0
ioo,oook
-77, OOO1
-200,000m
0
-52,000n
0
12,000°
696,000P
-390,000q
IS.OOOr
s
117,000
-300, OOO*1
- 25,000U
v
130,000
- is;ooow
VI-13
Arthur DUttlelnc
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NOTES;
a
Excludes producers of Lake Copper.
b
Includes the capacity of the Fhelps Dodge Corporation, United Verde
Branch, Clarksdale, Arizona, smelter (1,400,000 short tons of annual
capacity) which closed down June, 1950.
Q
Expansion in the capacity of Kennecott Copper Corporation, New Mexico
plant at Hurley, New Mexico (from 288,000 to 400,000 short tons),
minus the contraction in the capacity of the Kennecott Copper Corpora-
tion, Nevada plant at McGill, Nevada (from 450,000 to 440,000 short
tons).
Expansion in the capacity of the American Metal Company, Ltd., Carteret,
New Jersey smelter (from 200,000 to 265,000 short tons) minus the shut-
down of the Phelps Dodge Corporation, United Verde Branch, Clarksdale,
Arizona smelter (1,400,000 short tons annual capacity), which closed
down June, 1950.
8Expansion in the capacity of the American Smelting and Refining Company,
El Paso, Texas, smelter (from 300,000 to 350,000 short tons).
Contraction in the capacity of the American Metal Company, Ltd.,
Carteret, New Jersey, smelter (from 265,000 to 245,000 short tons).
o
The new San Manuel Copper Corporation, San Manuel, Arizona, smelter,
a wholly owned subsidiary of Magma Copper Company.
Expansion in the capacity of the American Smelting and Refining Company,
El Paso, Texas, smelter (from 350,000 to 400,000 short tons) minus
the contraction in the capacity of the following smelters:
Asarco, Garfield, Utah (from 1,608,000 to 1,440,000 short tons).
Asarco, Tacoma, Washington (from 675,000 to 600,000 short tons).
Expansion in the capacity of the San Manuel Copper Corporation, San
Manuel, Arizona, smelter (from 70,000 to 360,000 short tons) minus
the contraction in the capacity of the Magma Copper Company, Superior,
Arizona, smelter (from 250,000 to 150,000 short tons).
The new Kennecott Copper Corporation, Ray Mines Division, Hayden,
Arizona, smelter (400,000 tons annual capacity) minus the contraction
in the capacity of the smelting facilities at Garfield, Utah, purchased
by Kennecott Copper Corporation from American Smelting and Refining
Company (from 1,440,000 to 1,225,000 short tons).
k_
Expansion in the capacity of the following smelters:
Asarco, El Paso, Texas (from 400,000 to 420,000 short tons).
Asarco, Hayden, Arizona (from 300,000 to 360,000 short tons).
Tennessee Copper Company, Copperhill, Tennessee (from 70,000 to
90,000 short tons).
Contraction in the capacity of the American Metal Climax, Inc.,
Carteret, New Jersey, smelter (from 245,000 to 168,000 short tons).
VI-14
Arthur D Little Inc
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mShutdown of the Phelps Dodge Refining Corporation, Laurel Hill, New
York smelter (200,000 short tons annual capacity).
"Expansion in the capacity of the following smelters:
Asarco, Hayden, Arizona (from 360,000 to 420,000 short tons).
Inspiration Consolidated Copper Company, Miami, Arizona (from
360,000 to 450,000 short tons).
Magma Copper Corporation, San Manuel Division, San Manuel,
Arizona (from 360,000 to 403,000 short tons).
Kennecott Copper Corporation, Ray Mines Division, Hayden,
Arizona (from 400,000 to 420,000 short tons).
Minus the contraction in the capacity of the following smelters:
Kennecott Copper Corporation, Nevada Mines Division, McGill,
Nevada (from 440,000 to 400,000 short tons).
Kennecott Copper Corporation, Utah Mines Division, Garfield, Utah
(from 1,225,000 to 1,000,000 short tons).
Expansion in the capacity of the American Metal Climax, Inc.,
Carteret, New Jersey, smelter (from 168,000 to 180,000 short tons).
PExpansion in the capacity of the following smelters:
Asarco, El Paso, Texas (from 420,000 to 576,000 short tons).
Asarco, Hayden, Arizona (from 420,000 to 960,000 short tons).
Contraction in the capacity of the Phelps Dodge Corporation smelter
at Douglas, Arizona (from 1,250,000 to 860,000 short tons).
Expansion in the capacity of the Phelps Dodge Corporation smelter
at Douglas, Arizona (from 860,000 to 875,000 short tons).
Expansion in the capacity of the Magma Copper Corporation, San Manuel
Division, San Manual, Arizona, smelter (from 403,000 to 670,000
short tons) minus the permanent shutdown of the Magma Copper Corpora-
tion, Superior Division, Superior, Arizona, smelter (150,000 short
tons annual capacity).
Contraction in the capacity of the Anaconda Company, smelter at
Anaconda, Montana (from 1,000,000 short tons to 750,000 short tons)
plus contraction in the Phelps Dodge Corporation, New Cornelia Branch,
Ajo, Arizona, smelter (from 300,000 short tons to 250,000 short tons).
The new Chemetco, Inc., Alton, Illinois, smelter (150,000 short tons
annual capacity) minus the contraction in the Phelps Dodge Corporation
smelter at Douglas, Arizona (from 875,000 short tons to 700,000 short
tons).
Expansion in the capacity of the Magma Copper Corporation, San Manuel
Division, San Manuel, Arizona, smelter (from 670,000 to 800,000 short
tons).
"Contraction in the capacity of the Cities Service Company, smelter at
Copperhill, Tennessee (from 90,000 to 75,000 short tons).
SOURCE; Yearbook of the American Bureau of Metal Statistics. Inc..
(ABMS), annual yearbook volumes, 1958-1975.
VI-15
Arthur D Little Inc
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TABLE VI-3
GROWTH OF LAKE COPPER SMELTING CAPACITY8 IN THE UNITED STATES. 1950-1975
(short tons of product; end-of-year figures, as reported
by American Bureau of Metal Statistics, Inc.)
Year
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
m:>
Smelting
Capacity
197,000 b
197,000 b
112,000
112,000
92,000
128,000
128,000
137,000
157,000
162,000
167,000
177,000
177,000
177,000
177,000
177,000
202,000
132,000
132,000
135,000
135,000
135,000
105,000
105,000
105,000
105,000
Change in
Smelting
Capacity
...
0
-85,000
0
-20,000
36,000
0
9,000
20,000
5,000
5,000
10,000
0
0
0
0
15,000
-70,000
0
3,000
0
0
-30,000
0
0
0
Change in
Smelting.
Capacity Due
To New Plants
0
0
0
0
36,000 e
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Change in
Smelting
Capacity Due
To Expansion
(Contraction)
of Existing Plants
0
-85,000 °
0
d
-20,000
0
0
f
9,000
20,000 8
5,000 h
i
5,000
10,000 -1
0
0
0
0
15,000 k
1
-70,000
0
3,000 m
0
0
-30,000 n
0
0
0
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Arthur D Little Inc
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NOTES;
Includes Lake Superior District producers only.
bCapacity figure includes the idle capacity of the Copper Range Company,
Smelting Department, Houghton, Michigan (85,000 short tons of product
annual capacity).
CShut down of the capacity of the Copper Range Company, Smelting
Department, Houghton, Michigan (85,000 short tons of product annual
capacity).
Contractions in the capacity of the Calumet and Hecla, Inc.,
Hubbell, Michigan, smelter (from 100,000 to 80,000 short tons).
^he new White Pine Copper Company, White Pine, Michigan, smelter.
Expansion in the capacity of the White Pine Copper Company, White
Pine, Michigan, smelter (from 36,000 to 45,000 short tons).
Expansion in the capacity of the Calumet and Hecla, Inc., Hubbell,
Michigan, smelter (from 80,000 to 100,000 short tons).
Expansion in the capacity of the White Pine Copper Company, White
Pine, Michigan, smelter (from 45,000 to 50,000 short tons).
Expansion in the capacity of the White Pine Copper Company, White
Pine, Michigan, smelter (from 50,000 to 55,000 short tons).
•^Expansion in the capacity of the White Pine Copper Company, White
Pine, Michigan, smelter (from 55,000 to 65,000 short tons).
^Expansion in the capacity of the White Pine Copper Company, White
Pine, Michigan, smelter (from 65,000 to 90,000 short tons).
•'"Contraction in the capacity of the Calumet and Hecla, Inc., Hubbell,
Michigan, smelter (from 100,000 to 30,000 short tons).
"Expansion in the capacity of the Quincy Mining Company, Hancock,
Michigan, smelter (from 12,000 to 15,000 short tons).
"shut down of the capacity of the Universal Oil Products Company,
Calumet Division, Hubbell, Michigan, smelter (30,000 short tons
annual capacity).
SOURCE: Yearbook of the American Bureau of Metal Statistics, annual
volumes, 1958-1975.
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TABLE VI-4
Years
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
COPPER REFINERY
irt ton of product
EXPANSION IN
1958-1975
; end-of-year
THE UNITED STATES,
figures, as reported
by
American Bureau of Metal Statistics, Inc.)
Refinery
Capacity
2,108,500
2,309,000
2,331,500
2,341,500
2,334,500
2,334,500
2,364,500
2,420,500
2,430,500
2,522,000
2,643,000
2,676,000
2,676,000°
2,793,000°
2,723,000
2,850,000
2,850,000
2,909,000
Change in
Refinery
Capacity
_
200,500
22,500
10,000
- 7,000
0
30,000
56,000
10,000
91,500
121,000
33,000
0
117,000
-70,000
127,000
0
59,000
Change in
Refinery
Capacity due
to New Plants
—
198,000a
0
0
0
0
0
0
0
0
0
0
0
200, OOO1
0
132,000P
0
420, 000 r
Change in
Refinery
Capacity due
to Expansion
(Contraction)
of Existing Plants
—
2,500b
22,500C
10,000d
7,000e
0
30,000f
56, OOO8
io,oooh
91.5001
121, OOO3
33,000k
0
-83,000™
-70,000n
- 5,000q
0
-361,000s
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NOTES:
The new Kennecott Refining 'Corporation, Anne Arundel County, Maryland,
refinery.
Expansion in the capacity of the White Pine Copper Co., White Pine,
Michigan, refinery (from 45,000 to 50,000 short tons), minus the
contraction in the capacity of the Inspiration Consolidated Copper,
Inspiration, Arizona refinery (from 47,500 to 45,000 short tons).
CExpansion in the capacity of the Lewin-Mathes Co., Division of Cerro
de Pasco Corporation, St. Louis, Maryland, refinery (from 25,000 to
45,000 short tons).
Expansion in the capacity of the White Pine Copper Corporation, White
Pine, Michigan, refinery (from 55,000 to 65,000 short tons).
Expansion in the capacity of the American Metal Climax, Inc., Carteret,
New Jersey, refinery (from 121,000 to 125,000 short tons) minus the con-
traction in the capacity of the American Smelting and Refining, Tacoma,
Washington, refinery (from 114,000 to 103,000 short tons).
Expansion in the capacity of the Inspiration Consolidated Copper, Inspira-
tion, Arizona refinery (from 45,000 to 65,000 short tons) plus expansion
in the capacity of the Phelps Dodge Refining Corporation, El Paso, Texas,
refinery (from 290,000 to 300,000 short tons).
^Expansion in the capacity of the following refineries:
The Anaconda Company, Great Falls, Montana (from 150,000 to 180,000
short tons);
Inspiration Consolidated Copper, Inspiration, Arizona (from 65,000
to 70,000 short tons);
Kennecott Copper Corporation, Hurley, New Mexico (from 84,000 to
103,000 short tons);
Phelps Dodge Laurel Hill, Long Island, New York (reactivated,
20,000 annual short tons);
minus the contraction in the capacity of the Kennecott Copper Corporation,
Garfield, Utah, refinery (from 204,000 to 186,000 short tons).
Expansion in the capacity of the following refineries:
The Anaconda Company, Great Falls, Montana (from 180,000 to 190,000
short tons);
White Pine Copper Company, White Pine, Michigan (from 65,000 short
tons to 90,000 short tons);
minus the contraction in the capacity of the International Smelting and
Refining Company, Raritan, Perth Amboy, New Jersey (from 240,000 to
215,000 short tons).
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Expansion in Che capacity of the following refineries:
Asarco, Baltimore, Maryland (from 198,000 to 318,000 short tons);
Asarco, Tacoma, Washington (from 103,000 to 108,000 short tons);
Phelps Dodge Refining Corporation, El Paso, Texas (from 300,000 to
320,000 tons);
minus the contraction in the capacity of the following refineries:
Lewin-Mathes Co., Division of Cerro Corporation, St. Louis,
Missouri (from 42,500 to 39,000 short tons);
Phelps Dodge Refining Corporation, Laurel Hill, Long Island,
New York (from 175,000 to 155,000 short tons);
Calumet and Hecla, Inc., Hubbell, Michigan (from 60,000 to
30,000 short tons).
JExpansion in the capacity of the following refineries:
United States Metals Refining Co., Carteret, New Jersey, a
subsidiary of American Metal Climax, Inc. (from 150,000 to 175,000
short tons);
Asarco, Tacoma, Washington (from 108,000 to 126,000 short tons);
Kennecott Refining Corporation, Anne Arundel County, Maryland
(from 198,000 to 276,000 short tons);
Phelps Dodge Refining Corporation, El Paso, Texas (from 320,000
to 420,000 short tons);
Lewin-Mathes Co., Division of Cerro Corporation, St. Louis,
Missouri (from 39,000 to 44,000)
minus the contraction in the capacity of the following refineries:
International Smelting and Refining Co., Raritan, Perth Amboy,
New Jersey (from 215,000 to 150,000 short tons);
United States Metals Refining Co., Carteret, New Jersey, a sub-
sidiary of American Metal Climax, Inc. (from 125,000 to 85,000
short tons).
Expansion in the capacity of the Asarco, Tacoma, Washington, refinery
(from 126,000 to 156,000 short tons) plus expansion in the capacity of
the Quincy Mining Co., Hancock, Michigan, refinery (from 12,000 to
15,000 short tons).
Magma Copper Company, San Manuel, Arizona.
"contraction in the capacity of the Phelps Dodge Refining Corporation, Laurel
Hill, Long Island, New York, refinery (from 155,000 to 72,000 short tons).
"Contraction in the capacity of the following refineries:
The Anaconda Company, Great Falls, Montana (from 190,000 to 185,000
short tons);
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International Smelting and Refining Company, Raritan, Perth Amboy,
New Jersey (from 150,000 to 115,000 short tons);
Shutdown of Calumet Division, Universal Oil Products Company,
Hubbell, Michigan (annual capacity 30,000 short tons at the end
of 1971), which was idle in 1970 and 1971.
°Includes the "idle" capacity of the Calumet Division, Universal
Oil Products Co., Hubbell, Michigan refinery (30,000 short tons annual
capacity).
pThe following new refineries started operations in 1973:
Chemetco, Inc., Alton, Illinois (40,000 short tons annual capacity);
Reading Industries, Inc., Reading, Pennsylvania (20,000 shorts tons
annual capacity);
Southwire Company, Copper Division, Carrollton, Georgia (72,000
short tons annual capacity).
Contraction in the capacity of The Anaconda Company, Great Falls,
Montana, refinery (from 185,000 to 180,000 short tons).
The new Asarco, Amarillo, Texas, refinery.
Expansion in the capacity of the Anaconda Company, Great Falls,
Montana, smelter (from 180,000 to 252,000 short tons) minus the shut
down of the following smelters:
Anaconda Company, Raritan plant, Perth Amboy, New Jersey
(115,000 short tons annual capacity)
Asarco, Baltimore, Maryland (318,000 short tons annual capacity).
SOURCE; Yearbook of the American Bureau of Metal Statistics, annual
volumes, 1958-1975.
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come on-stream with a total capacity of 132,000 annual short tons.
Further, in 1975, Asarco began operations at its new 420,000 annual
short ton capacity refinery in Amarillo, Texas; at the same time,
however, it shut down operations at its 318,000 annual short ton
capacity Baltimore refinery and its 168,000 annual short tons capacity
Perth Amboy refinery.
D. TRENDS IN COSTS OF PRODUCTION
The primary producers are faced with two kinds of costs—variable and
fixed costs—at each of the four stages of processing of primary
metal—mining, milling, smelting, and refining. In some cases, cost
categories as viewed by copper industry management may not necessarily
reflect the economists' definition of fixed and variable costs; how-
ever, the fixed-variable cost distinction will prove important later
in our analysis of production costs and shifts in production costs
due to compliance with environmental regulations.
Five relevant categories of annual operating costs or variable costs
can be identified: materials; energy and fuels; operating supplies;
plant maintenance; and part of sales, administration and overhead.
Fixed costs are defined to include the following: general administration
costs (some portion); exploration and research costs (as capitalized);
interest expense; property taxes and insurance; depreciation; income taxes
(adjusted for variations in output); net income (i.e., a desired rate of
after-tax return on assets). The first four capital charges are real costs
borne by each'producer. Costs of depreciation do not represent actual costs;
that is, they are not cash charges, but rather are balance sheet items
reflecting a cash flow. Net income is treated as a fixed cost by the pro-
ducers in pricing decisions (i.e., they must receive a return on investment
at least equal to the opportunity cost of capital).
1. Past Trends in Primary Producer Costs
Accurate estimation of production costs for copper in the United States
is a difficult undertaking, both because of the variations in actual
costs facing individual producers and because individual producers do
not normally disclose detailed cost-of-production data.
However, there is general agreement that:
• Costs of mining and concentrating have traditionally formed, by
far, the largest proportion of total production costs of refined
copper. Smelting and refining costs have represented only a
small proportion of the total cost, with smelters and refineries
functioning mainly as "service" operations on fixed and relatively
low profit margins.
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TABLE VI-5
INDEX OF OUTPUT PER MAN-HOUR SERIES FOR PRODUCTION OR NONSUPERVISORY
M
ro
f
D
WORKERS,
SIC 1021 (COPPER MINING AND MILLING) , 1963-1975
(1967=1.000)
U.S. domestic
mine production
Total average of recoverable
Year
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
NOTES
Vs.
Average
employment
(thousands)
22.7
22.1
24.7
26.2
19.1
21.3
26.9
29.3
26. 8b
30. 7b
33. 7b
33.8b
28. 4b
AND SOURCES:
Department of
Bulletin No. 1312-9
bBLS,
Employment and
Average
weekly
ca _ «t
hours
43.1
42.9
43.4
43.5
43.0
47.0
46.3
44.7
42.9
41. 6b
42. 3b
41.1b
39. 2b
annual
man-hours
(millions)
50.875
49.301
55.743
59.264
39.394C
48.053C
64.764
68.105
59.785
66.410
74.126
72.237
57.891
Index of
man-hours
(1967=1.000)
1.291
1.251
1.415
1.504
1.000
1.220
1.644
1.729
1.518
1.686
1.882
1.834
1.470
copper
(thousands of
short tons)
1213.166
1246.780
1351.734
1429.152
954.064
1204.621
1544.579
1719.657
1522.183
1664.840
1717.940
1593. 590e
1410. 989e
Output
index
(1967=100.0)
1.272
1.307
1.417
1.498
1.000
1.263
1.619
1.802
1.595
1.745
1.801
1.670
1.479
Labor, Bureau of Labor Statistics (BLS) , Employment and Earnings, United
, pp. 10, 11
Earnings :
Index of
output per
man-hour
(1967=1.000)
0.985
1.045
1.001
0.996
1.000
1.035
0.985
1.042
1.051
1.035
0.957
0.911
1.000
States, 1909-72,
(for years 1963-1970 only).
1971: Vol. 18,
1972: Vol. 19,
1973: Vol. 20,
1974: Vol. 21,
1975: Vol. 22,
No. 9 (March,
No. 9 (March,
No. 9 (March,
No. 9 (March,
No. 9 (March,
1972), pp. 50,
1973), pp. 50,
1974), pp. 54,
1975), pp. 52,
1976), pp. 56,
81.
81.
85.
85.
89.
-------
ro
D
°To avoid errors due to prolonged strikes in these two years, total annual average man-hours have been computed
on a monthly basis before summing up to obtain the annual total.
dData refer to mine production of recoverable copper (copper content) in the form of blister. Source (1963-1973):
Copper Development Association, Inc. (CDA), Copper Supply and Consumption, 1955-1974 (New York: CDA, 1975),
pp. 8, 9.
e!974; U.S. Bureau of Mines, Mineral Industry Surveys, Copper in 1974 (April 8, 1975), p. 3. 1975: Ibid..
Copper in 1975 (March 26, 1976), p. 3.
The indexes of output per man-hour are computed by dividing the output index by the index of total average annual
man-hours.
-------
• Overall, real costs of refined copper production appear to have
remained stable or to have increased only gradually during the
1950s and 1960s. There is evidence, however, that real costs
have begun to rise sharply in the last few years.
• Labor productivity growth, on the other hand, stagnated through
the 1950s and 1960s and productivity has actually registered a
slight decline since 1971 in the face of continued degradation
of average ore grades being mined in the United States. The
industry, in effect, may have come close to exhausting possible
productivity gains from existing technology.
Orrice C. Herfindahl in the late 1950s advanced the hypothesis that
the long-run price of copper tends to equal the long-run economic
cost of copper or the price sufficient to induce continued investment
at all stages of production, from exploration to refining12. According
to Herfindahl's estimates, the long-run economic cost of producing
copper in the United States was fairly stable at 25-30 cents per pound
between the early 1920s and 1957. Herfindahl argued that copper
producers, through technological change, were able to keep pace
with real increases in factor costs during this period.
Over the period 1957-1968, as pointed out in a paper, by Raymond Mike-
sell , the deflated average United States producers price for refined
copper remained reasonably close to the upper range of Herfindahl's
estimated long-run cost of copper. After 1968, however, the average
producers price, in real terms, climbed substantially higher.
Productivity growth in the copper industry, meanwhile, has been
relatively stagnant since the early 1960s, with productivity gains
lagging behind those experienced by other United States industries.
Table VI-5 indicates that output per man-hour at the mining and milling
stage rose only slightly between 1963 and 1971 and registered a slight
absolute decline in the period after 1971.
The combination of a long-term trend towards escalation in the producers'
price (in real terms) and stagnant or negative productivity growth
suggests that the long-run real economic cost of producing copper
has been rising in recent years.
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Table VI-6, which shows recent increases in the prices of materials and
energy, leads partial support to the general proposition that the cost
of copper production has increased in real terms in recent years.
The industry's productivity problem lies in the lack of availability
of radically new technologies to take the place of conventional
mining practices associated with open-pit mines. The average copper
content of the ore mined in the United States declined from about
.85 percent in 1957 to .55 percent in 19721*. Conventional stripping
technology has been unable to offset the increased cost associated
with mining lower grade ores.
Several new approaches may be utilized in the future to overcome some
of the potential constraints on growth of productivity in the industry.
First, newly-developed pit slope engineering techniques may be employed
to steepen slopes and thereby decrease stripping ratios, as well as
to increase the amount of ore in a given mine which is economically
recoverable. In addition, the same design concepts associated with
steepening slopes can be utilized for predictable controlled caving
of slopes as an alternative to drilling and blasting under some
conditions. Finally, the development of self-propelled crushers and
belt-conveyors would eliminate the need for use of trucks in hauling
ore and overburden.
2. Estimates of Base Year (1974) Primary Producer Costs
As suggested earlier in the chapter, variable costs represents costs
incurred for inputs which can be varied in the short-term by changing
the firm's output; total variable costs increase as the firm's
output increases, since larger output normally requires increased
variable inputs (e.g., labor, raw and intermediate goods, energy,
etc.). Fixed costs, on the other hand, represent total obligations
over a given unit of time (e.g., year) incurred by a firm for fixed
capital inputs which are independent of the level of output.
Our estimate of the average variable costs for producing refined
copper (over all four stages of production) for the primary producers
in 1974 was 43c per pound, representing the weighted average of
company-specific production cost data for eleven major producers
(including both integrated and non-integrated companies)^
Our estimate of the average fixed costs for the primary producers
(over all four stages of production) for 1974 was about 29c per pound.
This figure, if anything, errs on the high side, by one or two cents
per pound; it was obtained by cross-checking a number of different
sources and historically observed average fixed cost data for the
primary producers.
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TABLE VI-6
WHOLESALE PRICE INDEX SERIES FOR MAJOR COMPONENTS OF
OPERATING AND MAINTENANCE COSTS, UNITED STATES COPPER INDUSTRY
(SIC 1021-COPPER ORES AND SIC 3331-PRIMARY COPPER) ,
Materials and
components, parts,
containers and
Years
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975d
NOTES
supplies (excl.
energy)8
(1967=100
94.3
94.8
96.3
99.1
100.0
102.6
106.3
110.2
113.8
117.9
129.2
154. ld
171. le
AND SOURCES:
.0) (1974=100.0)°
61.2
61.5
62.5
64.3
64.9
66.6
69.0
71.5
73.8
76.5
83.8
100.0
111.0
1963-1975
Purchased
electric
power L
(1967=100.0)
101.3
100.4
100.1
99.6
100.0
100.9
101.8
104.8
113.6
121.5
129.3
163.1d
176. 5e
(1974=100.0)"
62.1
61.6
61.4
61.1
61.3
61.9
62.4
64.3
69.7
74.5
79.3
100.0
108.2
Purchas
fuels
(1967=100.0)
96.1
93.8
95.6
99.6
100.0
98.6
100.1
104.3
110.0
112.7
125.6
184.9
225.9
!d
(1974=100.0)°
52.0
50.7
51.7
53.9
54.1
53.3
54.1
56.4
59.5
61.0
67.9
100.0
122.2
aWholesale price index (WPI) for total manufactured goods.
The base year is shifted from 1967 to 1974, by dividing the series by the 1974 index.
°WPI 054-Electric power.
U.S. Department of Labor, Bureau of Labor Statistics, Monthly Labor Review (January,
1976), various tables.
6U.S. Department of Labor, Bureau of Labor Statistics, Wholesale Prices and Price Indexes
for January through December; average of data for January through December.
WPI 05 (Fuels and related products and power) minus WPI 054 (Electric power) minus WPI
0561 (Crude petroleum). This measurement provides a broad coverage of various types of
fuel used by the copper industry, in mining through refining (i.e., included, among
others, are natural gas, distillate, and residual fuels).
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We have computed this price index series as follows:
Let AP = APjWi + AP2W2 + AP3W3
where
AP : change in WPI 05 (Fuels and related products and power)
between 1967 (1967 = 100.00) and a given year:
APi : change in WPI 054 (Electric power) between 1967 and a
given year;
AP2 : change in WPI 0561 (Crude petroleum) between 1967 and
a given year;
AP3 : change in "rest of WPI 05" (i.e., WPI 05 minus WPI 054
minus WPI 0561)
WL W2, W3 : weights in WPI 05 associated with Pj , P2, and P 3,
respectively;
3
Z W. • 1.0
i-1 X
We can solve for AP3W3 as follows:
AP3W3 = AP - AP^j - AP2W2
where AP, AF} and AP2 can be computed from the following series on P,
P! and P2:
Years P Pi ?2
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
SOURCES:
96.3
93.7
95.5
97.8
100.0
98.9
100.9
105.9
114.2
118.6
134.3
208.3
245.1
1963-1973: U.S.
101.3
100.4
100.1
99.6
100.0
100.9
101.8
104.8
113.6
121.5
129.3
163.1
176.5
98.7
98.3
98.2
98.9
100.0
100.8
105.2
106.1
113.2
113.8
126.0
211.8
245.7
Department of Labor, Bureau of Labor Statistics,
Handbook of Labor Statistics,
Table 129;
1974: U.S. Department of Labor, Bureau of Labor Statistics,
Wholesale
Table 5;
Price Indexes
, Supplement 1975 (September, 1975)
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1975; U.S. Department of Labor, Bureau of Labor Statistics,
Wholesale Price Indexes, monthly January through December,
1975, Table 6.
The weights Wj, W2 and W3 are computed as follows:
Wj = 1.728/7.697 • 0.2245
W2 • 0.635/7.697 - 0.825
W3 = 1.000 - 0.2245 - 0.825 = 0.6930
where
1.728 is the weight in the total WPI associated with WPI 054
(Electric power);
0.635 is the weight in the total WPI associated with WPI 0561
(Crude petroleum); and,
7.697 is the overall weight in the total WPI associated with
WPI 05 (Fuels and related products and power).
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Whole-
sale Prices and Price Indexes, Supplement 1975 (September,
1975), Table 4.
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In making Che cost estimates, we have assumed constant returns to scale
when firms are operating at between roughly 45-86 percent of installed
capacity; beyond this region, diminishing returns to scale are assumed
to set in. In other words, in the 45-86 percent range, average
variable costs are equal to marginal costs; beyond 86 percent of
capacity the average variable and marginal cost schedules (functions)
not only rise sharply but also, of course, diverge^.
Where production cost data were not available directly from companies
themselves, estimates of average variable costs were made by taking
into account differential ore grades, stripping ratios, recovery rates
and mining technology. Since smelting and refining processes involve
quite standard technologies with known input requirements, the cost
differentials observed were generally reflective of different ore
grades and mining costs among the different companies.
In summary, average total costs for the primary producers in 1974
were estimated at 72c per pound . Costs of new capacity expansion
have been estimated at $5,000 per annual short ton (in constant 1974
dollars), $1,600 per annual short ton of smelting and refining
capacity and $3,400 per annual short ton of mining and milling
capacity.
E. THE QUANTITATIVE ANALYSIS OF SUPPLY BEHAVIOR IN THE COPPER INDUSTRY
The quantitative analysis of supply behavior in the copper industry
attempts to explain the short-run and long-run supply response of the
copper producers by considering such variables as prices, production
costs, capital costs, ore grade and reserves, among others. The
approach typically taken in the past in modeling the supply response
of mineral/resource industries is that of the "supply curve" approach.
This is the approach taken in virtually all modeling work performed
in the past (for example, by Charles River Associates, Inc.—CRA).
This section presents a critical review of the supply curve (supply
function) approach to modeling the supply behavior of copper producers
and indicates broadly how we approached this problem in this study.
The thrust of our comments is directed to the use or applicability of
the supply curve approach in modeling the supply behavior of the
primary producers.
1. The Supply Curve for Primary Copper
The concept of the supply curve is a tool of partial equilibrium analysis
in economics. Neglecting the analytical complications that would arise
from the presence of secondary, as well as foreign, suppliers, the basic
supply function for primary copper can be expressed as Q = f(P), where
Q and P are the quantity and price vectors, respectively, given the
state of technology, factor prices, and the reserve situation. An
important related concept in analyzing the supply response of the
primary copper producers is the price elasticity of supply, which is
a measure of the responsiveness of supply to price, expressed as a
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ratio of the percentage change in quantity associated with a given
percentage change in price. In continuous terms it is expressed in
terms of the following formula:
P 60
v ss — —-&>
Ys Q ' 6P '
A distinction needs to be drawn between the short-run and long-run
supply curve. The short-run supply curve shows the relationship
between price and output with a given level of capacity, where
productive capacity represents the binding constraint. Because of
the capacity constraint, the producers have limited scope for expanding
their production as prices rise.
The long-run supply curve shows the relationship between price and
output, when there are no constraints on productive capacity (i.e., by
definition, over the long-run, all factors of production are perfectly
mobile). If the supply curve slopes upward gently, the price elasticity
of primary copper supply will be high; consequently, small percentage
increases in price will lead to large percentage increases in the
quantities offered. If, however, the curve is steeply sloped, the
elasticity will be low; in such a situation, even large price
increases will not bring forth large quantities of primary copper
onto the market.
2. Criticisms of the Supply Curve Approach
The supply function (curve) approach to modeling the supply response
of firms in a mineral/resource industry, such as the primary copper
industry, suffers from serious deficiencies. First, the supply
function approach has little, if any, microeconomic theoretical validity
in imperfectly competitive (e.g., oligopolistic) markets. Second, the
short-run and long-run distinction in specifying and estimating supply
functions fails to cope with the dynamics of the adjustment process
between the short-run and the long-run, via capacity expansion. Indeed,
the process of capacity expansion, as part of an evolving reality, is
completely ignored in the supply function approach. Third, the
estimation of supply functions through the use of econometric techniques
is fraught with serious practical and theoretical difficulties.
a. Microeconomic Theoretical Criticisms
The concept of the industry supply curve has validity only under
conditions of perfectly competitive markets. Another way of saying
the same thing is that a supply function does not exist under conditions
of imperfect competition in the product markets.
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"Perfect competition" is characterized by:
• a very large number of firms (buyers and sellers) where each firm
accounts for an extremely small share of the market;
• a homogenous or standardized product is involved;
• the numerous buyers and sellers are well-informed about product
quality and about each other's prices;
• the entry of new firms into the industry/market is free and easy
(i.e., there are no "barriers to entry").
Under these conditions, individual firms have no influence over the
going market price; each firm is a "price taker" and decides only
how much to produce and sell, under prevailing prices, given its
cost structure. Each firm acts atomistically, that is, it decides
its level of output ignoring the others in the industry. Since the
products of the firms are perfect substitutes for one another the
price-elasticity of demand facing the individual firm is infinite
(i.e., the demand function facing the firm is horizontal).
In the short-run, given the market price level, the profit maximizing
position for the firm is to produce that quantity at which price equals
marginal cost, moving along its marginal cost schedule which defines its
supply curve. At the industry level, this equilibrium condition is
obtained at the intersection of the industry supply and demand curves,
where the industry supply curve is obtained by horizontal summation of
the marginal cost curves of the producing firms. For an industry
characterized as perfectly competitive, a unique, deterministic
equilibrium solution for prices and quantities is thus obtained at
the intersection of the supply and demand curves. These short-run
conditions do not, in general, apply to firms under imperfect competition.
Deterministic market solutions, based upon the supply and demand functions
alone, are no longer possible and, in the general case (e.g., in an
oligopolistic market), a range of possible price and output solutions
can be expected on purely theoretical grounds.
The concept of a long-run supply function for an imperfectly competitive
industry rests on equally shaky ground. It will be recalled that for
an industry under perfect competition, the long-run supply function—where
supply is defined to include both actual and potential firms—will be
horizontal at the break-even point, assuming constant factor prices,
and will be sloping upward if the industry's expansion puts upward
pressure on its factor prices. The break-even point defines the
long-run equilibrium price at which the unit cost (average total cost)
is at the lowest point permitted by factor prices and technical
knowledge. At long-run equilibrium, when price equals average cost,
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firms just cover their full competitive costs (i.e., the firms operate
at a point of minimum unit cost, corresponding to an optimal scale of
operations, with no excess profit). Each firm is forced to operate at
this point, under the pressure of competitive conditions. One of these
conditions, ensuring such an outcome, is free entry and exit (i.e., no
barriers stand in the way).
When entry is blocked (e.g., because of absolute cost differences
between the established firms and potential entrants, etc.), market
price depends on the behavior of firms already in the industry and,
unless individual firms in the industry possess long-run average cost
functions that are constant, the result of their expansion would differ
from that predicted by long-run equilibrium conditions of perfect
competition. That is, if individual firm costs are not constant, the
existing number of firms may not produce at the lowest possible cost for
the industry, because the firms are not at optimal sizes where average
cost in each case is minimal. Under such conditions, excess profits,
at least for some firms, may exist on more than just a temporary basis.
If there are a few firms, they might not expand; instead, they might
reach a tacit understanding to maintain a smaller output at a higher
price. In the extreme, they may act as a monopolist. In short, the
concept of a long-run industry supply function for an imperfectly
competitive industry lacks the theoretical rationale underlying it
under conditions of perfect competition; hence, its use under imperfectly
competitive conditions to explain the long-run pricing behavior or
supply response (expansion) of the firms rests on questionable theoretical
foundations.
Apart from these theoretical objections, there are basic empirical issues
associated with the use of a short-run or long-run industry supply function
in imperfectly competitive markets. These issues arise more generally
in econometric practice, but it is helpful to discuss them more
specifically in connection with the specification and estimation of
industry supply (cost) functions.
b. Dynamics of the Supply Adjustment Process and the Supply Function
Appro ach-10
The supply adjustment process is typically modeled by taking a "partial
adjustment" approach. It is assumed that suppliers can make only a
partial adjustment in each period to a change in the current price,
and that the change in the actual quantity supplied is equal to some
fraction, A, of the difference between the desired quantity in the
given period, t, and the actual quantity in the previous period, t-1.
We may, therefore, express the partial adjustment hypothesis with
respect to the supply of copper as follows:
(i) s-s_
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where o
-------
The relationship between short-run elasticity of supply, egR, and the
long-run elasticity of supply, e , may be expressed as:
X6LR = 6SR
Since X will usually be substantially less than 1, ey^ should be some
multiple of eSR, or the long-run elasticity of supply of copper should
be substantially higher than the short-run elasticity.
The partial adjustment approach to the long-run supply of copper
summarized above provides the conceptual approach for modeling supply
under conditions of lagged adjustment of the desired quantity corresponding
to the market price (or to the expected price under the adaptive expectations
hypothesis). However, it has serious weaknesses as a theory of supply.
An adequate long-run supply theory must explain the relationship between
the cost and profitability conditions and expectations determining
investment decisions, given a wide variety of incentives, opportunities
and contraints. Each stage in the process by which copper production
capacity is created, from additional exploration to the construction of
a mine* or a smelter involves investment decisions that take into account
a host of variables, among which long-run price expectations are only
one. A change in price or price expectation does not set in motion a
series of adjustments that lead inexorably to a change in capacity
coming on stream ten or more years hence. New orebodies are
continually being discovered or prove to be commercially feasible;
technology, capital and operating costs, and sources of financing are
continually changing and plans can be altered or investments delayed
at every stage in the process as new information becomes available.
Further, the effects of new environmental regulations affecting copper
exploration and development and new capacity creation could not be
addressed by the supply function approach, whether or not one attempts
to capture the supply adjustment process through a "partial adjustment"
type supply function specification and estimation.
c. Econometric Issues and Criticisms
A number of technical econometric difficulties typically arise when
estimating supply or production functions from time-series or cross-
section data. These principally include the aggregation bias, the
simultaneity bias (i.e., the identification problem), and specification
bias.
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Aggregation bias is hard to avoid and difficult to assess. If, for
example, the analyst has a number of observations for a given firm at
time t, structural parameters in the cost, supply or production function
(given corrections for simultaneity biases) can be estimated. However,
when observations come from a cross-section or time series, with pooled
data for many firms, the estimated parameters will be biased, unless they
are all equal in reality. The degree of bias can be estimated by
examining the covariances of the actual micro parameters and the
estimated coefficients of auxiliary regressions . However, it is
difficult to deal with aggregation problems through this method. Instead,
it is advisable to seek to estimate parameters under conditions where
they may, indeed, be similar. Thus, sensible aggregation might be
possible, in the case of copper, only over time periods characterized
by similar economic and technological factors.
Next, simultaneity bias raises particularly difficult technical issues.
To judge from the small amount of evidence available20, single equation
estimates in the simultaneous systems will generate important incon-
sistencies in the parameter estimates. Of course, the reduced form
cost function is designed to avoid such difficulties. It must be kept
in mind, however, that this will be true only in some cases, but not
in all.
The problem of specification errors confronts every econometric analysis.
Difficulties particular to cost, supply or production function estimation
include the exclusion of managerial ability and other difficult-to-measure
inputs ...Some analysts approach this problem through analysis of the
residuals . It is not clear, however, that this approach provides a
successful resolution for the problem.
In the same vein, we should point out that the limitations of econo-
metrically estimating industry supply functions are well documented in
recent literature on the economics of the petroleum industry. Various
researchers have applied econometric methods to market data for the
purpose of inferring the historical relationships between price and
the quantity of petroleum produced within an area . A basic limitation
of the econometric approach is the inability to control for the
influence of resource depletion. The depletion effect operates both
on production from existing reserves and on the attempt to augment
the reserve stock via exploration. Attempts have been made to identify
and account for this phenomenon using aggregative market data, but they
have not proven successful. Estimated supply functions have not
remained stable for reasonable periods of time and their forecasting
performance does not meet a very high standard .
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3. Approach Adopted in this Study
We have raised above some of the key issues and criticisms associated
with the use of the supply function approach in modeling the supply side
of the copper market. These points apply particularly to modeling the
supply behavior of the primary producers. In dealing with the secondary
copper industry segments, we, too, have estimated and used supply
functions, since these secondary market segments can be characterized
as a "competitive fringe".
The supply behavior of the primary producers has been modeled by taking
an integrated approach which simultaneously considers market conditions,
capital expenditures for capacity expansion, production costs, and the
financial performance of the firms in the industry. This represents
an attempt to capture the dynamics of the supply adjustment process for
the domestic primary producers.
Briefly, in our analysis, engineering cost functions, as opposed to
econometrically estimated cost functions, were used, but only after a
careful and comprehensive review of the literature on statistical
analysis of cost functions and following some exploratory empirical
attempts in this direction. For example, a number of very powerful,
generalized models of the production/cost duality were investigated,
particularly the trans-log version.
Our exploratory attempts at an econometric analysis of cost functions
facing the primary producers was unsuccessful, for a variety of reasons,
quite apart from the theoretical issues raised above on industry supply
functions and the unavoidable data problems. First, estimation becomes
more complicated under assumptions of imperfect competition. Second,
the analysis dictated by the econometric approach is essentially
long-run, whereas evolving short-run (annual) cost functions are
required for the model. Third, the structure of the primary sector
embraces four major stages of production (mining, milling, smelting
and refining), such that there exist differences in the cost functions
of the individual firms horizontally at least at the mining/milling
stage and hence differences in cost functions vertically over all four
stages of production. This would be difficult to build into an econo-
metric approach. Further, transfer price data on materials flows between
stages of production are insufficient to permit production analysis for
each stage of production separately. For these reasons it was felt that
econometric analysis of cost functions would prove insufficient in the
present analysis.
As a result, it was decided that the theoretical rigor of a Cobb-Douglas,
CES, or trans-log formulation would have to be sacrificed for the greater
realism of engineering and financial cost estimates. This approach was
expected to provide not only greater realism but also increased
flexibility in dealing with several stages of production and with the
differences in the costs of production among firms. The engineering
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estimates of average variable costs, financially-based estimates of
total and average fixed costs (and, consequently the estimation of
average total costs) realistically and accurately represent costs of
production as perceived and acted upon by the-producers.
For our purposes, we have assumed constant returns to scale in the
roughly 45-86 percent range of installed capacity, with diminishing
returns to scale beyond this region. The implication of this is a
linear total cost function until about 86 percent of capacity which
becomes nonlinear beyond this point. Consequently, the average
variable cost function = marginal cost function is horizontal until
about 86 percent of capacity, rising monotonically thereafter and
rather steeply near full capacity.
The technical aspects of our approach are summarized in Chapter XI and
are explained in detail in the Technical Appendix to this report,
entitled Econometric Simulation and Impact Analysis Model of the U.S.
Copper Industry.
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CHAPTER VI
NOTES
1. Harold Hotelling, "The Economics of Exhaustible Resources", Journal
of Political Economy". Vol. 39 (April, 1931), pp. 137-175.
2. 0. C. Herfindahl, "Depletion and Economic Theory", in M. Gaffney
(Ed.), Extractive Resources and Taxation (Madison, Wisconsin:
The University of Wisconsin Press, 1967).
3. William D. Nordhaus, "The Allocation of Energy Resources",
Brookings Papers on Economic Activity, 3 (1973), pp. 529-576.
4. See Donald A. Hanson, "Second Best Pricing Policies for an
Exhaustible Resource", The American Economic Review, Vol. 67,
No. 1 (February, 1977), pp. 351-354.
5. Robert M. Solow, "The Economics of Resources or the Resources of
Economics", Richard T. Ely Lecture, The American Economic Review,
Vol. LXIV, No. 2 (May, 1974), pp. 1-14.
6. Ibid., p. 6.
7. For some of these points, see Ibid., p. 7.
8. Ibid.
9. Robert M. Solow and Frederic Y. Wan, "Extraction Costs in the
Theory of Exhaustible Resources", The Bell Jounral of Economics
(Autumn, 1976), pp. 359-370.
10. Darius W. Gaskins, Jr., "Alcoa Revisited: The Welfare Implications
of a Secondhand Market", Journal of Economic Theory, Vol. 7
(March, 1974), pp. 254-271.
11. Growth- in smelting capacity of Lake Superior District producers
of Lake copper are broken out in Table VI-3 because capacity
figures are reported in tons of product rather than tons of
charge material.
12. Orris C. Herfindahl. Copper Costs and Prices: 1870-1957. published
for Resource for the Future (Baltimore: The Johns Hopkins Press,
1959).
13. Raymond F. Mikesell, "A Note on Orris Herfindahl's Hypotheses
Regarding the Long-Run Price of Copper from the Vantage Point
of 1975", unpublished draft paper, (November 7, 1975).
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NOTES
(Continued)
14. Ibid.
15. Based on production cost data for Kennecott, Phelps Dodge, Newmont,
Duval, Cyprus Bagdad, Amax, Asarco, Copper Range, Inspiration,
Cities Service and Anaconda. The data refer to production costs
before credits for by-products (e.g., gold, silver, molybdenum;
credits for gold in 1974 have been estimated at about 2.5c/lb.;
total credits in 1974 for all three major by-product metals have
been estimated at about 4c/lb.).
This approach would tend to slightly overstate the average variable
costs facing the primary producers in 1974. However, it does make
an implicit allowance for ore grade degradation over time. Also
as a basis for econometric simulation of future market and
investment activity in the industry, the exclusion of by-product
credits avoids the assumptions that in the future (a) the prices
or production of the by-product metals will remain constant at
their 1974 levels (which is not really a desirable assumption) or
that (b) the prices of the by-product metals will grow at certain
rates (which would introduce new and unnecessary complications
and sources of error in the analysis).
16. Refer to the Technical Appendix for more detail.
17. Corresponds to the minimum point on the industry's average total
cost (ATC) function, at roughly 86 percent of installed productive
capacity.
18. The discussion presented here draws upon Raymond Mikesell, "The
Quantitative Analysis of Supply", draft version of Chapter VII
in a forthcoming book on the world copper industry.
19. See Henri Theil, Principles of Econometrics (New York: John Wiley
and Sons, Inc., 1971), pp. 556-573.Also see A. A. Walters,
"Production and Cost Functions: An Econometric Survey",
Econometrica, Vol. 31 (January-April), pp. 10-11.
20. J. Marschak and W. H. Andrews, "Random Simultaneous Equations and
the Theory of Production", Econometrica, Vol. 12 (July-October,
1944), pp. 143-205; A. A. Walters, "Some Notes on the Cobb-Dbuglas
Production Function", Metroeconomica. Vol. 13 (1961), pp. 121-128.
21. See Zvi Griliches, "Specification Bias in Estimates of Production
Functions", Journal of Farm Economics, Vol. 39 (1957), pp. 8-20.
22. Marschak and Andrews, op. cit.
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NOTES
(Continued)
23. E. W. Erickson and R. M. Spann, "Supply Price in a Regulated
Industry: The Case of Natural Gas". The Bell Journal of Economics
and Management Science, Vol. 2, No. 1 (Spring, 1971).F. M. Fisher,
Supply and Cost in the U. S. Petroleum Industry; Two Econometric
Studies (Baltimore: The Johns "Hopkins Press, 1974). J. D. Khazzoom,
"The F.P.C. Staff's Econometric Model of Natural Gas Supply in the
United States", The Bell Journal of Economics and Management Sciences,
Vol. 2, No. 1 (Spring 1971).P. W. MacAvoy, and R. S. Pindyck,
The Economics of the Natural Gas Shortage (1960-1980), (Amsterdam:
North Holland, 1975).
24. See P. L. Eckbo, H. D. Jacoby, and J. L. Smith, "Oil Supply
Forecasting: A Disaggregated Process Approach", M.I.T. World
Oil Project, Working Paper No. MIT-EL-77-001WP (February, 1977).
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VII. DEMAND
A. INTRODUCTION
The discussion in Chapter 71 concentrated on the characteristics of
copper supply. In this chapter, the focus is on patterns of copper
consumption and the dynamics of demand for copper. We first review
copper consumption trends and patterns in the past, with emphasis on
the following points: (a) key attributes of copper, (b) comparative
copper consumption trends in the United States and the world,
(c) consumption of refined and nonrefined (scrap) copper, (d) major
direct users of copper, (e) consumption of copper by end-use industries,
(f) the consumption and uses of copper versus the demand for copper, and
(g) definition of the market for copper for demand analysis. Next,
we discuss some of the basic theoretical considerations in demand
analysis for copper, touching upon such topics as specification and
functional forms, long-run substitution in demand, short-run and
long-run adjustments in demand, and potential problem areas in
econometric estimation. Finally, we review a number of econometric
studies of the copper industry in recent years and examine their
findings on short-run and long-run demand elasticities, along with our
own findings based on our econometric analyses of demand as part of
the modeling effort reported in detail in the Technical Appendix to
this volume.
Analysis of demand for copper should start with the simple proposition
that demand as an economic concept refers to the quantities the buyers
are willing to purchase at different prices, everything else being
equal. Further, typically, demand analysis represents the quantification
of a functional relationship between the quantity of copper demanded and
the key factors simultaneously affecting it, including, principally,
copper prices, macroeconomic variables influencing the activity levels
of semifabricators and end-use industries, and prices of other products
(e.g., aluminum) which are substitutable for copper. Demand hence
expresses a multivariate relationship which can be quantitatively
estimated by using appropriate methods.
Available econometric studies of demand for copper, including our own,
generally indicate that in the short-run demand is quite inelastic with
respect to both price and activity variables. The long-run elasticity
estimates are all greater than the short-run estimates, indicating
that the response of demand to relative prices and activity is more
sensitive in the long-run. However, even the long-run estimates
in about half of the studies examined fall in the inelastic range.
VII-1
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The presence of long-run substitution in demand for copper is generally
recognized as an important aspect of demand analysis for copper. In
our own econometric work, we have focused the analysis of copper
substitutes on aluminum because of its overriding importance as a
competitor to copper not only in the past but also potentially in the
future.
Appendices B and C given at the end of this volume accompany this
chapter. Appendix B presents a review of trends in long-run substitution
away from copper, concentrating primarily on aluminum. Appendix C
provides tabulations on interindustrial relationships of copper.
B. PATTERNS OF COPPER CONSUMPTION
1. Key Attributes of Copper
Copper is a metal of key importance, both because of its highly desirable
properties and because of its diversity of uses. Properties of copper
having major significance are its high electrical and thermal conductivity,
corrosion resistance, ductility and malleability, durability, low
melting point and high strength. In addition, copper has a pleasing
color, is nonmagnetic, and is easily finished by plating or lacquering;
it can be welded, brazed, and soldered. Because it can be alloyed
readily with many other metals to improve certain basic properties,
the commercial brasses, bronzes, copper-nickel alloys, and nickel
silvers have been developed. Copper has a wide range of uses in today's
modern industrial economy, in pure or alloyed form, including such
diverse products as plumbing fixtures, ship propellers, electrical
wire and car radiators. While aluminum and other materials are
substitutable for copper and alloys in many electrical, structural
and decorative applications, in still many other uses copper is the
preferred and largely nonsubstitutable resource.
2. Copper Consumption in the United States and the World; Comparative
Trends
Table VII-1 shows comparative United States and world trends in refined
copper consumption over the 1963-1974 period. As indicated here, world
consumption of refined copper was about 8.3 million metric tons in 1974.
Of this, United States consumption accounted for nearly 2.0 million
metric tons or 23.5 percent. The United States share of world
consumption of refined copper dropped from 28.8 percent in 1963 to
23.5 percent in 1974, reflecting a relatively higher growth in demand
for copper in the rest of the world. Accordingly, while refined copper
consumption in the United States has increased by only 1.90 percent per
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TABLE VII-1
UNITED STATES AND WORLD
REFINED
COMPARATIVE TRENDS IN
COPPER CONSUMPTION, 1963-1974
(thousand metric tons)"
Years
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Average Annual
Compound Growth
Rate (Percent)
1963-1973
1964-1974
U.S.
1590.0
1690.0
1845.6
2157.8
1797.5
1701.4
1944.3
1854.3
1830.5
2028.6
2218.6
1956.4
3.39
1.47
World
5519.3
5995.4
6193.2
6444.8
6194.8
6523.3
7148.0
7283.4
7309.9
7944.5
8791.6
8325.4
4.77
3.34
U.S. as
percent
of World
28.8
28.2
29.8
33.5
29.0
26.1
27.2
25.5
25.0
25.5
25.2
23.5
-
-
NOTES:aOne metric ton (1,000 kilograms) equals 1.102311
short tons (907.185 kilograms = 2000 pounds
avoirdupois, where one pound avoirdupose equals
0,453592 kilogram or 453.5924 grams).
SOURCE; Metallgesellschaft Aktiengesellschaft, Metal
Statistics 1963-1974 and 1964-1974. pp. 32-33.
VII-3
Arthur D Lit tie Inc
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year during the 1963-1974 period (1.47 percent/year over 1965-1974
and 3.39 percent/year over 1963-1973), world consumption has recorded
a substantially higher rate of growth at 3.81 percent per year over
the sample period (3.34 percent/year over 1964-1974 and 4.77 percent/
year over 1963-1973).
3. Consumption of Refined and Nonrefined (Scrap) Copper
Copper consumption trends in the United States since 1950 are shown in
Table VII-2. It can be seen that refined copper accounts for a large
and increasing share of total United States consumption during this
period, with directly consumed scrap reaching to over 30 percent
by 1974. It should be noted, however, that during this same period the
share of refined copper from scrap at smelters and refiners in total
refined copper production has increased from 14.3 percent in 1950 to
22.6 percent in 1974. Consequently, refined copper production from
scrap plus directly consumed scrap, taken together, account for a
larger share of total consumption (i.e., 46.1 percent in 1974).
During the post-war period, United States copper consumption, despite
long-term substitution principally from aluminum, shows an upward
trend. Over the 1950-1974 period, the growth in total consumption
has been relatively slow at 1.31 percent per year. However, since
the early 1960's, the growth rate has been significantly higher
(4.04 percent/year over 1960-1973 and 2.91 percent/year over 1960-1974).
The data presented in Table VII-2 can be augmented and brought up to
date (to 1976), based on information available from United States
Bureau of Mines, as follows:
United States Refined Copper Consumption Percent
Year (thousands of short tons) Change (%)
1973 2,437.0
1974 2,194.2 - 9.96
1975 1,534.5 -30.07
1976 1,960.1 27.74
SOURCE; United States Bureau of Mines, Mineral Industry Surveys
Copper in 1974 and Copper in December. 1976.
4. Major Direct Users of Copper
As shown in Figure VII-1, there are six major groups of direct users
of refined copper and scrap: four copper semifabricating industries-
wire mills, brass mills, foundries, and powder mills; ingot makers;
and a group of "other" industries such as chemicals, steel, and
aluminum.
VI1-4
Arthur D Lit tklnc
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TABLE VII-2
s
l-l
I
D
c:
CONSUMPTION OF COPPER IN THE UNITED STATES, 1950-1974
(copper content, in thousands of short tons)
Percent Composition (%)
Year Total
1950 2272.2
1955 2418.7
1960 2079.3
1965 2995.4
1970 2930.5
1971 2956.0
1972 3266.2
1973 3481.7
1974a 3106.2
Refined
Copper
1482.2
1536.7
1372.3
2034.4
2044.0
2017.8
2236.2
2445.6
2156.6
Scrap
790.0
882.0
707.0
961.0
886.5
938.2
1030.0
1036.1
949.6
(Average annual compound
1950-1970 1.28
1950-1974 1.31
1960-1973 4.04
1960-1974 2.91
NOTES : aPr el iminary .
1.62
1.57
4.54
3.28
0.58
0.77
2.98
2.13
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Refined
Copper
65.2
63.5
66.0
67.9
69.7
68.3
68.5
70.2
69.4
Scrap0
34.8
36.5
34.0
32.1
30.3
31.7
31.5
29.8
30.6
growth rate)
-
-
-
—
-
-
-
-
-
-
-
-
Includes copper refined from scrap.
cRefers to directly
consumed scrap.
SOURCE: Copper Development Association, Copper
Supply and
Consumption
1950-1969; 1955-1974
•
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FIGURE VII-1
COPPER CONSUMPTION IN THE UNITED STATES. 1974
(see below for units)
!
1
Total ^^^
Copper "^"™.
Consurptlnn 1
3.167 0
i
1
- •
Sloikb t
Ol hi'l
l_Lyi_,
1 Kcl.il
Stock*: <.
OthLr
1 170.6 J
T"
• ! 1
, L Scrap. 161.0
iJ2™ 1. J -2}3_7J
Metal
(Stocks &
1 Other
' »•' J
j TOT All 1,4.1
,_.k Ingot Milkers. f-7 — j
TOT, _b f InCot |
.A lie lined. 4.?' .'Stocks*!
* Scrnp. 2is.n . Other 1
1U1AL: >\<>.l- 1 10.9 !
I
i Other Industries:!
' ) Refined: 9 1 '
J Cc'a*1: 56 9
™, 10IAI.: 66 0 . Metal
Othul
2.6
>^M>>MMk, Piturfr r I'lailtfi- T
Ban- Ulru
214
Insulated
7u6 i
Other Ins.ll.llud
1,661
iluet riii-bliii; j
] ,OfiO Tiilu- i
35? |
and Tiili>> |
I'lrc 415 I
fnstlncs
"i.nld Ole
i£i 18
Ponr.incnt Oilier i
Mold 57
25
Powder 1
..r — :. ~=. S Sciap- 17 7 1 61 6
[ TOTAL 29.7
Net
Imports
5/
| ISulMlii".
4|C"II>-I Mill ll>'>l
1 Trnns- '
-| |iortntlon >
1 Hi :
1 Consumer (
L' & Cunc.ru!
* i"roju':tu
i 1.739
1 IiidusL l fal i
^Machinery & '
j rqnipavnt '
i ii.lJO._ ..j
1 Kl.TlrlraL
lU Elcctiunlc
*j Prnducto
2,056 i
CONSUMPTION BY SfaPABRlCATDRS
(Copper Content, Thousands of Short Tnns)
SUPPLY OF SCllIFABKLCATCn AND FABKICATtD PRODUCIS
AND CON<|'Pcr
SOURCE; Arthur D. Little, Inc., based In prirl. i.n Copper IVvclopment
AssociatIon, forj"r Supply niul f.»ns,iui>tjm l.W5^1 ">7*.
Figures presenti.>l here B.IJT differ sm.iruT.ar rrn*~ilioi-r i;lwi-ii
In Table 7-3.
vir-6
Arthur D Little Inc
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Ingot makers are, in effect, intermediate processors of refined copper
and scrap, producing copper alloy ingot, the bulk of which they sell
to the other semifabricating industries, principally brass mills and
foundries. While ingot makers and "other industries" are not copper
semifabricators as commonly defined, for convenience we shall refer
to the aggregate demand schedule of the six consuming groups as the
demand for refined copper and its equivalent on the part of semi-
fabricators.
The one characteristic shared by the four semifabricating industries
is their use of copper as a basic input. The general task of the
semifabricating industries is to alter the shape of copper inputs
into products for final end-use. Their production technologies are
almost completely different, and their products are not substitutes
or complements in any important way, Wire mills, brass mills, and
powder mills use mechanical means, while foundries use casting means.
Ingot makers produce copper alloy ingot which is then sold to brass
mills, foundries, powder plants, and other industries using copper.
Wire mills and brass mills have traditionally been the largest consumers
of refined copper and its equivalent accounting for about 86 percent
of total consumption in 1974 (refer to Table VII-3). Wire mills,
which use only refined copper, consumed about 47 percent, while
brass mills, which use refined copper and scrap in fairly equal
proportions, consumed about 39 percent. Ingot makers, who almost
entirely use scrap, were the third largest consumers at seven percent.
Foundries, which use mostly scrap, consumed about four percent of the
total, with powder plants and "other industries" accounting for the
remainder.
Over the last two decades, brass mills have generally accounted for
39-42 percent of total consumption; wire mills, on the other hand,
have gradually increased their proportion of total consumption from
37 percent in 1956 to the above-mentioned 47 percent. The proportion
of total consumption attributable to ingot makers and foundries has
declined somewhat over the last two decades.
Table VII-4 provides a breakdown of the various semifabricated products
of the four semifabricating industries and gives production levels for
1966, 1970, and 1974 in terms of metal content. Although total output
appears to have declined by 10 percent between 1966 and 1974,
fluctuations in intervening years not shown make it difficult to discern
any secular declining trend. Production of wire mills products increased
in absolute terms and as a percentage of the total. Powder mill output
remained fairly stable in both absolute and percentage terms, while
total production of brass mills products and foundry products declined.
Brass and wire mill products account for approximately 85 percent of
total production by metal weight for the entire period.
VII-7
Arthur DLittklnc
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TABLE VII-3
CONSUMPTION OF COPPER PRODUCTS BY
DOMESTIC SEMIFABRICATORS. 1974a
(thousands of short tons of copper content)
Wire Mills
Brass Mills
Foundries
Powder Mills
Ingot Makers
Other
Refined
Copper
1,433.4
670.3
28.7
12.0
4.7
7.5
2,156.6
Scrap0
-
563.0
115.4
17.7
215.0
38.5
949.6
Total
1,433.4
1,233.3
144.1
29.7
219.7
46.0
3,106.2
Percent
Breakdown
46.1
39.7
4.6
1.0
7.1
1.5
100.0
NOTES; "Preliminary.
Includes refined copper from scrap.
Q
Old and new scrap which is directly consumed.
SOURCE; Copper Development Association, Copper Supply and Consumption,
Annual Data. 1955-1974.
VII-8
Arthur D Little Inc
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TABLE VII-4
vo
D
fW
r»
PRODUCTION OF SEMIFABRICATED COPPER PRODUCTS, 1966, 1970, 1974
Wire Mill Products
Bare Wire
Insulated Communi-
cation
Other Insulated
Total
Brass Mill Products
Sheet
Rod and Mechanical
Wire
Plumbing Tube
Commercial Tube
Total
Foundry Products
Sand Castings
Permanent Mold
Die Castings
Other
Total
Powder Products
Granular
Flake
Total
Grand Total
NOTES ; "'Preliminary.
SOURCE^ Copper Development
Metal
Content
134.5
323.0
789.5
1,247.0
656.5
521.0
236.5
249.0
1,663.0
428.0
23.0
15.0
37.0
503.0
30.0
3.5
33.5
3,446.5
(Thousands
1966
Percent
of Total
3.9
9.4
22.9
36.2
19.0
15.1
6.9
7.2
48.2
12.4
0.7
0.4
1.1
14.6
1.0
100.0
of Short Tons)
1970
Metal
Content
113.0
350.0
701.5
1,164.5
441.5
402.0
189.0
224.0
1,256.5
310.0
24.5
11.0
30.0
375.5
21.5
2.0
23.5
2,820.0
Percent
of Total
4.0
12.4
24.9
41.3
15.7
14.3
6.7
7.9
44.6
11.0
.9
.4
1.0
13.3
.7
.1
.8
100.0
Metal
Content
109.5
383.0
830.5
1,323.0
530.0
493.5
176.0
207.5
1,407.0
282.5
12.5
9.0
28.5
332.5
31.5
3.0
34.5
3,097.0
1974 a
Percent
of Total
3.5
12.4
26.8
42.7
17.1
15.9
5.7
6.7
45.4
9.1
.4
.3
.9
10.7
1.0
.1
1.1
100.0
Association, Copper Supply and Consumption, 1955-1974.
-------
The right side of Figure VII-1 illustrates the fact that semifabricating
industries demand refined copper and its equivalent not for final
consumption, but as intermediate inputs in the production of semifabri^
cated products. The demand for semifabricated products on the part
of fabricators or end-use industries is, in turn, a derived demand,
derived from the demand for final goods being produced by fabricators
or end-use industries.
While we focus, in the remainder of this chapter, on patterns of
consumption by end-use industries and on methodological approaches
to demand analysis, it is important to keep in mind the important role
played by end-use industry demand for semifabricated products which
determine semifabricators' demand for refined copper and scrap.
5. Consumption of Copper by End-Use Industries
Table VI1-5 presents data on consumption of copper by end-use industries.
The end-use (fabricating) industrial categories that predominate in
the consumption of semifabricated copper are the following in order
of importance:
• Electrical and electronics products;
• Building construction;
• Consumer and general products;
• Industrial machinery and equipment;
• Transportation;
• Ordnance and accessories.
The electrical and electronics products industry group has grown to
be the principal consumer of copper, accounting for somewhat less
than one-third of all annual copper consumption. Building construction
continues to be a significant consumer of copper for electrical
wiring and pipe. The consumer products industry group grew significantly
during the late 1960's; however, its use of copper declined after 1969.
While economic conditions may explain part of this decline, substitution
and product redesign may also have contributed to this change. The
industrial machinery and equipment industry and the transportation
industry increased their consumption of copper through 1966; however,
by 1970, both industries returned to consumption levels found in 1960.
VII-10
Arthur D Little Inc
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TABLE VII-5
Transportation
Consumer and General
Products
Electrical and
Electronics
Products
Industrial Machinery
and Equipment
TOTAL
Building Construction
Transportation
Consumer and General
Products
Electrical and
Electronics
Products
Industrial Machinery
and Equipment
TOTAL
NOTES;^Preliminary.
UNITED
STATES COPPER
CONSUMPTION
BY BROAD END-USE CATEGORIES, 1960-1974
(thousands of short tons)
I960
i A78.5
293.5
342. S
619. 5
452.0
2,186.3
1961
539.5
297.0
358.5
604.5
446.5
2,246.0
1962
623.0
338.5
384.0
627.0
484.0
2.456.5 2
1963 1964
648.0 750.5
352.0 398.0
397.5 469.0
673.5 752.5
506.0 556.0
.577.0 2,926.0
1965
779.5
429.5
513.5
818.0
569.5
3.110.0
PERCENTAGE
1960
> 21.9
13.4
15.7
28.3
20.7
100.0
1961
24.0
13.2
16.0
26.9
19.9
100.0
lopper Development
1962
25.4
13.8
15.6
25.5
19.7
100.0
Association
1963 1964
25.1 25.6
13.7 13.6
15.4 16.0
26.1 25.7
19.7 19.1
100.0 100.0
, Copper Supply
1965
25.1
13.8
16.5
26.3
18.3
100.0
1966
780.0
452.0
741.0
947.5
634.5
3,555.0 3
COMPOSITION
1966
21.9
12.7
20.8
26.6
18.0
100.0
1967
647.5
351.0
752.5
797.0
519.0
,067.0
1967
21.1
11.4
24.5
26.0
16.9
100.0
and Consumption. 1955-1974;
1968
637.5
400.5
812.5
795.0
543.0
3,188.5
1968
20.0
12.5
25.5
25.0
17.0
100.0
1960-1968
1969
711.0
414.0
784.5
899.5
529.5
3,338.5 2
1969
21.3
12.4
23.5
26.9
15.9
100.0
: Charles
1970
632.0
333.5
601.5
835.0
484.0
,820.0
1970
21.9
11.6
20.8
28.9
16.8
100.0
River
1971
696.0
379.0
587.0
853.5
479.5
2.910.0
1971
23.2
12.7
19.6
28.5
16.0
100.0
Assocates ,
1972
749.5
411.0
664.0
1973
820.5
459.0
702.0
979.0 1,118.5
554.5
586.0
3,240.0 3,596.0
1972
22.3
12.2
19.8
29.2
16.5
100.0
Inc. (CRA)
1973
22.3
12.5
19.1
30.3
15.8
100.0
1974a
626.5
380.0
604.0
1,017.5
501.0
3,097.0
1974a
20.0
12.1
19.3
32.5
16.1
100.0
, Economic
Analysis of the Copper Industry (March, 1970), p. 12.
-------
6. Consumption and Uses of Copper Versus Demand for Copper
Analysis of demand for copper requires a distinction between the
consumption and uses of copper and the demand for copper. First,
the consumption and uses of copper are not definltionally Identical.
Similarly, uses of copper and the demand for copper differ
conceptually. Of these three terms, "consumption" is the most
straightforward. Next, while "uses of copper" refers to the
disposition of copper on hand, "demand" Is an economic concept which
refers to the quantities the buyers are willing to purchase at different
prices, everything else being equal. The problem typically encountered
in demand analysis is to move from consumption data to a data base that
more accurately approximates actual market conditions under which,
at prevailing prices, producers are willing to supply a certain amount
and the consumers are willing to purchase a certain amount (i.e. , the
market is cleared; supply and demand are equal at the prevailing
price level).
Data on copper flows are usually collected in terms of production,
consumption, and inventories. Therefore, "demand" (i.e., point
estimates of demand over time) must be estimated from these figures,
by adjusting either overall production or consumption figures for
changes in inventories and/or net exports. How this is precisely
accomplished depends on one's analytical objectives. From a
theoretical point of view, the choice of approach might be important,
but for the objectives of this study, this becomes relatively
inconsequent ial.
On the demand side, the principal use categories for refined copper
and refined copper equivalent (e.g., unrefined scrap or copper alloy
ingot) are:
• consumption by semifabricators;
• net additions to inventories;
• net exports.
The category of net inventory additions can be further subdivided into:
(a) stock changes of primary refiners; (b) stock changes of secondary
refiners; (c) changes in Federal Government stockpiles, and (d) stock
changes of semifabricators.
Table VII-6 indicates the relative importance of alternative uses of
refined copper or refined copper equivalent in the United States for
selected years from 1954 through 197A^-»2. Clearly, consumption by
VII-12
Arthur D Little Inc
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semifabrlcators dominate, among uses of refined copper equivalent.
Inventory changes at the semifabricator level have represented only
a marginal proportion of total uses. Although in some years net
exports and changes in primary producer inventories and government
stockpiles have represented a somewhat larger proportion of total
uses, their net impact on total quantities has been relatively small.
By definition, the total amount of copper supplied by the primary
.producers, secondary refiners, and scrap suppliers in any year must
equal total uses of copper for that year. The "materials balancing"
identity or accounting equation can then be represented as follows:
QPR + QSR + QSNR = QC + NE + AIGOV + AIF + AIRR + AIRS (1)
where QPR represents the quantity of primary refined copper produced,
QSR is the quantity of secondary refined copper produced from scrap,
and QSNR represents the quantity of unrefined scrap supplied (and
used directly); QC is consumption by semifabricators; NE is net
exports, AIGOV is the change in government stockpiles; AIF is the
change in semifabricator inventories; AIRR represents the change in
inventories of primary refiners; and AIRS is the change in inventories
of secondary refiners.
If demand is defined as the demand on the part of the domestic semi-
fabricators (definition 1), the relevant figure (QD) can be derived
from the consumption side as follows:
QD = QC + AIF (2)
Demand could also be defined, more broadly, to include net exports
and changes in government inventories (definition 2):
QD* = QC + AIF + NE + AIGOV (3)
These two additional components, when positive, clearly represent
additional demand for domestic supplies of refined copper equivalent.
The net result of adjusting semifabricator consumption figures for
net exports and government stockpile changes, as well as semifabricators
inventory changes, will be as follows: QD* > QD in years when net
exports and government stockpile changes are positive and QD > QD*
when net exports and government inventory changes are negative.
Because we are concerned principally with the dynamics of demand on
the part of domestic semifabricators, we have chosen to focus directly
on the demand for refined copper equivalent on the part of domestic
semifabricators. Aggregate^demand figures for the domestic semi-
fabricators industries under definition 1 are presented in Table VII-6.
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Arthur DLittk Inc.
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TABLE VII-6
UNITED STATES SEMIFABRICATOR DEMAND FOR REFINED
COPPER AND SCRAP, 1954-1974
(Thousands of Short Tons of Cu Content)
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974a
NOTES;
SOURCE:
QC T
1,916.5
2,418.7
2,365.0
2,106.4
1,974.6
2,318.6
2,079.3
2,170.0
2,361.1
2,565.7
2,775.0
2,995.4
3,368.6
2,850.4
2,813.5
3,164.2
2,930.5
2,956.0
3,266.2
3,481.7
3,106.2
Preliminary.
AIF
-26.0
24.0
7.0
- 2.0
4.0
-39.0
8.0
4.0
5.0
- 8.0
10.0
9.0
63.0
-49.0
-14.0
10.0
64.0
-13.0
-62.0
0.0
75.0
Copper Development Associa
Consumption, 1954-1973 and
QD
1,890.5
2,442.7
2,372.0
2,104.4
1,978.6
2,279.6
2,087.3
2,174.0
2,366.1
2,557.7
2,785.0
3,004.4
3,431.6
2,801.4
2,799.5
3,174.2
2,994.5
2,943.0
3,204.2
3,481.7
3,181.2
tion, Copper Supply and
1955-1974.
VII-14
Arthur D Little Inc
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It should be noted, in this connection, that in our construction of
a simultaneous-equation econometric model of the copper industry,
described in greater detail In the Technical Appendix to this
volume, the demand side was given considerably greater attention
than may be implied by the above remarks. Specifically, separate
equations have been constructed for the various types of inventory
holders and for net exports, while changes in government inventory
stocks enter the model exogenously.
7. Definition of the Market for Copper for Demand Analysis
Before proceeding with a discussion of the main theoretical issues
and econometric approaches in analyzing demand for copper, we should
note that, for purposes of analyzing market demand, it is generally
accurate to think in terms of a unified market for refined copper,
copper scrap, and copper alloy ingot.
As pointed out earlier in this chapter, except for wire mills,
semifabricators and fabricators use not only refined copper but also
various types of scrap and copper alloy ingot in their operations.
Typically the difference between refined copper prices and prices of
various types of scrap and copper alloy ingot would be roughly indicative
of the added costs to the user of substituting the latter form of
copper for the former. Since there are buyers for all possible
combinations of products, arbitrage can be fully effective, especially
since copper merchants stand ready to trade in virtually all types of
copper.
C. DEMAND FOR COPPER; THEORETICAL CONSIDERATIONS
1. Basic Considerations
There are a number of points that deserve emphasis in a discussion of
the demand for copper. First, in- accordance with economic theory,
demand for copper is negatively correlated with its price. That is,
if the relationship between the total quantity demanded and the unit
price for copper (assuming other variables are held constant) can be
stated:
Q = F(P)
or linearly as
Q = "o + alp
the coefficient «i has a negative sign. This equation can be represented
graphically by a demand curve (schedule), which indicates the total
quantity of copper that would be demanded by a group of users (in this
case domestic semifabricators) at various price levels. Thus, the
demand curve in Figure VII-2 indicates that, if everything else is
VII-15
Arthur DLittk Inc.
-------
FIGURE VII-2
GENERAL DEMAND SCHEDULE FOR COFFER
Price
Quantity
VII-16
Arthur D Little Inc
-------
held constant and the price of copper (refined copper and its equivalent)
is PI, demand for copper would be Qi units. If the price were to fall
to ?2, Qa would be demanded. Here, the other factors affecting the
quantity demanded are held constant in order to isolate the relation-
ship between price and quantity.
Second, the demand for copper is a "derived" demand, which arises
from the final demand for the goods for which it is an input. The
four semifabricatlng Industries (i.e., brass mills, wire mills,
foundries, and powder plants) plus other industries (i.e., chemical,
steel, aluminum and other industries) which directly use refined or
scrap copper as inputs, buy copper not for purposes of final con-
sumption but for use in their own intermediate production. Their
output of semifabricated products is, in turn, demanded by fabricators
and end-use industries as intermediate inputs in the production of
final durable goods for domestic consumption (i.e., personal
consumption or government purchases), investment (i.e., as producers'
durable equipment or construction), or exports to the rest of the
world. Consequently, we should expect a causal relationship between
the general utilization of copper and industrial production of
durable manufactured goods, including construction materials. As
industrial production of durable manufactured goods increases, the
demand for copper would then decrease. If greater specificity in
demand analysis is sought, demand for copper can be analyzed by
relating it to the activity of the individual end-use industries.
This could provide a more differentiated examination of the dynamics
of demand, as the share of copper's cost in the total is different
for different final products (e.g., in an automobile or a refrigerator
its share is very small, whereas in power transmission lines its share
is very large).
Third, the demand for copper is positively correlated with the price
of substitute goods. For various products which use copper, there
are other materials which could be used even though they are not,
in general, perfect substitutes for copper in the manufacturing process.
The most Important substitutes for copper in various uses include
aluminum, stainless steel, zinc and plastics. Each substitute is a
competitor to copper in limited situations. For example, aluminum is
a substitute for copper mainly in wire products, given its high
electrical conductivity. For consumer products, plastics are the
more important substitutes.
Substitution of aluminum or another material for copper can occur in
either the short-run or the long-run. Short-run substitution for
copper can take place whenever an alternative material can be used
without requiring major alterations In fixed plant and equipment,
or changes in product design. The major instances of this sort of
VII-17
Arthur D Little Inc
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substitutions are probably to be found in residential and nonresidential
construction. For example, the leading substitutes for copper drainage
pipe are plastic and cast iron pipe. Copper pipe is preferred on
technical grounds, but if the price becomes too high or copper is simply
unavailable, contractors can readily use plastic or cast iron.
Decisions on what sort of pipe to use are made frequently, so
substitution can take place in the short-run in the sense that it
requires no investment and that the effects of a change in price
probably occur rapidly.
Short-run substitution can also take place through variations in the
copper content of alloy semifabricated products. That is, a consumer
who normally uses semis of pure copper or alloys with a very high
copper content might switch to alloys with a lower copper content
when prices are high. There are also many ways in which the quantity
of copper used per unit of output can be reduced.
While it appears that there can occur, in some instances, a noticeable
short-run response to changes in price, in many other situations,
the capital fixity of plant and equipment will limit the possibilities
for substitution in the short-run. While copper and its substitutes
may exhibit the same required physical properties in use, the capital
in place in the using industry cannot generally be used in processing
the substitutes.
Finally, we should comment briefly on the role of speculative demand
in demand analysis for copper. Although speculative demand and
speculators are often blamed for much of the copper market's
instability, it is difficult to tell, to paraphrase Sir Ronald
Prain, whether the speculators are the cause or the beneficiaries.
While they may influence prices for a very short time, there has yet
to be found any way to alter the fundamental laws of supply and
demand in the long-run3.
2. Specification and Functional Forms
Based on the basic points outlined above, the demand for refined
copper and its equivalent can be said to be a function of macroeconomic
activity levels (driving the activity levels of the end-user industries),
the price of refined copper, and the price of substitute products.
In an econometric analysis of demand for copper, these would serve
as the independent variables. Other factors, such as the prices of
complementary commodities and factors of production, probably have
some influence on quantities of refined copper demanded, but there is
little a priori evidence to suggest a degree of influence substantial
enough to require their inclusion as explanatory variables in an analysis
of demand for copper.
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Arthur D Little Inc
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For the most part, the economic theory behind these variables acting
as demand determinants is straightforward. As economic activity
and income increase, greater quantities of producers' durable goods
and consumer durables using copper inputs will be demanded; this
will, in turn, lead to a greater derived demand for copper on the
part of semifabricators. Similarly, as copper prices increase,
semifabricators and end-users will react by cutting back their consumption
in most instances. When prices decrease, in most instances semifabricators
and end-users will demand more.
Accordingly, a demand equation for copper can be specified showing the
relationship not only between the quantity (of copper) demanded and
its own price, as given above, but also between the quantity demanded
and all of the pertinent variables simultaneously, as shown below:
Q = F(P, Ps, Y) (5)
This equation simply indicates that although the price of copper (P)
affects the quantity demanded (Q), the quantity demanded is also a
function of the prices of substitute commodities (P ), and the income
or activity levels (Y) of the users.
The demand curve suggested by Equation (5) is not only static
(i.e., time invariant) but also quite general; it indicates only that
the variables are causally related in some way to quantities demanded.
In order to introduce greater specificity into the demand equation,
it is necessary to look at the production function for semifabricators.
This production function is simply a technical relationship indicating
the maximum amount of output which can be produced by a producer or
industry with each and every set of possible factor inputs (capital,
labor, materials). The exact mathematical form of the demand schedule
for refined copper equivalent, because it is a derived demand, will
reflect the relationship expressed in the aggregate production function
for semifabricators^.
Even given the need to reflect the production function for semifabri-
cators, however, the exact form of the equation can still be specified
in different ways, each of which involves different assumptions
concerning price and income response behavior of semifabricators
(and, by implication, fabricators and end-users) over time. For
example, the demand equation introduced above could be specified in
linear or nonlinear forms.
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Arthur D Little Inc
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The linear form of Equation (5) can be written as follows:
Q^ = oc0 + cc^ + «2pS + cc3Yt + ut (5a)
where t refers to a given year, «o» ai» K2> "3 refer to econometrically
estimated parameters (coefficients) and u is a stochastic (random)
disturbance term. The requirements for u are that it be independent
of the other explanatory variables, be free of autocorrelation and have
constant variance.
The general demand curve in Equation (5a) could be utilized to model
the demand for refined copper equivalent for each semifabricating
industry (wire mills, brass mills, foundries, powder mills, ingot
makers, and other industries) separately or for the group of all
semifabricating Industries consuming refined copper equivalent. Since
a derived demand curve reflects the characteristics of the production
function of the consuming industry, a demand curve estimated for
the aggregation of the semifabricating industries would reflect an
amalgamation of each of the production functions of these industries.
If the objective is to estimate the parameters of the individual
production functions, such an aggregation would probably generate
aggregation errors^. However, in order to examine the relationship
between aggregate demand for copper and price and activity variables,
such a disaggregation is not necessary. Furthermore, attempts in
the literature to disaggregate demand analysis to individual semi-
fabricating industries have not proved successful6.
Equation (5) can also take a nonlinear form, such as
Q = anP
^t ° t u
which is normally transformed for estimation purposes into the following
log-linear (log-log) form:
Q
log (y = log «0 + "1 Io8 p_ + "2 Io8 P.. + "3 Io8 Y + u . (6a)
t u t t t
The linear form requires the assumption that, whatever the initial
price level, an absolute increase in price of a certain amount will
lead to an absolute decline in the quantity demanded. Thus, a $1.00
increase in price will lower the quantity demanded by the same
absolute amount whether the initial price is $10.00 or $100.00.
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The log-log form, on the other hand, imposes the assumption that
a proportional (percent) Increase in price from any initial price
level will lead to a corresponding proportional (percent) decrease
in quantity demanded. Consequently, in the log-log specification,
a $1.00 price increase from a $100.00 price level (i.e., one percent)
would have a much smaller absolute impact on the Quantity demanded
than a $1.00 increase from a $10 price level (i.e., ten percent).
If a log-log form is used, and the equation is estimated on an annual
basis, the nature of the log-log form will cause the estimated price
and income elasticities to be constant annually over the entire
sample period. This imposed constancy of the elasticity estimates
can be undesirable if it is felt that in reality price elasticities
change from year to year, given changes in such factors as taste and
market conditions. The linear form requires no such assumption, and
permits the estimation of differing elasticities as they may change
from year to year.
In short, any model of demand applied to a body of data imposes certain
inherent constraints. If the range of price variation has historically
been small, the assumption of a fixed absolute quantity response to an
absolute price change (as in the linear form) may not be worrisome.
In fact, in such a case, the ability of the linear formulation to estimate
differing elasticities over the sample period may be analytically helpful.
3. Long-Run Substitution in Demand
Long-run substitution (LRS) has been a serious concern on the part of
the copper industry, especially since 1947 when the price of copper
went above the price of aluminum for the first time. Although the
relative price of copper has fallen sharply on occasion in the past
(e.g., during 1957 and again during the last half of 1970), the upward
trend was resumed shortly thereafter.
Industry observers are not in complete accord on the importance of
LRS. However, it is generally agreed that aluminum has been the
most serious competitor to copper, having made the most serious inroads
in electrical conductor and heat-exchanger applications.
The most important potential instances of LRS are in telephone conductor
cable and automobile radiators. Conductor cable and automotive radiators
account for roughly 25-30 percent of total demand for primary copper
in the United States. There is also clearly LRS in the demand for
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copper electric transmission cable where aluminum has almost completely
displaced copper for overhead transmission and the possibility of LRS
in the demand for several other markets has been mentioned in the trade
press. In general, LRS is present in most of the markets for copper
wire, and these constitute 60 percent of the demand for refined
copper. More detailed information on LRS in specific cases in provided
in Appendix B.
Substitution for copper will occur only when the relative price of
a substitute for copper becomes low enough to justify engineering and
tooling costs required to alter the capital equipment of the using
sector. The full substitution from copper to a competing commodity
will occur only in the long-run. In economic terms, the long-run
own-price and cross-price elasticities will be greater than the short-
run price elasticities.
Technological advances can contribute to long-run substitution (LRS)
in two ways. On the one hand, fabricators and end-users are
responsive to technical as well as economic considerations in choosing
to use copper versus a substitute. Thus, LRS may be stimulated by
changes in the technical and practical feasibility of substitution
(i.e., mechanical and physical properties achieved in using a sub-
stitute material, safety, ease of handling and storing, size or weight
limitations). Technological developments can also alter the relative
price ratios at which substitutes for copper may be economical. For
example, developments in the last decade in the use of aluminum
telephone cables and automobile radiators made aluminum, in theory
at least, a realistic substitute at prevailing relative prices.
During the last two decades, world market prices for refined copoer
have often experienced substantial and at times violent fluctuations.
Producers in the industry have at times voiced fears that, regardless
of the relative price of refined copper, a lack of stability in that
price over time would by itself stimulate fabricators and end-users
to substitute other materials for copper.
It seems unlikely, however, that price fluctuations alone encourage
LRS for copper. Most copper consumers base their purchasing plans
not on daily price fluctuations occurring on a free market, such
as the London Metal Exchange, but rather on fluctuations of the monthly
or quarterly average price. Short-term fluctuations leading to
unusually favorable or unfavorable dates for buying can be expected
to cancel each other out in the long-run, regardless of the general
buying practices of most firms. Thus, expectations of future long-
term relative price trends are likely to be the most important
determinant of LRS, as part of long-term investment planning on the
part of the user Industries.
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The fact that long-term substitution in demand can require a period
of years as changes in capital equipment take place implies that
end-users of copper only "partially adjust" to a new copper price
level each year. Their equipment will only depreciate so fast each
year and because such equipment will not be replaced immediately,
the derived demand for copper is less elastic in the short-run than
in the long-run. In the long-run, the end-use industries can fully
adjust to new factor prices (price changes being assumed once-for-all)
through structural and equipment alterations; hence, demand will be
more elastic over the long-run.
4. Short-run and Long-run Adjustments in Demand; Dynamic Demand
The analytical framework for dealing with the short-run and long-run
adjustment process in demand, due to the existence of long-run
substitution (LRS), is provided by a class of models known as the
"adaptive expectations" ("partial adjustment" or "distributed lag")
models .
The dynamics of the adjustment process can be examined with the aid
of Figure VII-3. DL in Figure VII-3 is the long-run demand schedule
of a group of copper using Industries and D is the short-run demand
curve. The curves are assumed to be in equilibrium at (Qj., PI).
If we assume there is a once-far-all price decrease from PI to ?2»
the long-run desired quantity demanded would be (fe. However, in the
short-run, equipment and structural rigidities cannot be removed
quickly enough. The copper-using industries would therefore end up
operating on a new short-run demand curve D , demanding Q2, which
represents only partial adjustment to the new price situation.
Eventually, as the copper-using industries continue to adjust by
altering plant^ and equipment, their short-run schedule will move
outward from B until it reaches a new short-run demand curve D .
Equilibrium issagain achieved at (Q2, Pa) by producers operating at
the intersection of the short-run demand curve D* and the long-term
demand curve D .
LI
Equation (7) given below, is similar to Equation (5a) except that
it relates the desired quantity demanded Q*, by semifabricators,
in a given year (rather than the actual quantity demanded Q ) to
prices and activity levels:
Q* = cc0 + «1Pt + a2ps + «3y. (7)
Where the desired quantity demanded and the actual quantity demanded
are the same, there is no problem. However, as discussed above, users
of copper may not be able to consume Q* (the desired quantity) because
of technological constraints. Although, in the long-run, they shall
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FIGURE VII-3
THE SHORT-RUN AND LONG-RUN ADJUSTMENT
PROCESS IN DEMAND FOR COPPER
Price
Q2 Q2
Quantity
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move toward Q*, they can only adjust partially to that level of the
short-run. We can represent this latter substitution as follows:
Qt-Qt_! = ^(Q?-Qt_i). ^l1 (8)
which means simply that the users of the factor (i.e., copper) adjust
the level of their actual demand from year t-1 to year t (estimated as
Qt - Qt-]) in some proportion X of the difference between desired
demand (Q?) and actual demand during the preceding period (Qt_i).
If no technological constraints existed, X = 1 and Qt = Q*. In that
case* the short-run and long-run demand responses (and elasticities)
would be equivalent.
Since "desired" quantities cannot be observed, we can combine
Equations (7) and (8),
which can be econometrically estimated because all the explanatory
variables are observable.
5. The Relationship between Short-run and Long-run Elasticities
We can see that in Equation (7), <*} is a measure of the long-run own-
price elasticity. If Equation (7) were estimated in log-log form,
«1 would be that elasticity. In Equation (9), a}X is a measure of
the short-run elasticity, since the equation is specified with
actual price and actual quantity demanded, rather than desired
quantity demanded. If Equation (9) were estimated in log-log form,
the short-run elasticity would be A«I. Hence, a knowledge of X q
indicates the difference between the short-run own-elasticity (egR)
and the long-run own-price elasticity (e^) of demand, and the
two are related as follows^;
Implicit in the short-run/long-run interrelationship is an outward
movement in the short-run demand curves. As producers adjust to
?2, Ds moves_out_to D8, "os, and so on^-l as Qi increases to Q£, Q2
etc. (where Qa, (?2 etc. represent actual quantities demanded).
Equilibrium is reached when the short-run demand curve reaches DSD8
and equilibrium is again achieved at (Q2> ?2) by the intersection
of DsDs and
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6. Stochastic Considerations
The above models, which are theoretical specifications attempting to
approximate the complexity of derived demand for copper, represent
simplified methods of dealing with demand. Before such models can
be utilized, they must be estimated. Econometric estimation of
demand functions poses some potentially difficult problems, although
they are not insurmountable.
One possible difficulty can be the identification problem. The
technical aspects of the identification problem are not developed
here12. Suffice it to say that in models of the size used for the
nonferrous metals industries, under identification is usually not
the problem; over identification is usually the case. Overidentification
is a problem of riches; there exist more than enough restrictions on
the parameters to yield several different estimates (in small samples)
of the parameter. As can be demonstrated1^, two-stage least squares
(2SLS) yields consistent and efficient estimates (2SLS was used
throughout our analysis, reported in the Technical Appendix).
A second problem involves the presence of lagged endogenous variables.
In single equation estimation under conditions of serial correlation1^,
the presence of lagged endogenous variables can yield inconsistent
parameter estimates. Lagged endogenous variables in a simultaneous
system lead to similar difficulties. Needless to say, there exist
techniques to deal with the problems. The usual technique utilized
in our analysis is the use of instrument to obtain consistent estimates
of E and the autocorrelation coefficient p1^ and the use of p to
estimate ft and run GLS.
*_! -1 ._!
(X X) X'n Y
yielding consistent but not efficient estimates of B. Maximum
likelihood techniques could he used to obtain asymptotically efficient
estimates; however, in our own analysis the efficiency gained was
not judged to be worth the extra effort1?.
Finally, there is always a potential "errors in variables" problem
that must be discussed. In the typical nonferrous metals markets,
demand specification could pose particular problems depending on the
availability of data on prices (e.g., actual transactions prices,
or list prices) especially in the presence of "rationing" during
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periods of demand-crunch. It is obvious that in order to estimate
the relationship between the price actually paid (transaction prices)
by users and the quantity demanded at such prices the analyst must
observe the actual quantities and prices. However in some cases,
the only price series available are list prices, which can differ
considerably from transactions prices depending upon market conditions.
In times of a supply glut, for example, sellers may shave their
actual transactions prices from list through various rebates, absorption
of transportation margins, and various inventory financing schemes.
It is this transaction price that is relevant for the analysis of
demand for a given commodity. Furthermore, if a commodity is
rationed in periods of excess demand, the actual quantity demanded
at the observed price can be ascertained only by an exact knowledge
of who is rationed and by how much.
When transaction prices and quantities are recorded for markets nearly
in equilibrium these considerations are less worrisome. Therefore,
it is important for the sample to be defined in such a way as to
avoid observations reflecting significant disequilibrium (i.e.,
rationing) or, alternatively, to attempt to correct for disequilibria,
through the use of a dummy variable, for Instance. As a rule,
transactions prices should always be used. The next best alternative
is at least to use a proxy for transactions prices. For example, in
the aluminum industry, list prices predominate recorded price series
while transactions prices can vary significantly from such list
prices. Therefore, to avoid the problem, the price series for
secondary refined or for scrap aluminum clippings may be used as
proxies for transactions prices under the assumption that the
transaction prices will move closely with these two price series.
Since, for copper, the transactions prices are as a rule the same
as the list prices, these analytical problems are minimized in
econometric analyses of copper.
D. ECONOMETRIC ANALYSES OF DEMAND FOR COPPER; SOME RESULTS
There have been a number of econometric studies of the copper industry
in recent years, which are discussed more fully in the Technical
Appendix which accompanies this volume. We will briefly dwell here
on a few of these studies, with emphasis on their econometric analyses
of demand for copper. We explicitly consider here the results on
short-run and long-run demand elasticities found byFisher-Cootner
Baily (FCB) - , Charles River Associates, Inc. (CRA) , and McNicol ,
along with our own findings (reported in the Technical Appendix).
Table VII-7 summarizes the short-run and long-run elasticities
that have been estimated.
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TABLE VII-7
Own-Price (EMJ Price)
Cross-Price (Aluminum)
Activity Variable (FRB Index of
Durable Manufacturers)
Own-Price (EMJ Price)
Cross-Price (Aluminum)
Activity Variable (FRB Index of
Industrial Production)
Own-Price (EMJ Price)
Cross-Price (Aluminum)
Activity Variable (U.S. Index of
Construction Materials)
•E Own-Price (EMJ Price)
i
to
oo
PRICE AND ACTIVITY RI.ASTIPITY
ESTTMATF.fi
FROM VARIOUS STUDIES
Elasticities
Short-Run
-.47
.61
1.30
-.21
.24
.33
-.17
.20
.15
-.21
.46
.26
-.33
.66
.44
-.12
.35
(At the Mean)
Long-Run
-.64
.84
1.78
-.90
1.01
1.40
-.82
.98
.73
-2.88
6.30
3.56
-.77
1.57
1.06
-.39
1.13
Source
ADL (Model)3
Fisherv-Cootner-
Baily
Fishetj-Cootner-
Baily
Charles River
Associates, Inc
(CRA)C
d
D. McNicol
D. McNicol
Period of Analysis
1950-1973
1950-1958; 1962-1966
1957-1958; 1962-1966
1950-1967
Cross Price (Aluminum)
Activity Variable (FRB Index of
Durable Manufacturers
Own-Price (EMJ Price) -.33 -.77 D. McNicol~ 1949-1966
Cross-Price (Aluminum)
Activity Variable (FRB Index of
Durable Manufacturers)
Own-Price (EMJ Price) -.12 -.39 D. McNicol" 1949-1966
Cross-Price (Aluminum)
Activity Variable (FRB Index of
Durable Manufacturers) .32 1.05
NOTES AND SOURCES;
Refer to the Technical Appendix to this report.
F. Fisher, P. Cootner, M. Baily, "An Economic Analysis of the World Copper Industry," The Bell Journal of Economics
and Management Science, 3,2. (Autumn, 1972), 568-609.
Charles River Associates, Inc. (CRA), Economic Analysis of the Copper Industry (March, 1970), pp. 278-315.
D. McNicol, "The Two Price Systems in the Copper Industry," Unpublished Ph.D. dissertation,
Massachusetts Institute of Technology (February, 1973), pp. 68-69.
-------
In econometric studies of demand for copper, demand is related
basically to the price of copper, prices of substitutes and measures
of industrial activity for durable goods. Allowance is also made
for inventories, imports' and exports in varying degrees. The
presence of long-run substitution in demand for copper is generally
recognized. Consequently, demand functions are designed to measure
short-run and long-run substitution in demand. Although the precise
analytical approaches adopted in these studies differ somewhat, they
basically utilize the same approach (Koyck-Nerlove) to differentiate
short-run and long-run elasticities.
A cursory examination of Table VII-7 does confirm some of the insights
introduced earlier in this chapter. For example, 17 out of 18 short-
run elasticity estimates indicate substantial inelasticity (or
insensitivity) with respect to price and activity. The long-run
elasticity estimates are all greater than the short-run estimates,
Indicating that the response of demand to relative prices and activity
is, indeed, more sensitive in the long-run. However, about half of
the long-run estimates are still in the inelastic range (i.e., less
than 1.0). The long-run elasticity estimates of Charles River
Associates, Inc. (CRA) are quite high. There are numerous reasons
why the results differ. For example, each of the studies used slightly
different estimation techniques21. The activity variables utilized in
the four studies differ. The aluminum price estimates also differ.
Further, the long-run elasticity estimates depend crucially upon the
estimate of X. Interestingly, the major reason for the different
long-run elasticity estimates in the various studies is alternative
estimates of A.
Our own econometric analyses of demand for copper, performed as part
of the modeling effort reported in the Technical Appendix benefited
considerably from previous econometric studies. Equation (9) given
above introduced a Koyck-Nerlove type partial adjustment demand model
for estimating the price effects for both the long-run and the short-
run. Furthermore, the impact of production levels of the industries
using copper can be estimated. However, in order to estimate these
elasticities, proper data series are required.
An aggregate demand series of domestic semifabricators was presented
in Table VII-6. Equation (9) states that the amount of refined
copper equivalent demanded by semifabricators is affected by the price
of refined copper (Ft), the price of competing substitutes (P|), and
the production levels of the consuming industries (Yt). The price
series used for Pt is the deflated EMJ price of copper (i.e., United
States producer refinery wirebar, f.o.b.).
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We have focused our analysis of copper substitutes on aluminum because
of its overriding importance as a potential competitor to copper.
The price series used for P8. is therefore the monthly average New
York dealers' buying price of new aluminum clippings. Production
levels of consuming industries have been presented by the Federal
Reserve Board (FRB) index of industrial production (durable manu-
facturers' production). We could have also utilized production
levels (or indices) for the semifabricating and fabricating industries.
Other analysts have examined some of these alternatives^.
Estimates derived during this study indicate a 1.0 percent increase
in the price of copper will lower demand (consumption) of refined
copper equivalent by .47 percent in the short-run and .64 percent
in the long-run. Furthermore, a 1.0 percent decrease in the market
price of aluminum will stimulate substitution to aluminum (i.e., a
decrease in demand for refined copper equivalent of .61 percent in
the short-run and .84 percent in the long-run). Also, our income
(activity) elasticities are both greater than unity, Indicating that
a 1.0 percent increase in the production of durable goods manufacturers
would generate a 1.3 percent increase in the demand for refined copper
in the short-run and 1.79 percent in the long-run^.
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Arthur DLittklnc
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CHAPTER VII
NOTES
1. United States copper production and consumption data developed
by the United States Bureau of Mines and the Bureau of Domestic
Commerce of the United States Department of Commerce inevitably
involve inconsistencies due to differences in reporting, coverage,
etc. In order to reconcile these inconsistencies and obtain a
consistent accounting flow of copper from production through
consumption, the Copper Development Association adjusts inventory
data developed by the Bureau of Domestic Commerce. For purposes
of our overall materials balancing equation, we have used the
adjusted "apparent change" inventory figures of the Copper
Development Association; but in analyzing Individual inventory
components, we have preferred to use the original United States
Government data.
2. It is impossible to obtain an entirely accurate breakdown on
inventories of primary and secondary refineries as we have
defined them. United States Department of Commerce data on
refinery stocks of refined copper and scrap reproduced by the
Copper Development Association have been used as proxies for
stocks held by primary and secondary refiners. Because of the
reporting coverage of the Commerce Department's Bureau of
Domestic Commerce, some refined copper stocks which we have
attributed to the primary producers might logically be part of
secondary refinery inventories, while some scrap stocks which
we attributed to the secondary refiners might actually be
associated with primary refinery Inventories. However, these
redistributed quantities would without doubt be marginal and
use of the Bureau of Domestic Commerce data does not seriously
affect the reliability of modeling results obtained.
3. Sir Ronald Prain, Copper; the Anatomy of an Industry (London:
Mining Journal Books Limited, 1975), p. 97.
4. Technically speaking, the derived demand schedule will fall out
of the first order conditions for cost minimization-subject to
the production constraint. Derived demand equations are derived
for Cobb-Douglas production functions under conditions of perfect
and imperfect competition in both factor and product markets.
5. See Henri Theil, Principles of Econometrics (New York: John
Wiley & Sons, 1971), pp. 556-573.
6. See Charles River Associates, Inc. (CRA), Economic Analysis of
the Copper Industry (March 1970).
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Arthur DLttlelnc
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NOTES
(Continued)
7. Other forms of logarithmic transformation for estimation purposes
include the semilogarithmic
Qt = "0 + "1 Io8 pt + "2 lo§ Pt + "3 Io8 Yt + ut
and the inverse semilogarithmic
log Qt = «0 + ?lpt + "2*1 + «3*t + "t
8. The econometric specifications of such models works out to be
the equivalent to that of a Koyck lagged model. Of course, the
stochastic specification will be different for different models.
For a discussion of such models, see Henri Theil, Principles of
Econometrics (New York: John Wiley & Sons, Inc., 1971),
pp. 258-268.
9. The difference between short-run and long-run elasticity also
applies to cross-price elasticities and to the differential
impact of Y in Equation (9) .
10. This equality can be demonstrated by referring again to Figure VII-3.
Let DL be the long-run demand curve of any group of producers demanding
a given factor input and D be the short-run curve. Assume the curves
are in equilibrium at (Qi, PI). Assume further that there is a once-
for-all price decrease to ?£• By Equation (7), the long-run desired
quantity demanded is Q2. However, in the short-run, equipment and
structural requirements, cannot be expanded quickly enough and the
producers only demand 0.2 (i.e., demand is more inelastic in the
short-run, as D2D2 is the relevant demand curve), where by Equation (8)
Q2 - Qi - X(Q2 - Qi) (9a)
(Note; it should be remembered that 0.2 is desired while Q2 is actual) .
Here we see that the short-run elasticity is X times the long-run
elasticity since:
AQ/Q (09 - QO/Qi
eLR = AP/P (P2 - PI) /Pi
AQ/Q (Q9 - QO/Qi _ X(Q? - Qi)Ql = ,.
6SR = AP/P = (P2 - P2)/pl " (?2 - pl)/pl LR
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NOTES
(Continued)
Hence,
e,
— = X and
eSR
eLR
6SR A
11. In the second period, Q2 can be solved as:
Q2 - Q2 = A(Q2 - Q2)
= A{Q2 - [Q2 H
= A(l - A) (Q2 -
Likewise,
Q2 - Q2 = A(Q2 - Q2)
= A(Q2 - [Q2 + A(Q2 - Q2)]}
I- A(Q2 - Qi) + A[Q2 - (Qj + AQ2 -
22
• A
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NOTES
(Continued)
23 2
Since,
AB - 2A^B + A*B = AB(1 - 2A + A )
and since
2 1
(1 - 2A 4- A ) = (1 - A)
then
AB - 2A2 + A3B = AB(1 - A)2 = A(l - A)2B.
Hence, setting X = A and (Q2 - Qi) - B, we have
= 2
Qz - Q2 = xd ~ x>
12• See Franklin M. Fisher, The Identification Problem in Econometrics
(New York: McGraw-Hill Book Company, 1966).
13. Henri Theil, op. cit., Chapter 10: E. Malinvaud, Statistical
Methods of Econometrics (Amsterdam: North-Holland Publishing
Company, 1971), Chapters 16-20.
14. Serial correlation will be particularly likely in time-series
analysis. Further, it is well known that the use of some lag
form induces serial correlation even if it were not present
in the unlagged specification. For a discussion of the serial
correlation incuded by the Koyck lag, see Henri Theil, op. cit.,
pp. 258-261.
15. Usually only first order serial correlation was assumed.
16. The information matrix is not block diagonal.
17. This discussion presupposes familiarity with the terminology and
issues of econometric mentioned.
18. F. M. Fisher, P. H. Cootner and M. N. Baily, "An Econometric
Model of the World Copper Industry", The Bell Journal of
Economics and Management Science, 3, 2 (Autumn, 1972),
pp. 568-609.
19. Charles River Associates, Inc., (CRA), Economic Analysis of the
Copper Industry (March, 1970). Also see An Econometric Model
of the Copper Industry (September, 1970); Forecasts and Analysis
of the Copper Market (May, 1973); and Policy Implications of
Producer Country Supply Restrictions; The World Copper Market
(August, 1976).
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NOTES
(Continued)
20. David L. McNicol, "The Two Price Systems in the Copper Industry",
Unpublished Ph.D. Thesis, Massachusetts Institute of Technology,
February, 1973. Also see his "Two Price Systems in the Copper
Industry", The Bell Journal of Economics, 6, 1 (Spring, 1975),
pp. 50-73.
21. For details, see the Technical Appendix to this report,
Supporting Paper 1, "Economic Analyses of the Copper Industry:
General Theoretical Considerations and Critical Review of
Selected Empirical Studies".
22. For example, an index of construction activity was examined by
Fisher-Cootner-Bally. See Fisher-Cootner-Baily, op. cit.
23. As reported in the next chapter, the historical presence of a
two-tier price system for copper has prompted the hypothesis
of a rationing behavior on the part of the domestic primary
producers. To account for the possible effects of such
hypothesized rationing behavior, we performed alternative
estimates of demand elasticities for differing sample periods
which did not include rationing years. This yielded similar
estimates for the short-run elasticities. However, the long-run
elasticities differ since the estimate of X did change. Infor-
mation on rationing is quite inadequate to introduce it effectively
into the analysis. None of the analyses in Table VII-6 appear to
have accounted for the possible presence and hence effects of
rationing.
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VIII. PRICES
A. INTRODUCTION
An adequate understanding of the manner in which supply and demand
forces have interacted in the copper industry in the past cannot be
attained without a firm grasp of the rather complex set of institutional
arrangements which characterize copper markets, the process of price
formation among firms in the industry, and, as a directly related
matter, the existence of the "two-price system" for copper which in
the past has been a source of controversy both in terms of the reasons
underlying it and in terms of its role, if any, on the pricing behavior
of the domestic primary producers. This chapter therefore focuses on
these three closely interrelated subjects.
Historically, copper has been marketed at prices based on a number of
different systems, some of them quite complex. Nevertheless, two basic
pricing channels can be distinguished, the producer prices and prices
related to quotations on a metal/commodity exchange. Producer prices
are prices set independently by the major primary United States and
Canadian producers at which primary refined copper is sold in the United
States. During the postwar period, about 75 percent of all refined
copper production in the United States has been sold at the domestic
producers' price. Prices related to quotations on a metal/commodity
exchange refer to prices at which copper is sold internationally
(outside North America) by most producers most of the time, related
through various formulas to prices prevailing principally on the
London Metal Exchange (LME). The LME and the New York Commodity
Exchange (COMEX) are the two organized metal exchanges (markets).
Of the two, the LME is generally considered to be the more important
in terms of turnover, physical deliveries, and its influence on the
pricing of copper in general.
Most of the "formulas" for pricing copper that are found on long-term
contracts are related, in one way or another, to LME prices, since
LME prices are generally considered to reflect, without delay, changes
in the supply and demand situation worldwide. It is important to
emphasize that the LME and COMEX are basically hedge and speculative,
rather than physical markets.
Prices prevailing in the United States, other than the primary producers'
prices, can be grouped under the collective title of "outside" market
prices, which encompass all trade in copper within and entering the
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United States (apart from sales made within the United States by the
primary producers) at prices other than the domestic producers' prices
(which would include prices tied to the LME or COMEX quotations).
The outside market encompasses the secondary industry (including scrap
dealers and secondary refiners), some of the smaller domestic producers
of refined copper selling at premiums over the price of the major
domestic producers, and the merchants who generally buy and sell copper
outside the principal producer-consumer channels.
As we have seen, demand for copper is quite inelastic in the short-run,
and the supply of copper is basically slow, characterized by long
adjustment periods. Hence, wide swings in demand over the business
cycle in industrial countries, combined with speculative activity in
the very short-run on the two organized commodity exchanges, have
contributed to the volatility of copper prices internationally.
However, United States domestic producers' prices, while lagging LME
prices, have generally been considerably more stable. Generally
speaking, the domestic primary producers, in response to persistent
demand shifts have tended to change their prices only slowly and not
by the magnitude often experienced by the LME price, such that the
producers' prices have generally remained well below LME prices during
periods of strong-demand and above LME prices during periods of weak
demand. This resulted in the existence of a two-price system for refined
copper in the postwar period which was characterized by a wide divergence
between the outside market price for copper (i.e., the LME price) and
the domestic producers price. In periods of rising or excess demand,
the participating producers chose to keep the prices low and ration
their available copper supplies to customers rather than raise the
prices. There appears to be no complete, simple, logical explanation
or set of explanations for the apparent rationing behavior of the
principal United States and foreign producers during periods of excess
demand and hence of the two-price system. All of the proposed
explanations are either logically inconsistent and/or are unable to
explain certain "anomalous" behavior.
A combination of factors appears to •have had substantial restraining
influence on the pricing decisions of the domestic primary producers.
These factors include the actual (as well as the expected) threat of
long-run substitution from aluminum, some competition from secondary
producers, the apprehension that domestic customers might shift to
overseas suppliers if the domestic producers' price remained above
the LME price over a prolonged period, the presence of United States
government stockpiles and the threat of government intervention.
The sharp rise in copper prices worldwide in 1973-1974, which occurred
as part of a more general "commodity boom" affecting nonfuel primary
commodities at a time when OPEC oil prices were quadrupled, was
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caused by a unique juxtaposition of factors, including simultaneous
economic growth in many countries, strikes and political unrest,
constraining supply, and widespread speculation brought about by
fears of supply cutbacks, inflationary expectations and considerable
uncertainty surrounding exchange rates.
For purposes of modeling the United States copper industry, the existence
of the two-price system raises two basic questions. The first pertains
to the interaction between the LME prices and the domestic copper
prices (including both the primary producers' prices and the "outside
market" prices). The causal channels here are quite complex and no
simple answers can be readily found. Our approach basically takes
the point of view that, everything else being equal, the LME prices
more directly or immediately influence the domestic "outside" market
prices and affect the producers' prices in a more indirect and delayed
manner. The effect on the primary producers' prices is both via
price and supply responses generated on the "outside" market (which
theoretically would have some influence on the production decisions
of the primary producers) and via the conditioning of the perceptions
of both the primary producers and the independent fabricators as to
the current or continued strength of the world copper market, thus
affecting price-output, inventory and purchasing decisions simultaneously.
The second question relates to the responsiveness of net United States
international trade in copper to the "spread" between the LME and the
producers' price or changes in this price "spread". Our basic finding
is that, in the past, net United States international trade in copper
(i.e., exports minus imports) has ever the longer-run remained
remarkably insensitive to the existence, magnitude, or the rate of
change of the spread. Consequently, the modeling of net international
trade in copper (i.e., net imports or net exports) presents special
difficulties, for lack of discernible trends. This, combined with
the fact that United States net imports or net exports in copper have
been normally quite small in the past, would suggest that the modeling
of net imports or net exports inoopper under ordinary circumstances
requires relatively little analytical emphasis.
Recent developments, however, suggest that such a conclusion might be
unwise, as far as forecasting into the medium-term or the distant future
is concerned. The reason for this is that the observed historical
patterns have recently undergone a dramatic reversal. Since late-1974,
the primary producers' price has remained above the LME price. This
certainly is not the first time such a development has occurred in
the postwar history of the two-price system. Nevertheless, it has
given rise to widespread speculation, currently gaining increasing
acceptance in the light of the depressed economic conditions facing
the United States copper industry, that the current two-price system,
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with the primary producers' price above the Offi prices, will continue
into the future. It is believed that an unavoidable consequence of
such a development would be a substantial rise in Imports into the
United States, low domestic copper prices resulting from increased
foreign competition and a relatively depressed domestic copper
industry. In this respect, the sharp rise in imports, for example
in 1976 from such countries as Zambia and Chile, is thought to be
indicative of possible future upsurge in United States Imports.
Such a reversal of historical patterns would require a shift in the
basic perception of the domestic semifabricators, including the
downstream subsidiaries of vertically integrated major domestic
copper producers, that they can achieve both short-run and long-run
cost minimization by switching to foreign suppliers. The rest-of-
the-world and the domestic copper markets would then equilibrate,
which in turn implies that the price "spread" would virtually
disappear (except for transportation and distribution costs) or
would at any rate narrow down significantly.
Such a view of an emerging "state of the world" is conditioned by two
basic factors or perceptions. The first is that quite low macroeconomic
recovery and growth in especially the European OECD countries, as
currently projected, will mean continued weak world demand for copper.
Continued weak demand, together with the large size of current copper
inventory stocks worldwide, would drive down the LME prices, even if
restraints on production were to be assumed. The second reason extended
in support is that the major copper exporting developing countries
(e.g., Zaire, Zambia, Chile, etc.) face substantially increased foreign
exchange requirements not only to pursue minimal development objectives
but also to finance their mounting external debts (including that incurred
to finance copper production) and to pay for their significantly higher
energy import bills. This means, the argument goes, these countries
will continue to produce copper at or near full capacity with little
regard to copper price movements. Their production decisions, even in
the face of depressed world copper prices is explained as follows.
Their cost of production consists of both foreign and domestic cost
components, incurred, respectively, in a basket of convertible foreign
currencies (e.g., interest payments, etc.) and in domestic currency
(i.e., to pay for domestically utilized factors of production). In order to
translate these two basic cost components into "true" national costs, they
respectively need to be valued not in strictly financial terms, which would
reflect "distorted" existing market prices, but rather in an economic sense
at their estimated scarcity values (shadow prices). In such a calculation,
the relatively large domestic cost component would become quite low, by virtue
of the relatively low shadow prices that would be assigned to most of the
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domestic factors of production (e.g., labor) which are in relatively
abundant supply. Consequently, the weighted average of the two cost
components would help define the true national unit cost of production.
By contrast, on the national benefit side, unit foreign exchange earnings
would be imputed a very high scarcity value (shadow price). Consequently,
even at quite low LME prices, these countries would enjoy a favorable
national benefit-cost ratio. This, rather than normal profit or rate of
return considerations, would serve as the basis for their pricing-production
decisions over the next few years, given their existing productive capacity.
This general argument, which, has a certain logical appeal, explains
mostly current or short-run market behavior and'is conditioned
basically by the current economic conditions facing the copper
industry both domestically and in the rest of the world. However,
strong economic recovery both in the United States and in the other
industrialized countries (particularly in the European countries),
together with, for example, renewed growth of electric utility-
related construction activity could strengthen copper demand to
the extent of restoring the historical pattern.
Over the long-run, the costs of production provide a rising floor
on copper prices, such that, the long-run price of copper tends to
equal the price that is sufficient to induce continued investment.
This price, which may be regarded as the long-run economic cost of
producing copper, is thought to have increased sharply in recent
years .after having remained fairly steady over a long period. Thus,
if the long-run copper price is not sufficient to induce continued
Investment, such investment would cease until rising demand and
capacity shortages result in price levels sufficiently high to
induce new productive investment.
B. COPPER PRICING MECHANISM
Historically, copper has been marketed at prices based on a number
of different systems, some of them quite complex. Today, the
basic complexity of copper pricing mechanisms remains, in the sense
that the distribution and pricing of copper supplies to copper
consumers is characterized by many pricing/institutional arrangements.
Nevertheless, two basic pricing channels can be distinguished.
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Producer prices: These are prices set independently by the major
primary producers at which primary refined copper is sold. In the
United States, the domestic producers' price is a set of nearly
uniform price quotations used by the major United States producers
and, for a good part of the postwar period, by Noranda, one of the
Canadian producers, for sales in the United States.
Prices related to quotations on a metal/commodity exchange: These
are prices at which copper is sold internationally (outside
North America) by most producers most of the time, related through
various formulas to prices prevailing principally on the London
Metal Exchange (LME). The LME and the New York Commodity Exchange
(COMEX) are the two organized metal exchanges (markets). Of the
two, the LME is generally considered to be the more important in
terms of turnover, physical deliveries, and its influence on the
pricing of copper in general: most of the "formulas" for pricing
copper that are found on long-term contracts are related, in one
way or another, to LME prices, since LME prices are generally
considered to reflect, without delay, changes in the supply and
demand situation over the entire world. However, COMEX handles a
wider variety of metals, and it also provides facilities for trading
other commodities^. It is important to emphasize that the LME and
COMEX are basically hedge and speculative, rather than physical
markets. Their principal function is, hence, to provide hedging
facilities for both producers and fabricators against losses
resulting from price changes rather than as markets for spot sales
for physical deliveries. COMEX1s trading rules virtually preclude
its use as a physical market. However, the LME can be, and some-
times is, used as a physical market, but even in Europe its role
as a physical market is very limited.
In addition (and related) to these two basic copper pricing
channels, a number of others can be distinguished, under the
collective title of prices prevailing in the "outside market".
The term "outside market", with reference to copper markets in
the United States, is sometimes used to describe all trade in
copper apart from sales made by the primary producers. The
outside market encompasses the secondary industry (including
scrap dealers and secondary refiners), some of the smaller
domestic producers of refined copper selling at premiums over
the price of the major domestic producers, and the merchants.
Defined more broadly, the "outside market" includes, with
reference to the United States, transactions in physical copper
on the LME and COMEX plus imports based on LME quotations.
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It night be noted, in this connection, that the metals merchants
are trading firms which typically trade in all types of copper
products, as well as in various metals, and organize the refining
of numerous small lots of material (i.e., scrap, secondary
blister, and the output of small mines).
In the United States, refined copper has been bought and sold on
average in the following proportions during the postwar period.
• About 76 percent of average annual consumption has been sold by
United States primary producers at the domestic producers1 price;
• About 13 percent of average annual consumption has been marketed
by the principal secondary refiners (e.g., Amax, Cerro Corporation ,
Southwire Company, Reading Industries, Inc.) at their own established
price (i.e., explicitly if sold to others or Implicitly, in terms
of internal company "transfer prices", if shipped to their own
semifabricating/fabricating subsidiaries or affiliates) generally
reflecting the prevailing price for copper scrap plus operating
margins;
• The remaining 11 percent of consumption on an average annual basis
has consisted of imports from foreign producers based on LME
quotations and copper handled by United States metals merchants,
mostly sold at the LME price or at a price closely reflecting
that price.
Because movements in the price of domestic scrap tend to follow
closely movements in the LME Price, however, on average 24 percent
of refined copper consumption in the United States (including imports
of refined copper) can be said to have been marketed on the basis
of LME prices.
The great bulk of refined copper sales by the major producers are
handled through their own subsidiary sales agencies. Some sales
agencies handle not only the refined output of their parent companies,
but also copper refined by several other domestic and foreign primary
producers, and it is not uncommon for the output of a small primary
producer to be sold through the sales agency of a larger producer.
Sales by these agencies represent current orders by buyers for future
physical delivery of copper at an agreed upon price.
1. The United States Producers' Price
Since shortly after World War II, the major United States primary
producers have, in effect, used a common basis for determining the
price at which they sell refined copper to affiliated and independent
fabricators within the United States3. This domestic producers' price
has represented a common set of price quotations for delivery of
wirebars, ingots, and ingot bars to any consuming destination within
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4
the continential United States . Cathodes have been available at a
slight discount, indicating the absence of melting and casting costs.
Cakes and billets, on the other hand, have sold at premiums which
cover additional casting and fabricating costs. In 1973, two major
producers began referring to their cathode price as the standard
producers' price. In part, this reflects the increasing amount of
cathode copper produced by electrowinning from hydrometallurgical
treatment of oxide copper. Also, the Cost of Living Council used the
cathode price in setting ceilings on refined copper prices in the
United States in December 1973.
Currently, the following are the principal United States domestic
producer price quotations:
• MW U.S. producer delivered: This is a daily weighted average
producers' price quotation published by Metals Week (formerly
E/MJ Metal and Mining Markets) based on United States mine
production and current selling prices of United States producers,
quoted on a delivered wirebar basis .
• MW U.S. producer refinery: This is a daily f.o.b. refinery
quotation, also published by Metals Week, which represents
the producers' delivered price quotation minus a standard
shipping cost. This Metals Week price, or its weekly or monthly
arithmetic average, published in Engineering and Mining Journal
(E/MJ), is normally referred to when speaking of the domestic
producers' price for refined copper.
• MW U.S. producer cathode: This daily quotation, published by
Metals Week, is an estimated weighted average based on United
States mine production and published prices for delivered full-
plate cathodes.
• American Metal Market domestic delivered: This represents an
additional price quotation for domestic primary refined copper
published daily in the American Metal Market; the monthly
arithmetic average of these quotations is published annually
in Metal Statistics.
United States producers usually sell on the basis of the price prevailing
on the date of shipment, regardless of when the buyer placed his order.
Some sales, however, are made at the average weekly or monthly price
quotation as published in E/MJ or American Metal Market; other sales
may be made at a firm price prevailing on the date of the sale.
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Early in January, 1976, Kennecott, the largest domestic primary
producer, announced that as of January 1, 1976 it had stopped producing,
supplying, marketing and quoting electrolytic copper wirebar, on the
grounds that this reflected the trend for increasing use of cathode
instead of wirebar and increasing demand for copper rod . Also in
early 1976, two primary producers, Duval and Copper Range, switched
their pricing of copper back to the producers' price basis following
a brief period of experimentation since 1974 during which Duval had
sold on an average price basis and Copper Range had been selling its
Lake brand copper on the basis of copper futures contracts traded on
the COMEX7.
g
2. The Copper Exchanges; The LME and COMEX
Of the two exchange markets on which copper is quoted, the LME is
certainly the more important in terms of volume of transactions,
physical deliveries, and influence on world copper prices generally.
As has already been noted, producers' prices outside the United States
tend to follow LME quotations rather closely and long-term contracts
employ a variety of formulas for pricing copper related to LME prices.
Although there is frequently a price differential of several cents
per pound for the same type of copper between the two markets as a
consequence of the time and cost of shipping copper, government trade
controls, and other factors, arbitrage transactions between the COMEX
and the LME tend to limit the amount of the differential. There are
a number of important differences in the two markets that require
explanation.
a. The London Metal Exchange (LME)
The LME dates from 1882, although copper and other metals had been
quoted in London much earlier. During World War II and the immediate
postwar period, when the government controlled the price of strategic
metals, the exchange was closed; but it reopened in 1953, and since
that time a steady increase in activity has been noted.
The LME deals exclusively in nonferrous metals—copper, lead, zinc,
tin and silver. Two copper contracts are traded on the LME: one for
electrolytic wirebar, and one for electrolytic cathode'. Cathodes
normally trade at a discount under wirebar, reflecting conversion costs.
Contracts are on a cash ("spot") or three-months ("ninety days") basis,
minimum trading units being multiples of 25 metric tons. Dealings
on the LME are not simply paper transactions. Purchasers can always
obtain delivery of metal on the day agreed upon (and in the case of
spot transactions, the following day) at any of the registered LME
warehouses at the seller's option. Warehouses and wharves approved
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by the LME for delivery and storage of metal traded on the exhcange are
located In London, Birmingham, Liverpool, Manchester, Birkenhead, Hull,
Newcastle-on-Tyne, Swansea and Glasgow in the United Kingdom;
Rotterdam in the Netherlands, Bremer and Hamburg in Germany; and
Antwerp in Belgium. Insistence on delivery has remained paramount
and is reflected in the fact that contracts may not contain any
force majcure provisions.
Trading on the LME takes place through representatives of the currently
28 registered member companies, known as "ring traders", who are seated
in a circle around the exchange floor and who make bids and offers to
each other across the ring. Deals are made when a bid or offer is
accepted and contracts are issued promptly. Dealers may hold a position
in the metal traded on any market day between the current day and three
months forward, with the final day for liquidation being the last
market day before the contract matures. Dealing members accept the
responsibility of honoring their own contracts^.
Two sessions operate daily, in the morning and in the afternoon,
Monday through Friday. The morning session, lasting 60 minutes and
known as the "Official Session", is followed by 20 minutes of kerb
trading (i.e., dealings outside the market). The afternoon session,
lasting SO minutes and called the "Unofficial Session" is followed
by 15 minutes of kerb trading. At each session, there are two five-
minute rounds of trading in each metal. A deal is regarded as having
been concluded when a bid or offer is verbally accepted. Details
are noted by clerks of the buying and selling ring traders involved
in each transaction, and contracts are exchanged before noon of the
following trading day. The official LME price for each day is based
on the prices asked and bid after the last actual trade in each metal
at the end of the morning11.
The LME price, although it is determined by a small number of trans-
actions dally, is important as it has been used as a transaction price
by a number of major producers. During the postwar period, with the
exception of five and one-half years, it has been the policy of the
Anglo-American Corporation (AAC) and Rhodesian Selection Trust (RST),
both with properties In Zambia, to sell at the LME price12. Union
Miniere du Haut Katanga (UMdHK), with properties in Zaire, also
generally sold at a price closely related to the LME price. Further,
sales of Canadian and Chilean copper made outside the United States
have usually been based on the LME prices.
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b. The New York Commodity Exchange (COMEX)
The COMEX copper contract are for 25 short tons of either electrolytic
wirebar, high conductivity fire-refined copper (HCFR), Lake Copper,
electrolytic cathode, or 99.88 percent fire-refined copper, all
specified according to American Society for Testing Materials (ASTM)
standards13. Electrolytic cathodes and high conductivity fire-refined
(HCFR) copper may be substituted at fixed differentials.
Price movements on COMEX have a daily limit of three cents per pound
for all trading months except the spot months. This limitation,
together with the system of trading for delivery in seven selected
months and at any day during the month at the seller's option, is
designed to prevent the price from being disproportionately affected
by a few large transactions. However, this system complicates the
use of COMEX as a hedging medium and as a basis for establishing prices
for contracts outside the market. It also complicates the problem
of comparing LME and COMEX spot and forward prices and/or arbitrage
between the two exchange markets. However, formulas have been adopted
to compare the prices in the two markets in a manner which will
eliminate to the maximum degree possible the distortions arising from
the different trading and delivery arrangements.
On the COMEX, cathode and the lower grades of fire-refined copper are
traded at a discount below electrolytic wirebar. Since the cost of
casting cathode into wirebar and the actual market value of lower
grade fire-refined is generally more than the discount, it is to the
producers' advantage to deliver these lower grades against COMEX
contracts. Hence, the COMEX warehouses contain mainly the lower
grades of copper. Such grades serve as a source of direct supply
to brass mills and foundries. Other United States semifabricators
tend to purchase wirebar from merchants, whose prices fluctuate at
a premium above the COMEX quotations. By pricing their copper in close
relation to COMEX prices, both merchants and consumers are able to
employ the COMEX for hedging purchases and sales for future delivery
against price changes.
In summary, COMEX is considerably less important in world copper
markets than is the LME. Like LME, COMEX is basically a hedge and
speculative market, but COMEX is even less of a physical market than
LME, and the COMEX price is not generally used for sales on the
"outside" market. Arbitrage between the LME and COMEX generally keeps
the prices close together.
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3. The "Outside Market"; Secondary Refiners and Role of the
Merchants
a. Secondary Refiners
The term "outside market" has often been used to denote all trade in
copper in the United States other than sales of the major United
States primary producers. The term has been so applied, to delineate
more sharply the dominant role played by the major primary producers
in providing the bulk of refined copper supplies at domestic producers'
prices to United States fabricators.
Although refined copper within the United States can be bought on the
outside market at a number of different prices, including the LME spot
and forward price, the COMEX price, the United States merchants or
dealers' price, and the custom smelters/refiners and/or secondary
refiners price, the two most important price bases at which the bulk
of outside market sales of refined copper are quoted have been the
LME price and the price set by custom smelters/refiners and/or
secondary refiners. We should repeat, at this point, the important
distinction between custom and toll smelting/refining, applicable to
both primary and secondary smelters/refiners. Custom smelting/refining
refers to purchasing ores, concentrates or scrap from other producers
for own-account smelting and refining. Toll smelting/refining, on the
other hand, refers to smelting/refining for a fee and then returning
the resulting metal to the original owner (e.g., mining companies,
merchants, etc.) for marketing. In this sense, both primary and
secondary smelters/refiners may be engaged in custom smelting/refining
as well as in toll smelting/refining. Further, while it is generally
correct to say that the output of a secondary smelter/refiner,
regardless of whether it operates on a custom or toll basis (or both),
is most probably sold on outside market prices, such a statement
would be incorrect for a primary smelter/refiner.
This distinction brings up the role and classification of Asarco based
on its pricing behavior, which is often incorrectly understood in
current studies of the United States copper industry. Prior to
August, 1967, Asarco sold at least some proportion of its output at
a "custom smelter" price published in both Metals Week and Engineering
and Mining Journal. After August, 1967, Asarco suspended the practice
of quoting a custom smelter price, and generally followed producers'
price quotations in its sales. We understand that even prior to 1967,
less than 50 percent of Asarco's output was actually sold at the custom
smelter price.
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Given the facts pertaining to Asarco's position prior to 1967, plus
the fact that Asarco has behaved essentially as a primary producer since
1967, we have classified Asarco as a primary producer in this study and
have included Asarco's output in the figures for total primary refined
copper production in the United States sold basically at the producers'
price during the postwar period.
2
With Asarco thus excluded, Amax and Cerro have accounted for at least
75 percent of United States secondary refined copper production from
scrap in most years since 1946, with the remainder divided among a
number of other firms (e.g., Reading Industries, Inc., Southwire
Company, Chemetco, Inc.)- These two firms can thus be considered
"representative" of the United States secondary copper industry.
Amax and Cerro sold their refined copper output on their own Individual
pricing basis. We have estimated that refined copper sold on this basis
accounted for an average of about 13 percent of total refined copper
supplied each year between 1947-1974 and have held about 11 percent of
domestic refinery capacity during this same period.
Because both Amax and Cerro have depended heavily on the copper scrap
market for material inputs in the production of refined copper, the
profitability of their operations has been dependent on maintaining
flexible pricing policies which enable them to respond to fluctuations
in the price of copper scrap.
In our analysis, we have not had access to a recorded historical price
series for sales by Amax and Cerro; hence, as a second-best
approximation, we have developed an estimated price series based
on the dealers' buying price for #2 heavy copper scrap^ ana- estimated
annual processing costs and margins for the two custom refiners which
reflect a "fictitious" price series in the sense that it does not
necessarily represent actual prices charged by these custom refiners
at any one point in time, but rather an approximate estimate of their
average pricing behavior over the. study period.
b. Role of the Merchants
The remaining 11 percent of annual United States refined copper con-
sumption has generally come from one of the following sources: directly
purchased imports from foreign producers, sales on the London Metal
Exchange, or purchases from United States metals merchants. With the
exception of refined copper sold in the United States by Noranda (a
Canadian company) at the domestic producers' price, imported refined
copper and merchant copper has generally been sold in the United
States on the basis of the price prevailing on the London Metal
Exchange or at a price closely reflecting that price.
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The major producers have refrained from selling copper in large
quantities on the LME not only because their customers often require
nonstandardized grades and shapes of copper to suit their specific
needs, but also because the Standard Contract on the LME requires
physical delivery of the copper in European warehouses, a requirement
which is economically prohibitive for selling copper to customers
in other parts of the world. Moreover, the major producers normally
insist on the inclusion of a force majeure clause in their sales
agreements; such clauses are not permitted under the LME contract
system.
In this connection, it should be noted that merchants generally buy
and sell copper outside the principal producer-consumer channels.
Merchant copper traded in the United States is related to the COMEX
price. Merchants for the most part do not invest in production
facilities, but they can and will hold or finance stocks. In the
United States, where there is more integration in the copper industry,
merchants may be experiencing somewhat less scope for their activity
than in Europe. For one thing, COMEX has a smaller physical turnover
than the LME, and although its facilities for hedging and speculating
are as developed as those to be found in London, it is not especially
oriented toward the international market.
Merchants tend to make extensive use of independent refineries. They
also buy a great deal of scrap for refineries handling secondary
materials. Many of the physical deliveries on the LME result from
the transactions of the merchants; and, by the same token, they
carry out arbitrage operations on a worldwide basis. They are usually
busiest when the demand for copper is highest, since during these
periods more copper than ever will come from the smallest mines
(i.e., mines that under normal circumstances are only marginal
producers and possibly have not committed their production to any
given refinery) or scrap. There are also periods when buyers or
sellers are most likely to misjudge requirements and thus need the
service of merchants.
C. COPPER PRICES SINCE WORLD WAR II
The significant aspects of pricing behavior in the postwar copper
industry can be adequately described by focusing on the history of the
LME and domestic producers' prices. As a general rule, LME price
movements have been relatively volatile and sensitive to speculative
pressures and short-run shifts in copper demand and supply. By contrast,
the producers' price has tended to change only slowly, usually lagging
significant trends in LME prices by several months.
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1. Review of Price Movements
Table VIII-1 provides average annual figures for the E/MJ domestic
refinery price, the LME spot price, the price for #2 heavy copper
scrap (//I heavy copper scrap prior to 1956) and the United States
producer refined aluminum (list) price, over the 1950-1975 period,
all expressed in nominal or current dollar terms. Figure VIII-1
shows the relationship, over the same period, between the LME
prices and the United States domestic primary proudcers' prices.
The essential facts concerning price movements and the pricing behavior
which underlay them can be fairly easily grasped by dividing the entire
study period into a number of smaller periods on the basis of changing
supply and demand conditions in the copper industry and the particular
response of copper producers to those changing conditions.
• 1947-1953: This was a period marked by government controls of
both the LME and the United States producers' prices. The LME
price was administered by the British Government until August,
1953. A price ceiling on the domestic producers' price was in
effect from January, 1951 to February, 1953 in response to Korean
War requirements.
t November, 1953-July, 1956: This period marked the first so-called
"two-price system" for refined copper. A sudden and excessive
increase in the demand for copper led to a rapid rise in the LME
price; the domestic producers' price, on the other hand, was
kept substantially below the market-clearing level by United States
producers, who rationed their customers. One foreign producer,
RST, also sold copper at substantially below the LME price.
• July, 1956-early, 1964: Except for a brief period of rising
demand in 1958-1959, this was a period of generally slack world
demand for refined copper, characterized by decline of relative
stability in both the domestic producers' and the LME prices and
general equilibrium between the two price series (with LME prices
remaining below the domestic producers' prices, after accounting
for the differential cost of tariffs and transport).
• Early 1964-late 1970: This was a period of the second and third
"two-price system", characterized by excess demand for copper, a
very dramatic increase in the LME price, and a wide differential
between the higher LME price and the producers' price, where
the producers' price stayed well below the LME price.
The second and third two-price systems are distinguished principally
by the difference in the group of firms which participated in
selling copper below the free or open market price. During
the second two-price system between January, 1964 and March, 1966,
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TABLE VIII-1
PRICES OF REFINED COPPER. COPPER SCRAP AND REFINED
ALUMINUM IN THE UNITED STATES, 1947-1976
(yearly averages, cents per pound)
Year
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
NOTES AND
U.S.
Producer
Refined a
Copper
21.0
22.0
19.2
21.2
24.2
24.2
28.8
29.7
37.5
41.8
29.6
25.8
31.2
32.1
29.9
30.6
30.6
32.0
35.0
36.2
38.2
41.8
47.5
57.7
51.4
50.6
58.9
76.6
63.5
68.8
SOURCES :
LME
Refined,
Copper
23.5
24.1
21.9
22.3
27.5
32.3
32.2
31.3
43.9
41.0
27.4
24.8
29.8
30.8
28.7
29.3
29.3
44.0
58.6
69.1
51.2
56.0
66.3
62.9
49.3
48.5
80.8
93.1
56.1
63.9
Scrap
Copper
16.2
17.3
13.9
17.7
21.3
19.0
22.4
24.5
33.6
31.6
20.1
17.6
22.6
21.2
21.8
21.6
22.2
26.0
34.5
44.7
33.2
32.8
42.9
39.5
27.6
39.0
50.2
54.9
33.9
51.6
U.S.
Producer
Refined d
Aluminum
15.0
15.7
17.0
17.7
19.0
19.4
20.9
21.8
23.7
24.0
25.4
24.8
24.7
26.0
25.5
23.9
22.6
23.7
24.5
24.5
25.0
25.6
27.2
28.7
29.0
26.4
25.0
34.1
39.8
44.3
U.S. producer refinery wirebar f.o.b. (i.e., U.S. producer delivered price
minus shipping cost; the shipping cost was 0.9c/lb. effective August 1,
1976): Metals Week, Engineering and Mining Journal.
Official morning session prices on the London Metal Exchange; electrolytic
wirebars, monthly average, settlement price: Metal Bulletin, American
Bureau of Metal Statistics Yearbook and Engineering and Mining Journal.
Estimated New York area delivered price from clean No. 2 heavy copper scrap
(No. 1 prior to 1956): Metal Statistics and Engineering and Mining Journal.
Major U.S. producer (list) ingot price: Metals Week, Engineering and Mining
Journal.
VIII-16
Arthur D Little Inc
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FIGURE VIII-1
TRENDS IN UNITED STATES PRODUCERS' PRICES AND LME PRICES. 1947-1976
(cents per pound)
to
4J
C
100
90
80
?ll
60
U.S. Producers' ?r
UIE Pri
I ,
T
40
30
^t
I '
r- /
i ,
r/ •
I !
'^•.•^, - :11
'
II
1
- X-— •>
,-'
|
/
/
/•--•*
i
i
,v
"*> ' /
\V- .
i
i
>-" ^"
— . _. .
. _ .
—
i
i
\
1947 4f> 4y bU il i2 i'j i4 ii ib 3/ 38 59 dO bl b^ 63 t>4 02
j
i
i
i
fib b/ b« by /u /i (
i
T- ^T TTT
r~n '- • * -
1(. -
Years
VIII-17
Arthur D Little, Inc
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all of the major foreign producers joined United States producers
in selling at essentially the domestic producers' price1". Between
April, 1966, and late 1970, during the third two-price system,
the major foreign producers returned to selling at the LME price17,
while United* States producers continued to sell at the domestic
producers' price.
• Late 1970-early 1973: A period of slack demand and declining
or fluctuating prices in which LME price quotations were generally
below the producers' price. United States price controls on
refined copper were instituted in August, 1971, but the producers
price remained below the established price ceiling until April,
1973.
• Early 1973-Late 1974: A period of great instability in world copper
markets characterized initially by a sharp increase in world demand
and prices and ultimately by a similarly sharp decline in both demand
and prices. Some increase in the producers' price was permitted
by the United States government in December 1973; price ceilings
were formally abolished in May, 1974. Controls on the domestic
producers' price remained in effect through April, 1974.
2. Basic Factors Influencing Prices
As we have seen, demand for copper is quite inelastic in the short-run,
and the supply of copper is basically slow, characterized by long
adjustment periods. Hence, wide swings in demand over the business
cycle in industrial countries, combined with speculative activity in
the very short-run on the two organized commodity exchanges, have
contributed to the volatility of copper prices internationally; As
we just pointed out, however, United States domestic producers' prices,
while lagging LME prices, have generally been considerably more stable.
The relationship between the LME prices and the United States producers'
prices has been the subject of widespread discussion but very little
Illuminating analysis, as we shall explain in some detail below, with
reference to the "two-price system". For now, it may suffice to indicate
broadly that primary copper producers' domestic pricing decisions are
influenced by a large number of factors, Including their production
costs, aggregate macroeconomlc activity level affecting demand as well
as the price elasticity of demand for copper, level of capacity
utilization, inventory stocks, the difference between the current
and recent LME Prices and producers' prices, their desired rate of
return on investment, the possible response by other major producers
to a price change, the United States government's stockpiling policies
VIII-18
Arthur D Little Inc
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and possible responses to a price change, and the effect of a price
change on short-run and long-run substitution of alternative materials
for copper (basically substitution away from copper by aluminum).
Although all producers may not perceive these factors in the same way
or consider them, implicitly or explicitly, with equal weight, they
nevertheless can be expected to take some or all of these factors
into account in their pricing decisions.
Generally speaking, the domestic primary producers, in response to
persistent demand shifts, have tended to change their prices only
slowly and not by the magnitude often experienced by the LME price,
such that the producers' prices have generally remained well below
LME prices during periods of strong-demand and above LME prices
during periods of weak-demand. The ability of the domestic primary
producers to refrain from following LME prices right to the peak of
the upswing and to hold their prices somewhat above the LME prices
at the bottom of its downswing has led some to conclude that
(internationally) the copper industry "represents a composite
picture of competition and collusive restraint"18. Such observations,
as we shall see, pertain to the reasons for the existence of the
"two-price system" and, taken by themselves, provide quite incomplete
explanations of the pricing behavior of the domestic primary producers.
Although the primary producers appear to possess discretionary pricing
power as is implicit in the existence of the two-price system, there
is no evidence to indicate that they have even remotely approached
monopolistic pricing. The threat-of long-run substitution from
aluminum, some competition from secondary producers, the apprehension
that domestic customers might shift to overseas suppliers if the
domestic producers' price remained above the LME price over a pro-
longed period, the presence of United States government stockpiles
and the threat of government intervention appear to have had sub-
stantial downward influence on the pricing decisions of the domestic
primary producers.
The threat from overseas suppliers has more recently been perceived in
terms of the political commitment on the part of the copper producing
developing countries, where copper production has recently been
nationalized, to maintain high levels of production and employment.
This is widely believed to put downward pressure on prices and thus
lead to increasing competition from abroad. Such a perception largely
discounts, of course, any possibility of cartelization of copper
internationally and/or the likely emergence of an international copper
price stabilization program.
United States government policies, in addition, have periodically had
a significant effect on the price of copper, especially during
"demand crunch" periods, through such measures as export controls
V1II-19
Arthur D Little Inc
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and the use of the stockpile. In the 1950's, when the stockpile was
being purchased, the increased demand, along with the demand resulting
from the Korean War, caused producers to greatly overexpand their
capacity, which was later to prove quite costly to them in the late
1950's when, with a severe drop in demand, they were faced with sizeable
idle capacity. When prices rose in late 1959, sales from the stockpile
were used to keep the price down. In 1965, when copper producers pro-
posed raising their price by two cents per pound at the same time that
the LME price was rising fast, President Johnson reacted by threatening
to have 200,000 tons of copper sold from the United States strategic
stockpile and forced producers to rescind their price increase. Later,
the United States stockpile undoubtedly prevented copper prices from
Increasing beyond the high levels attained during the Vietnam War.
Finally, following the unprecedented surge in copper prices (as well
as in the prices of other nonfuel primary producers) in 1973,
President Nixon ordered the complete disposal of the national stockpile
to stabilize copper prices. Copper from the stockpile was then sold
at prices considerably above the producers' price, at a time when the
producers' price was fixed by government price controls^'.
3. Factors Influencing Sharp Price Increases in 1973-1974
A review of copper price movements and the factors influencing them
would be incomplete without a quick glimpse of the factors influencing
the extraordinary price increases in 1973-1974. It will be recalled
that copper price Increases in 1973-1974 was part of a more general
"commodity boom" affecting nonfuel primary commodities at a time when
OPEC oil prices were quadrupled. The sharp rise in copper prices and
in commodity prices in general startled most observers and fed fears
of impending commodity shortages. The price increases also came at
a time of heightened concern about worldwide inflation.
In retrospect, a number of factors appear to have been juxtaposed
during this period, each reinforcing the others, in bringing about
the surge in copper prices, especially copper prices on the LME. First,
on the demand side, simultaneous economic growth in many industrial
countries caused a significant shift in demand for copper, coming soon
after the recession of 1970-1971. The fact that demand rose simultaneously
in most of the industrialized countries meant that when supplies became
tight in the United States, this country could not relieve the pinch,
as it sometimes had done in the past, with relatively cheap imports.
If Imports were to be a safety valve, they were going to be expensive .
Meanwhile, on the supply side, quite apart from relative supply
inelasticity in the short-run, world copper supply became constrained
by strikes and political unrest. The supply of copper was affected,
for example, by the strikes and political unrest in Chile, a major
exporter of copper; and Zambia halted its copper shipments through
Rhodesia. In addition, some have blamed the recession of 1970-1971
and the subsequent rise in environmentalist pressures for the failure
VIII-20
Arthur D Little Inc
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of sufficient investment for productive capacity expansion in the United
States to match the upward shift in demand*!. The fact that the cost
of meeting environmental regulations would be likely to divert some
funds away from capital expansion should have been evident, but seems
to have been underrated^. Further, price controls complicated both
investment and production decisions in the early 1970'8*3.
These factors were further complicated and exacerbated by the sudden
emergence of a "shortage mentality", not solely confined to the
United States, which was largely characterized by widespread speculation.
This was brought about by fears of supply cutbacks, inflationary
expectations and considerable uncertainty surrounding exchange rates.
Speculation led to anticipatory buying and in a general building of
inventories which in turn fueled the price boom^*.
4. Long-Run Prices and Costs
It is important to note that the costs of production provide, over
long-run, a rising floor on prices as discussed in Chapter VI. To
recapitulate, Herfindahl had advanced the hypothesis that that long-
run price of copper tends to equal the price that is sufficient to
induce continued investment at all stages of production, from
exploration to refining". This price, which may be regarded as the
long-run economic cost of copper production was found by Herfindahl
to have remained fairly steady over a long period from 1885'^to 1957,
after eliminating selected abnormal years and except for the years
immediately following World War I when the equilibrium real price
(cost) of copper declined as a consequence of changes in mining and
processing of copper. More recent evidence appears to indicate that
at least until the early 1970's, Herfindahl's hypothesis has held
up rather well. However, since about 1973 it is quite likely, based
on still incomplete evidence, that there has been a sharp increase
in the equilibrium price of copper, perhaps mostly as a consequence
of an increase in the real cost of inputs rather than as a result of
a deterioration of world copper resources (i.e., ore grade) occurring
at a faster rate than increases in total factor productivity26.
In the United States, an escalation in production costs in real terms,
combined with stagnant or negative trends in labor productivity may
suggest that the United States copper industry has begun to operate
along the sharply rising segment of the industry's long-run average
total cost curve.
D. THE TWO-PRICE SYSTEM AND PRICING BEHAVIOR OF THE PRIMARY
PRODUCERS
With respect to the pricing behavior of the primary United States and
foreign producers, probably the most significant characteristic of
postwar copper markets has been the existence in nine of the 27 years
between 1947-1974 of a two-price system for refined copper, characterized
by a wide divergence between (1) the outside market price for refined
VIII-21
Arthur DLittklnc
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copper as represented by the LME price and (2) the price at which
domestic United States producers and some of the major foreign
producers sold their output. Over this period some or all of the
major copper producers held their price below the level that would
have cleared the market during periods of rising or excess demand
for refined copper and rationed their "available supplies"2' to
customers rather than raise the prices. As noted earlier in Section C,
there were actually three two-price systems in effect during three
different periods: (1) from November, 1954 to July, 1956; (2) from
January, 1964 to March, 1966; and (3) from April, 1966 to early 1970.
The various periods are distinguished principally in terms of
differences in who among the foreign producers participated along
with the United States producers. During periods when the two-price
system was not in effect, either a general equilibrium existed
between the LME price and the domestic producers' price, or government
controls were in effect on either one or both prices, or they were
both subject to the depressing effects of an economic recession. These
three periods are discussed below in greater detail than presented
earlier:
1. The First Two-Price System (November. 1954-July, 1956)
The first two-price system was set off by a sudden increase in world
copper demand at the end of 1954. Between October, 1954 and April,
1955, the LME price ranged from 4c to lie above the domestic producers'
price. Although United States producers raised their price twice, in
January, 1955, and again in March, rationing by the producers during
these months was reported in the trade press as the LME price still
remained 5c/lb. above the producers' price in April.
Then, in May, 1955, RST initiated what has been frequently called in
Europe the first "producers' price experiment", when it announced that
it would sell refined copper at a price approximately in balance with
the then prevailing domestic producers1 price—about 10c/lb. below the
existing LME price. The announced purposes of this policy were to
stabilize the price of copper and keep the price low enough to
prevent long-term substitution away from copper.
During this period, Noranda adopted the policy of selling in the United
States at the domestic producers' price and abroad at the LME price.
All of the other major foreign producers continued to sell directly or
indirectly on the basis of LME prices. Although the producers' price
was subsequently increased somewhat, the price differential continued
until mid-1956, when declining demand for copper led to a rapid decline
in the LME price which eventually undercut the producers' price. In
October, 1957, RST returned to its earlier policy of selling at the
LME spot price on the date of delivery.
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Arthur D Little Inc
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2. Slack Demand and Support of the LME (July, 1956-January, 1964)
The demand for copper both worldwide and In the United States was
generally slack during the 1957-1964 period. In the recession year
of 1958, both the 1MB price and the producers' price were lower than
they had been in nearly a decade. Although demand increased somewhat
in 1959 and again in early 1960, producers continued to operate at
substantially below capacity.
Most notable between late 1961 and mid-1963 was an attempt by two
of the African producers, RST and AAC, to prevent the LME price
from slipping below equilibrium with the producers' price by cutting
back on production and shipments. The result was, in effect, a single,
stable world price for copper, as UMdHK and the Canadian producers
continued to sell at the supported LME price.
3. The Second and Third Two-Price Systems (January. 1964-Late, 1970)
The second two-price system developed in January, 1964 in response to
a sudden, unanticipated surge in worldwide copper demand which led to
a sharp rise in LME prices. The two Zambian producers—AAC and
RST—had insufficient inventories to alleviate upward demand pressures.
Rather than following the upward LME prices, AAC and RST initiated
what came to be known as the second "producers' price experiment".
Both the United States and the Zambian producers began selling to their
customers at a price well below the world free market price and
rationing their output. UMdHK, INCO, and Noranda adopted the Zambian
producers' price28. Excluding tariff and transport differentials,
the major producers thus continued to sell at essentially a common
world producers' price during the January, 1964 to March, 1966 period.
This second two-price system or "producers' price experiment" was
seriously weakened by pressure from the Chilean government on Anaconda
and Kennecott to increase the price at which they sold copper refined
from blister imported from Chile2^. The Chilean government was anxious
to maximize short-term revenues in a period of expanding world copper
demand. Following several smaller increases, the second two-price
system collapsed in early April, 1966, when Anaconda and Kennecott
were forced to increase the price of their Chilean copper from 42c/lb.
to 62c/lb. (the monthly average LME spot price in April, 1966 was
86c/lb.). The foreign producers refused to follow this Increase,
AAC, RST, INCO, and Noranda began selling at the LME three months
forward price on the date of delivery, while UMdHK resumed its
traditional policy of selling at an announced price which closely
followed the LME price.
VIII-23
Arthur D Little Inc.
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A third two-price system maintained only by the United States producers
in the United States market was in effect more or less continuously
from April, 1966 until late, 1970. During this period, Noranda sold
at the LME price until August, 1968; thereafter it sold in the
United States at the domestic producers' price and abroad at the LME
price.
The third two-price system was interrupted by a strike in the domestic
copper industry from August, 1967 to April, 1968. During much of this
period, the domestic producers' price was suspended. Demand reportedly
fell off early in 1967 because fabricators had already accumulated
very large inventories in anticipation of the strike. At other times,
however, demand for copper remained excessive, as reflected by the wide
differential between the LME price and the price at which domestic
fabricators were obtaining rationed supplies.
4. The Two-Price System Since 1970
Since 1970, domestic producers' prices have generally remained above
the LME price, except for 1973 and 1974. LME prices fell off
dramatically in 1970, 1971 and 1972 as refined copper supplies
exceeded consumption for the first time since 1964. This was a delayed
response to the recessionary trends simultaneously in several of the
developed nations in 1970-1971. The two-year period covering 1973 and
1974, characterized by "demand-crunch", could be identified as another
case of the two-price system; however, it must be kept in mind that the
27-month price control program (October 1971-December 1973) was in part
responsible for keeping United States domestic producers' prices below
the LME prices, although the producers' price remained below the
effective price ceiling. Prices of the United States primary producers
remained effectively under government control until May, 1974; there-
after, producers increased their prices only to be met by a plummeting
LME price which forced down the domestic producers' price.
In 1975 and 1976, copper prices have followed a generally upward trend
marked by a seesaw pattern, in direct response to the pace of worldwide
economic recovery from the worst recession of the postwar period.
During these two years, United States domestic producers' prices have
remained generally above the LME prices, in a market environment
characterized by slow economic recovery, a sizeable build-up of refined
copper stocks estimated at about two million short tons (May 1977)
and the expectation of a strike as the United States copper industry
faces labor negotiations at the end of June, 197730.
VIII-24
Arthur DLittklnc
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E. EXPLANATIONS FOR THE TWO-PRICE SYSTEM
At least on the surface, the pricing behavior of the major copper pro-
ducers during periods of excess demand and high LHE copper prices
seems totally inconsistent with the motive of profit maximization.
The major producers themselves have revealed little in detail about
their motives other than the common rationale of the fear of long-run
substitution for copper by end-users if copper prices are allowed to
rise too high or are too volatile.
There appears to be no complete, simple, logical explanation or set
of explanations for the rationing behavior of the principal United
States and foreign producers during periods of excess demand and hence
of the two-price system. All of the available explanations are either
logically inconsistent and/or are unable to explain certain "anomalous"
behavior on the part of the producers.
We would first like to quickly review the policy concern shown by the
United States Government in the past with respect to the whole
questions of rationing and the two-price system, in order to put
this matter in a policy context, and, second, to examine the various
explanations given for the two-price system.
1. The Policy Content
The issue of rationing or "dual distribution" by the major copper
producers has been the subject of widespread public interest and policy
concern, starting especially with the "Dual Distribution" hearings
before Congress in 196531. In January, 1970, the President directed
the Cabinet Committee on Economic Policy to make a study of the United
States copper market. The Subcommittee on Copper issued its report
on May 13, 1970 (known as the Houthakker Report33). Although the
report deplored the existence of inequities and economic inefficiencies
resulting from the two-price system, it did not recommend any government
action to force a change in the industry's sales practices. The report
subsequently led to the introduction of a bill in Congress (H.R. 17656,
91st. Congress, 2nd. Session) designed "To amend the Federal Trade
Commission Act to prohibit certain unfair sales practices in the
copper industry". This bill would declare it to be an unfair method
of competition and thus a violation of Section 5 of the Federal Trade
Commission Act, 15. U.S.C. Section 45(a), to sell refined copper at a
price determined by the Commission to be significantly below the world
market price unless the seller allocates refined copper among domestic
users in a manner the Federal Trade Commission determines is fair and
equitable33. The objective of the bill was, hence, to ameliorate the
alleged economic disadvantage experienced by non-integrated fabricators
who must either buy at a higher world market price or prevail upon the
domestic integrated producer-fabricator(s) to allocate lower priced
domestically produced copper to them .
VIII-25
Arthur D Little Inc
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We should finally mention, in this context, that the two-price system
has been the subject of an important antitrust suit which has been in
progress over the past several years, involving Triangle Industries, Inc.,
et. al. and several domestic primary copper producers, being litigated
in the United States District Court, Southern District of New York.
2. Explanation of the Two-Price System
We will briefly review the explanations of the two-price system offered
by the Houthakker report and by McNicol35, who has performed perhaps
the most exhaustive (yet inconclusive) examination of the subject.
a. The Houthakker Report
The Houthakker report described a
-------
pressures on the market. Following the LME price under these circumstances
would have invited unjustified substitution away from copper37.
b. McNicol's Explanations27*35
David McNicol, in his study of the two-price system, argues that in the
face of a sudden unanticipated surge in demand for the refined copper,
producers have three alternatives:
• They can choke off demand by letting refined copper prices rise
freely, in the process stimulating LRS (and, by implication,
a loss of long-run profits);
• They can maintain the price at a level below which they believe
it will stimulate LRS and still continue to supply the entire
market demand by stepping up output; or
• They can maintain the price at a level below that which will
stimulate LRS and ration their production at existing levels,
at the same time expanding long-run capacity to bring down the
equilibrium price level38.
Each of these alternatives presents the producers with a basic dilemma:
no matter which alternative policy they adopt in the face of a sudden
unanticipated increase in demand, the economics of the industry dictate
that they may suffer negative consequences.
McNicol immediately rejects the "rudimentary" long-run substitution
(LRS) theory as an explanation of the rationing behavior of the primary
producers, and hence of the two-price system, by arguing that rationing
would not prevent long-run substitution3^. However, this objection to the
LRS theory holds only if we suppose a unified market for copper, since,
then, the LRS motive as such makes no distinction among the producers
and/or the consumers and so does not provide a forceful explanation
of why some producers rationed at times when others did not and why
some consumers were rationed at times while others were not. The
objection does not apply if the market for copper can be segmented
and there is LRS in demand in some markets and not in others.
Hence, the LRS theory cannot be immediately rejected on an a priori
basis; its evaluation must rest on its implications. While the LRS
theory does not lend itself to statistical testing, it implies that
only those markets in which there is not LRS will be rationed
(i.e., selective rationing). In other words, if producers were to
ration brass mills while continuing to supply most, if not all, of the
needs of wire mills, producers could continue to produce at the same
level of output, while avoiding both LRS and the need to operate in
the short-run at a loss or near loss.
VIII-27
Arthur D Lit
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McNicol then proceeds to Indicate that domestic brass mills were,
indeed, rationed and wire mills not rationed during the first
two-price system (1955-1956) and during the first half of the
second two-price system (1964-mld-1965). Unfortunately, the sane
evidence forces him to conclude that domestic wire mills were
rationed along with brass mills through the second half of the
second two-price system (mid-1965 to 1966) and throughout the
third two-price system (1966-1970). This leads McNicol to conclude
that the "selective rationing" version of the LRS theory does not
provide a satisfactory explanation of the two price system.
McNicol then proceeds to resolve this apparent impasse by following
the clues in the trade press suggesting that rationing is more
profitable for the partially integrated producers than for the
nonintegrated producers. This leads him to his "quantity discrimination"
(QD) hypothesis to explain the rationing behavior of some domestic
producers and, hence, the two-price system. This hypothesis is based
on the observation that all of the United States producers and some of
the foreign producers are partially integrated, possessing their own
captive semifabricating subsidiaries, for the most part, in the form
of wire mills.
McNicol argues that during periods of rising or high demand, semi-
integrated producers would have found it possible to increase their
profits at the semifabrication stage by cutting back on the total
quantity of refined copper they would supply to both their own
subsidiaries and to independent fabricators. In essence, the semi-
integrated producers would be acting as a monopolist to regulate the
availability of supplies and thereby the market prices at which
semifabricated goods were sold. Hence, while a producers' costs of
refining copper inputs to fabrication would remain the same, the
increased selling price of its subsidiary's semifabricated output would
provide it with an Increased profit margin. It should be noted, of
course, that this profit gain would be obtained at the possible expense
of LRS among wire mill customers, who might be stimulated to switch
to alternative materials because of the increased price of wire mill
products.
Hence, McNicol1s "story" of the broad features of the two price system
in terms of the QD and LRS motives is as follows*2. Rationing would
not be expected to occur during periods of slack demand. In a
demand-crunch situation, rationing for the QD motive becomes more pro-
fitable and rationing for the LRS motive might be profitable for
the nonintegrated producers. Specifically, McNicol's two important
hypotheses are: (1) that it was profitable for the integrated pro-
ducers to ration during the two price systems but not at other times;
and (2) that it was profitable for the nonintegrated producers to ration
only during the second two price system. He further hypothesizes,
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while providing no evidence, that it was not profitable for the
integrated producers to ration wire mills in 1955-1956 and 1964-1965,
but was profitable to ration them during 1965-1970.
The underlying weaknesses of both the revised LRS explanation and the
QD explanation for rationing lies in the difficulty of obtaining or
developing quantitative data to support these hypotheses. In terms
of the LES motive, as McNicol himself points out, it is almost
impossible to accurately estimate, for any one point in time, the
price at which copper end-users will begin switching to alternative
materials. To assume that producers themselves based their pricing
behavior on any more perfect knowledge of potential behavior on the
part-of copper end-users may be misleading. In addition, the revised
LRS explanation ignores a multitude of non-price factors, such as
institutional rigidities, expectations of technological change, and
the like, which may be reasonably expected to have exerted an important
influence on LRS decisions.
In terms of the QD motive, it is similarly impossible to accurately
estimate at just what combination of copper prices, long-run demand
elasticity in fabricator markets, and producer marginal cost
schedule producers would have faced a situation where they could
gain more profit from practicing quantity discrimination than they
would lose from LRS as the price of copper rose or remained relatively
high.
This basic lack of empirical support in McNicol1s work leaves a number
of questions unanswered. For example, since rationing for the QD
motive has a stimulative effect on LRS (by forcing up copper prices
or maintaining them at a high level), accepting the QD motive for
rationing requires accepting the idea that after 1965 producers felt
that they would gain greater profits by rationing wire mills as well
as brass mills than they would lose through LRS for wire mill products.
But, if this was the case, why did producers not ration wire mills
prior to 1965? Did their perception of long-run demand elasticity
change? Were they proceeding on a trial-and-error basis? Questions
such as these cannot be satisfactorily answered given present
information*-*.
Further, McNicol's combined QD-LRS theory fails to account for the
irregular pattern of participation by the major foreign producers
during these periods. AAC, INCO, and UMdHK rationed during the
second two-price system between 1964 and 1966, but not during the
first and third. The non-integrated nature of these firms means that
they would not have rationed for the QD motive. However, if they did
ration during the second two-price system for the LRS motive, why not
during the first and third? McNicol suggests that because producers
do not have identical costs and do not sell in precisely the same
markets, rationing might have been profitable at times for some of the
major producers while not profitable for others. In other words,
these three producers might have been faced with less of a threat
of long-run substitution in their European markets or might have been
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better able to expand production levels In the short-run without a
corresponding loss of short-run profits. But this line of reasoning
is, once again, primarily conjectural, with little firm evidence
offered to support it**. RST and Noranda, on the other hand, are both
partially-integrated firms which would have had both the LRS and QD
motives for participating. While both participated in the first and
second two-price systems, RST failed to participate in the third two-
price system after 1966**.
In conclusion, McNicol's QD-LRS theory can, in practice, be evaluated
only on an a priori basis; his hypotheses can, in principle, be tested
by computing the profitability of rationing using estimated cost and
demand functions. But this would be very difficult and McNicol offers
no such empirical tests. Consequently, McNicol's explanations remain
largely conjectural and inconclusive.
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CHAPTER VIII
NOTES
1. Ferdinand E. Banks, The World Copper Market; An Economic Analysis
(Cambridge, Massachusetts: Ballinger Publishing Company, 1974)
p. 41.
2. Cerro-Mannon Corporation as of February 24, 1976, created by a
combination of Cerro Corporation and The Marmon Group, Inc.
(Michigan).
3. On this point it is interesting to note that some producers,
before 1961, reserved a portion of their output for sales to
merchants. These transactions were later largely terminated
(mostly at the insistence of the copper companies operating in
Africa) on the grounds that sales of this type contributed to
destabilizing the market, and many producers inserted "no resale"
clauses in their contracts. It is probably true that similar
' no resale clauses are still employed by many American producers
(see Banks, op. cit., p. 43).
4. The domestic producers' price was quoted as delivered Connecticut
Valley until July, 1950. Kennecott thereafter quoted its price
as delivered anywhere within the continental United States; the
other major producers did not follow suit until January, 1954.
5. Prior to 1971, the "E/MJ domestic refinery price" represented a
weighted average of the United States producers' price getting
more than 97.5 percent of the weight.
6. Metal Statistics 1976—The Purchasing Guide of the Metal Industries
(New York: American Metal Market Fairchild Publications, Inc.,
1976), p. 65.
7. Ibid.
8. The discussion presented here draws upon the following principal
sources: (a) Raymond F. Mikesell, "The Nature of the World Market
for Copper", unpublished paper (Eugene, Oregon: University of
Oregon, June, 1974); (b) Ferdinand E. Banks, The World Copper
Market; An Economic Analysis (Cambridge, Massachusetts:
Ballinger Publishing Company, 1974), pp. 41-49; (c) Charles River
Associates, Inc. (CRA), Economic Analysis of the Copper Industry
(March, 1970), Chapters 5 and 6; (d) Sir Ronald Prain, Copper;
The Anatomy of an Industry (London: Mining Journal Books,
Limited, 1975), Chapters 7 and 8.
9. LME permits trading in electrolytic wirebars, cathodes, and fire
refined ingot or ingot bars. High conductivity fire refined
(HCFR) wirebar may be delivered for electrolytic wirebars at a
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NOTES
(Continued)
discount, but, with this exception, substitutions are not
permitted.
10. This differs from the COMEX where the Clearing Association has
responsibility for honoring transactions. See "Exclusive
Interview: Robert Gibson-Jarvie, Executive Secretary of the
LME", Metals Week (April 11, 1977), pp. 9-10.
11. See "Exclusive Interview: Robert Gibson-Jarvie, Executive
Secretary of the LME", Metals Week (April 11, 1977), pp. 9-10.
The LME price quotes daily may reflect business done in what are
usually only small tonnages of copper. Yet these same quotations
are used as a basis for pricing infinitely greater quantities
of metal which are sold directly by producers to•fabricators
outside the Exchange. In other words, producers and fabricators
use the LME quotations in much the same way as one might use an
official stock exchange quotation for a private share deal,
and the transaction in no way represents physical copper actually
being dealt in across the floor of the Exchange. (See Prain,
op. cit., p. 95).
12. The African producers have departed from the policy of selling at
the LME price on two occasions. First, during the period 1955-1957,
RST sold at announced producer prices, while AAC, UMdHK, the Canadian
producers and Chile sold at a common producers' price.
In the period 1964-1966 RST and AAC sold at a common producer
price. Union Miniere, the other major African producer, sold
at an announced price. In 1958, Sir Ronald L. Prain stated
that the UMdHK price followed the Metals Week weighted average
export refinery price more closely than the LME Price (see
Sir Ronald L. Prain, "Copper Pricing Systems"; address to the
Organization for European Economic Co-operation, Paris, June 25,
1958, reprinted in, Selected Papers of Sir Ronald Linsay Prain,
Volume II [London: B. T. Batsford], p.15).
Furthermore, during the two years prior to the "second producers'
price experiment" AAC and RST had supported the LME price at a
fixed level. These periods are discussed in more detail below.
The Korean War must also be excluded here, as in this period the
maximum domestic producers' price was set by the government
(see Charles River Associates, [CRA], op. cit.. p. 122).
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NOTES
(Continued)
13. Trading on the COMEX is done by floor brokers working in a ring
through bid and offer procedures daily from 9:45 a.m. to 1:10 p.m.
At the end of the day purchases and sales on the COMEX are
"cleared" through the Clearing Assocation composed of commission
houses and trading firms. The Association guarantees fulfillment
of all contracts handled by its members. This procedure differs
from that of the LME which is a market of "principals" (i.e.,
the participating brokers underwrite the performance of each
contract).
All members of the Clearing Association maintain guarantee funds
and fixed original margins within the Association. Trading takes
place for delivery in seven specified months—January, March, May,
July, September, October and December.
Delivery on COMEX contracts may be made on any day during these
months, at the seller's option, to any registered COMEX warehouse.
Warehouses are located in Chicago, St. Louis, and Franklin Park
in Illinois; El Paso, Texas; Reading, Pennsylvania; New York City;
and Tacoma, Washington. A semifabricator who purchased a contract
on COMEX might receive fire refined copper in Tacoma on May 31,
while it wanted electrolytic wirebars in New York on May 1.
14. Dealers' buying price for #1 heavy copper scrap prior to 1956.
15. See Banks, op. cit., pp. 41-43.
16. Foreign copper was sold at a slight premium (generally 1.5c/lb.)
reflecting United States tariff and transportation charges.
17. Noranda had returned to selling within the United States at the
domestic producers' price in 1968.
18. See B. R. Stewardson, "The Nature of Competition in the World
Market for Refined Copper", The Economic Record, 46 (1970), p. 181.
19. See Simon D. Strauss, "Government and Mineral Markets", presentation
before the American Metal Market's London Metal Forum, London,
England (October 27, 1976).
20. National Commission on Supplies and Shortages, Government and the
Nation's Resources, Report of the National Commission on Supplies
and Shortages submitted to the President and Congress of the United
States (December, 1976), p. 51.
21. For this and some of the earlier points see Richard N. Cooper and
Robert Z. Lawrence, "The 1972-'75 Commodity Boom", Brooking Papers
on Economic Activity. 3 (1975), pp. 671-715.
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NOTES
(Continued)
22. This is paraphrased from a statement made by National Commission
on Supplies and Shortages op. cit., p. 59.
23. Ibid.. p. 55.
24. See Cooper and Lawrence, op. cit., pp. 703-706 and Edward R. Fried,
"International Trade in Raw Materials: Myths and Realities",
Science. Vol. 191, No. 4288 (20 February 1976), p. 642.
25. Orris C. Herfindahl, Copper Costs and Prices: 1870-1957
(Baltimore: Resources for the Future by Johns Hopkins Press,
1959).
26. See Raymond F. Mikesell, "A Note on Orris Herfindahl1s Hypotheses
Regarding the Long-Run Price of Copper from the Vantage Point
of 1975", preliminary draft (November, 1975).
27. David L. McNicol, "The Two Price System in the Copper Industry",
Bell Journal of Economics, Vol. 6, No. 1 (Spring, 1975), p. 50.
Also see his "The Two Price Systems in the Copper Industry";
an unpublished Ph.D. Thesis, Massachusetts Institute of Technology,
February, 1973.
28. Noranda continued to sell in the United States at essentially the
domestic producers' price.
29. The bulk of this copper was re-exported for sales on the inter-
national market after being refined in the United States.
30. See "Copper Prices Ride a Speculative Seesaw", Business Week
(May 16, 1977), pp. 39-40.
31. "Dual Distribution", Hearings before the Subcommittee on Anti-
trust and Monopoly of the Committee on the Judiciary, United
States Senate, September 15, 16 and 17, on S.1842, S.1843 and
S.1844 Part 1 (Washington, D. C.: United States Government
Printing Office 1966).
32. Report of the Subcommittee on Copper to the Cabinet Committee on
Economic Policy (May, 1970). Also see, "Copper Pricing Practices",
Hearings before the Subcommittee on Commerce and Finance of the
Committee on Interstate and Foreign Commerce, United States House
of Representatives, 91st. Congress, 2nd. Session on H.R. 17657,
July 20 and 21, 1970 (Washington, D. C.: United States Government
Printing Office, 1971), pp. 11-24, plus the press conference of
Hendrick Houthakker, pp. 24-29.
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NOTES
(Continued)
33. "Copper Pricing Practices", (Ibid.), pp. 3-4.
34. Ibid.. p. 4.
35. McNicol, op. cit.
36. Evidence concerning allocation procedures during the first
two-price system is equally spotty. In the 1964 Federal
Court decision requiring Kennecott Copper Corporation to
divest itself of Okonite, a wire and cable firm which it had
acquired in 1958, the Court found no evidence supporting the
Government's contention that Kennecott had favored its own
subsidiaries at the expense of its independent customers
during the first two-price system and again in a high demand
period in 1959. See "Dual Distribution", O£. cit.. "United
States v. Kennecott Copper Corporation," pp. 188-196.
37. Fisher-Cootner-Baily have argued that producers, in addition
to fearing long-run substitution, may resist a short-run rise
in the producers' price out of fear that independent miners
and new entrants to the industry may take the price rise as
a signal of a long-run rise in demand in the market. These
independents would then open new mines and/or step up production
in response to the higher price, leading to a long-run over-
supply of copper and depressed prices during a subsequent period
of dampened demand. They cite little evidence in support of
this hypothesis, however. Fisher-Cootner-Baily, "An Econometric
Model of the World Copper Industry", op. cit., p. 573.
38. Short-run production planning in the copper industry is
generally done on a five to six months' basis. Orders for
semifabricated products are usually placed a month in advance
of delivery and the processing of refined copper from mine
output typically involves a three-month period.
Expanding capacity in an existing mine generally requires
eighteen months to three years; however, this involves
effectively shortening the life of the mine.
Although there is generally a ten-to-fifteen year lag between
the decision to bring a major copper deposit into production
and the beginning of production, the major producers typically
have one or more mining projects through the "exploration"
stage of the development. From that point, the development
period is generally the same as that required to expand capacity
in an existing mine.
Thus, for planning purposes, the short run involves at least
a period of six to eighteen months from a given date, and
possibly as long as three years, while the long run would
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NOTES
(Continued)
prevail at some point between eighteen and thirty-six months
in the future and would continue into the Indefinite future.
39. Producers have, undoubtedly, been aware of this fact, as it has
been frequently mentioned by industry observers in the trade
press.
40. Whether or not it is ultimately less beneficial depends on
the precise cost schedule facing fabricators, as well as the
degree Of discretionary pricing which fabricators (as opposed
to semifabricators) are capable of practicing—two areas
which McNicol does not specifically analyze.
41. Briefly, McNicol argues that, given existing conditions in
the United States wire mill and brass mill industries, the
differential between the price of wire mill products and
refined copper and the price of brass mill products and refined
copper should remain constant if fabricators are not rationed.
On the other hand, if either wire mills or brass mills are
rationed, the differential between the prices of their products
and that of refined copper should widen, since the marginal
price of copper inputs will be the price on the outside
market.
McNicol's argument requires that producers' markets be segmented;
in other words, that it be impossible for unrationed semifabri-
cators to resell part of their supplies to rationed semifabricators
at a price approaching the outside market price. RST and AAC
reportedly inserted "no resale" clauses on their sales contracts
during the second two-price system; no apparent legal restrictions
exist to prevent foreign producers from following this policy.
United States producers might face antitrust prosecution if
they did the same, but they may have been able to discourage
resales by firms in unrationed markets, given their control over
the supply of primary copper.
42. See his Bell Journal article (referenced in Footnote 27),
pp. 72-73.
43. McNicol hypothesizes that domestic producers may have initially
begun rationing wire mills in the autumn of 1965 In response
to a foreign producers' price increase which United States
producers were not allowed to match because of United States
Government pressure to maintain price guidelines then in effect.
Although the needs of domestic wire mills were assumedly being
met, the price differential between United States and foreign
refined copper led to a price differential between United States
and foreign wire mill products. Higher wire mill product prices
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NOTES
(Continued)
abroad would have stimulated a significant growth in wire mill
product exports from the United States. This, in turn, would
have strained the capabilities of United States producers to
continue to meet all of the demand of the United States wire
mills for refined copper. Rationing would have solved this
problem by bidding up the price of United States wire mill
products. The problem lies in explaining domestic rationing
of wire mills after January, 1966, when United States controls
were placed on wire mill product exports.
44. McNicol refers to Fisher-Cootner-Baily's estimates of a much
lower European long-run demand elasticity for copper compared
with long-run demand elasticity in the United States. As McNicol
points out, however, the weakness of this line of argument lies
in the absence of barriers dividing the European market from
the domestic United States market.
45. McNicol explains this by suggesting that the "Zambianization"
of the RST and AAC firms from early 1967 onward might have had
an effect on the willingness of the firms to participate, since
the government of Zambia was probably concerned with maximizing
short-term revenues. However, RST went off the producers'
price in April, 1966; and the Zambian Government did not acquire
the legal power to regulate the price of Zambian copper until
1968. McNicol cites no other evidence to support the implication
that the producers were attempting to placate the Zambian Government
in 1966 by shifting back to the producers' price.
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IX. ENVIRONMENTAL REGULATIONS
A. INTRODUCTION
In this chapter, we discuss the environmental laws and regulations affect-
ing the copper industry. This description provides the basis for the
discussion, in Chapter X, of the cost and capacity consequences of Federal
efforts to control pollution.
It should be noted that although the Federal Government retains ultimate
authority for ensuring that environmental regulations are enforced, a good
deal of the actual enforcement, as well as interpretation of the laws,
is undertaken at the state and local levels. In addition, local authorities
have considerable latitude in requiring pollution control beyond that
needed to meet Federal standards. Therefore, the regulatory framework in
which individual copper mining, smelting, and refining operations function
varies by state and by local authority within the state. As far as the
copper industry is concerned, the significant impacts generally result
from Federal standards since most state or regional regulations are not
more stringent. An exception is the Puget Sound Air Pollution Control
Agency which has adopted regulations that are more stringent than
the Federal standards. Even in this case, the Federal Government, through
the regional EPA office, has been involved in providing technical assistance
and review.
In Section B, we discuss the 1970 and 1977 Amendments to the Clean Air Act
including New Source Performance Standards and efforts to prevent signi-
ficant deterioration. Section C discusses the Federal Water Pollution
Control Act of 1972 together with Effluent Guidelines for copper mining,
smelting and refining. Section D enumerates other regulations, still in
their formative stage, which could have an impact on the copper industry
but were not considered in this study.
B. AIR POLLUTION
This section provides a discussion of the Federal efforts to control air
pollution. The historical background is discussed first, followed by a
detailed discussion of the laws and regulations applicable to the control
of air pollution from copper smelters.
1. Legislative and Institutional Background
a. Air Pollution Control Prior to 1970
Prior to 1970, the most important pieces of Federal legislation to deal
with stationary source air pollution were:
• the 1955 Air Pollution Control Act;
• the Clean Air Act of 1963; and
• the Air Quality Act of 1967.
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The 1955 Air Pollution Control Act authorized, for the first time, a
Federal program of research, training, and demonstrations relating to air
pollution control. However, primary responsibility for controlling air
pollution resided with state and local governments. The 1963 Clean Air
Act gave the Federal Government enforcement responsibility for the first
time against both inter- and intra-state polluters; however, enforcement
procedures against intra-state dischargers were cumbersome, and not
uniformly effective.
The 1967 Air Quality Act embodied the concept that air cleanup required
a national effort, but it specified that the states should retain primary
authority and responsibility for doing so. The Act authorized the
Department of Health, Education and Welfare (HEW) to oversee the
establishment of state standards for ambient air quality and state
implementation plans for achieving those standards. Following the develop-
ment by HEW of criteria which set forth the relationships of concentrations
of specific pollutants in the atmosphere to damages to "health and
welfare", states were required within 90 days to file a letter of intent
that within six months they would establish standards for ambient air
quality. Moreover, within six more months, states had to develop
implementation plans for each of the pollutants in the "air-sheds" over
which they had jurisdiction. However, HEW was delayed in providing the
criteria for pollutants, and states were slow to act once criteria were
issued. By 1970, no state had a comprehensive plan of both standards
and implementation in effect for any of the pollutants identified by HEW.
b. The 1970 Clean Air Act Amendments
The major problems experienced with air-pollution control legislation
until 1970 were related to inadequate regulatory procedures and the
lack of specific standards. The Clean Air Act Amendments of 1970 sought
to deal with these inadequacies. The existing law was amended to pro-
vide for Federal direction in setting standards and established
implementation schedules and enforcement mechanisms.
(1) Criteria and Hazardous Pollutants
The principal objective of the 1970 Amendments was to establish and enforce
National Ambient Air Quality Standards (NAAQS) for designated (criteria)
pollutants. The 1970 Amendments provided for development and enforce-
ment of two kinds of standards for ambient air quality—"primary" standards
necessary to protect health, and "secondary" standards desirable to pro-
tect welfare, including property and aesthetics. Economic considerations
are absent from the setting of NAAQS; the Agency could not trade-off
health and economic factors. The stated goal was the achievement of
primary standards throughout the nation between 1975 and 1977.
The Amendments also set forth a strategy for attaining this goal. EPA
was to establish air quality standards for major classes of pollutants.
So far, such standards have been established for particulates, sulfur
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dioxide (S02), hydrocarbons (HC), carbon monoxide (CO), nitrogen dioxide
(N02), and photochemical oxidants. In addition, EPA is scheduled
to propose an ambient lead standard this year. These standards were to
be set on the basis of "threshold values" for the designated pollutants
representing levels of ambient concentration below which scientific
evidence indicated that no damage occurs to human health. Congress
directed the EPA to determine these values and then set primary standards
based on these values minus "an adequate margin of safety." In addition,
secondary standards were also to be designed which would be sufficient
to protect public welfare, broadly defined to include "economic values...
personal comfort and well being...effects on soils, water, crops, vege-
tation, man-made materials, animals, wildlife, weather, visibility, and
climate, damage to and deterioration of property...." (Section 302h, CAA
of 1970).
The Congress did not rely solely upon the establishment of standards for
ambient air quality to control pollution. It also gave the EPA power
to set specific limits on the emission of certain kinds of "hazardous
pollutants", considered to have especially serious health implications and
attributable to relatively few source categories.
These hazardous pollutants are exclusive of the criteria pollutants for
which national ambient air quality standards exist. The EPA was directed
to prepare a list of such substances and to issue regulations limiting
their emissions by both new and existing sources, which were to be
enforced at the Federal level.
Standards have been set or are in the process of being set for asbestos,
beryllium, mercury, vinyl chloride, vanadium, and cadmium. The Amendments
allow for two years' (discretionary) lead time for compliance by existing
sources with emissions standards for hazardous air pollutants.
(2) Implementation of Ambient Air Quality Standards
The 1970 Clean Air Act Amendments recognized the role of the States,
EPA and private groups in implementing the NAAQS.
The states were to exercise primary responsibility for attaining and
maintaining ambient standards. The Amendments directed the states to
develop State Implementation Plans (SIPs) showing how they would achieve
ambient standards by mid-1975. A two-year extension of the deadline was
permitted in those regions where the necessary technology was not avail-
able when needed to meet the mid-1975 date.
Each Implementation Plan, typically, was a compilation of state air
pollution statutes and regulations and of pollution control strategies
including emission limitations, land use controls and transportation
controls. The states were not bound to enacting technically and
economically feasible directives for individual sources. It should be
noted, however, that despite the name, these Plans were not mere state-
ments of general intention, but rather were fully enforceable legal
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documents prescribing how and when individual sources were to comply.
EPA's role was to ensure that the SIPs would achieve and maintain NAAQS
consistent with the emissions reduction philosophy of the Amendments.
In the event that a state did not submit an adequate plan, EPA was
responsible for publishing an effective implementation plan. Once
approved, a State Implementation Plan could be enforced by the state, the
Federal Government, or private citizens.
Because different geographical, climatic and other conditions introduce
necessary variations in the state plans and because each plant contained
several often complex programs, EPA developed a policy of approving them
on a program-by-program basis. In most SIPs, considerable emphasis
was placed upon the development of source control plans for the achieve-
ment of primary standards.
(3) Establishment of National Emission Standards for New Sources
The objective of minimizing emissions of pollutants from new or modified
stationary sources was also written into the Clean Air Act Amendments
of 1970. The Amendments directed the EPA Administrator to set "New
Source Performance Standards" which limit the emission of pollutants from
new or modified sources to an amount no greater than that attainable
with "the best system of emission reduction which (taking into account the
cost of achieving such reduction) the Administrator determines has been
adequately demonstrated." The Act specifically provided the EPA
Administrator with the option of distinguishing among "classes, types,
and sizes" within source categories. In most cases, process units rather
than entire plants have thereby been assigned emissions limitations.
New Source Performance Standards for copper smelters were published by
EPA in January 1976.
(4) Citizen Participation
Allowance for major public participation in the law's execution, both in
standard setting and in enforcement, was an additional key feature of the
1970 Amendments. Suits brought by various groups have already had a
significant impact on the law's interpretation and implementation. For
example, the Natural Resources Defense Council has successfully challenged
portions of the State Implementation Plans which permitted the issuing
of temporary operating certificates of variances. The Sierra Club and
other organizations, in a separate case, succeeded in requiring EPA to
adopt regulations concerning significant deterioration of existing air
quality.
(5) Issues Arising from the 1970 Clean Air Act Amendments
Validity of Ambient Air Quality Standards
EPA is continuing technical studies to validate the six ambient air
quality standards established in 1971. Other pollutants such as fine
partlculate, sulfate, lead, etc., are being studied extensively by the
EPA for possible consideration as criteria pollutants.
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Intermittent Versus Permanent Control Systems
A major controversy evolved after passage of the 1970 Amendments over the
advantages of permanent control devices (scrubbers) versus the advantages
and legality of intermittent control systems for controlling S02 emissions.
Scrubbers remove sulfur from stack gases after combustion but before
emission to the atmosphere. Intermittent control systems seek to disperse
stack gas and dilute SO emissions by use of tall stacks and various
operating practices, including curtailing operations or switching to low
sulfur fuels during times of anticipated adverse air quality or other
unusual meteorological conditions.
In 1974, the United States Court of Appeals for the Fifth Circuit, in
Natural Resources Defense Council vs. EPA, held that intermittent control
systems are acceptable only when emission reduction equipment has been
used to the maximum extent feasible. In September 1973, EPA proposed
that "supplementary control system" (SCS) be permitted as a temporary
measure applicable only to sulfur oxide emissions from isolated nonferrous
smelters and coal-fired power plants, where the sole alternatives were
permanent curtailment of production, closing of the plants, or delays in
attainment of the standards. However, constant emission limitation re-
mained the preferred strategy for attaining and maintaining the standards
in the long-term. Tall stacks would also have been allowed under the
proposal as a part of an approved supplementary control system. This as-
pect of the 1973 proposal was cited by the Fifth Circuit as an example of
EPA's improper reliance on stack height as a means of achieving NAAQS.
Subsequently, EPA proposed regulations allowing the interim use of SCS
at several smellers located in the Western United States in such states as
Arizona, Montana, New Mexico, and Utah. These regulations required the
installation of Reasonably Available Emission Control Technology (RACT)
and further stated SCS could be employed only if certain conditions out-
lined in the regulations were met, and its use was needed to achieve
national standards.
State Implementation Plans (SIPs)
The 1970 Amendments required the states to submit SIPs for existing
stationary sources of "criteria" pollutants that would assure that
national primary ambient air standards would not be exceeded in any part
of a state after mid-1975 (or after 1977 when a two-year extension was
granted). With a few notable exceptions (e.g., sulfur oxide emission
limitations in the State of Ohio), all states had fully enforceable
emissions limitations affecting stationary sources by 1974, although
in portions of 16 states an extension had been granted for one or more
pollutants.
State and Federal programs faced an immense task in achieving compli-
ance since there are estimated to be over 200,000 stationary sources
subject to SIP emission standards. Of this number, however, approxi-
mately 20,000 are major emitters (i.e., facilities individually capable
of emitting over 100 tons of a pollutant per year), which as a class,
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produce about 85 percent of all air pollution emitted by stationary sources.
Accordingly, EPA and state enforcement programs focused on ensuring
compliance by this class of emitters in order to have the greatest
impact on pollution abatement.
In May 1972, the SIPs for the States of Arizona, Idaho, Montana, Nevada,
New Mexico, and Utah were disapproved insofar as they applied to non-
ferrous smelters. Promulgation of Federal replacement regulations were
delayed due to controversies over air quality data, the availability of
controls and the possible use of intermittent control systems and tall
stacks.
Resolutions to these problems were approached in late 1973, and EPA had
finalized Federal regulations for the control of SOX for some primary
nonferrous smelters by early 1975. Regulations proposed required the
application of the reasonably available retrofit control technology,
and, if necessary, allowed the interim use of supplementary control
systems (SCS) and tall stacks until adequate constant control techniques
became available. Each smelter using SCS was further required to conduct
a research and development program to hasten the development of such
technology.
The SIPs in some states failed to fully meet EPA requirements, in others,
states and local agencies adopted technically impractical standards for
existing sources or chose to supersede technically-based EPA standards
for new sources in order to control the use of land, for example.
Three separate court cases, involving challenges on the reasonableness
of regulations contained in SIPs approved by EPA, resulted in a
Supreme Court ruling that the EPA need not consider technical feasibi-
lity and economic practicality in approving state-submitted SIP regu-
lations. EPA can deny a SIP If it will not result in the attainment
of air quality standards. Under these conditions, EPA must consider
availability of technology, economic practicality, etc., in proposing
alternative SIPs.
State Variances
Most state implementation plans were drafted so that all emission limi-
tations were effective immediately. Because most sources were not in
compliance with emission limitations of implementation plans, there
was a transition period (still continuing for some) between the time a
plan became effective and the time that ambient air standards had to
be attained. The most common way of dealing with source noncompliance
was for a state pollution control authority to issue a variance from
the requirements, provided that the source and the state reached an
acceptable compliance schedule and that the national ambient air
quality standards were met by the statutory deadlines. EPA took the
position that such variances would be treated as revisions of the state
implementation plans, requiring approval by EPA.
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This variance procedure was challenged throughout the country and much
litigation ensued. In April 1975, the Supreme Court held that the pur-
poses and philosophy of the Clean Air Act of 1967 were not changed by
the 1970 Amendments. Accordingly, the chief responsibility for attain-
ment of ambient air standards rested with the states. So long as a
state's control strategy achieved and maintained ambient air standards
through emissions reduction, the Court ruled that EPA could not inter-
fere with the state's timing or its enforcement techniques unless there
were significant delays.
"Significant Deterioration" Controversy
Although the original Clean Air Act of 1970 contained no mention of
"significant deterioration" (the words used in the act are "protect and
enhance" air quality) in a 1972 suit brought by the Sierra Club against
the EPA, the District of Columbia District Court ruled that according
to the provisions of the Clean Air Act, no state could permit "signifi-
cant deterioration" of air quality in areas where it was already cleaner
than required by ambient standards. This ruling was upheld by the
Supreme Court, and on August 16, 1974, EPA proposed regulations to
incorporate the District Court opinion into state implementation plans.
The EPA regulations, covering particulates and S02» were published after
long public debate about the nature and severity of the controls. Those
seeking strong controls had argued that the court ruling required state
implementation plans that would fully protect clean air areas from
pollution by new industrial facilities. Those favoring less control
argued that there must be some provision for growth and industrialization
even in clean air areas and that a strict interpretation of "significant
deterioration" by EPA would in effect amount to land use controls pro-
hibiting new industrial development.
The proposed final regulations separated areas into three classifications—
Class I, where air quality would be protected at existing levels; Class II,
where moderate changes would be permitted; and Class III, where major
industrialization and growth would be allowed to a point at which air
pollution reached national standards. All areas were to be established
as Class II areas at first, with authority given state governors to change
any to Class I or III. In this way, the Federal Government would not
be forced to determine industrial siting policies for regions based on
air quality alone but would allow wide discretion to the states. The
regulations were adopted in final form by EPA on November 27, 1974.
The regulations were challenged by industry and environmental groups. Industry
sought to have the regulations set aside as an arbitrary and capricious
exercise of authority. At the same time, the Sierra Club (the successful
plaintiff in the original district court suit that forced promulgation
of the regulations) and other environmental groups brought legal challenges
on two grounds—that the regulations allowing growth and siting of
facilities in Class III areas violated the court order and that the Act
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did not allow limiting the regulation to particulates and SOX emissions,
but required that all criteria pollutants be included.
"Non-Attainment"
EPA's Interpretive Ruling of December 21, 1976, addressed the issue of
industrial growth in regions where national air quality standards were
not being attained. This ruling provided that a major new source of air
pollution could be built in such areas only if a set of specified con-
ditions were met. These conditions required the control of emissions from
the new source to the greatest degree possible and a more than equivalent
offsetting emission reduction from existing sources (labelled "emission
offsets") so that there was progress toward the achievement of standards.
This Ruling defined major sources as those with emission of 100 tons
or more per year of each pollutant (1,000 tons for carbon monoxide). EPA
simultaneously proposed a tentative definition for major sources based
on half the emissions rate mentioned above. These major new sources
would have to meet a lowest achievable emission rate, which, at a
minimum was the same as the applicable New Source Performance Standards.
During the preconstruction review phase of a project to construct such
a major new source, the following considerations were to be taken into
account to determine the emissions offset.
The emissions offset had to be from a "baseline" State Implementation
Plan (SIP) that was considered adequate by EPA and not one that was re-
jected as being substantially inadequate. Furthermore, there had to be
a more than one-for-one emission offset and any leftover emission off-
set credit could not be "banked" for future pollution growth. Emission
offsets could be based on sources owned by the new source owner or by
other parties with whom the new source owner was able to arrange for
the offset.
c. The Clean Air Act Amendments of 1977
The Clean Air Act Amendments of 1977 were signed into law on August 7,
1977. In general, these Amendments reaffirm the basic goals and
strategy of the Clean Air Act of 1970; namely, ambient standards should
be achieved via the permanent reduction of emissions. As before, the
responsibility and authority for enforcing these standards rests with
the state and local bodies. The Amendments, in addition, clear up several
of the controversies and ambiguities resulting from the 1970 Amendments,
generally by accepting court decisions and EPA's interpretive rulings and
policy formulated in the interim. EPA has been provided with new tools to
do its job. Finally, the Act allows for special consideration of certain
industries in order to avoid undesirable side effects of strict regulation.
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(1) Basic Approach
The basic goals and strategy for achieving air pollution control remain
unchanged. The Amendments, therefore, rely on the establishment of
National Ambient Air Quality Standards designed to protect public health
and welfare and emission standards, based on control technology, to re-
duce pollutant concentrations below the ambient standards and keep them
there. The new law also retains the State Implementation Plan as the
basic mechanism through which this approach is implemented.
For those areas which have not attained ambient standards, so-called
"nonattainment areas", states must have an approved implementation plan
revision by July 1, 1979, which provides for attainment of primary standards
by December 31, 1982. This requirement is a recondition for construction
or modification of major emission sources in nonattainment areas after
June 30, 1979. If, despite implementation of all "reasonably available
measures", a state cannot attain primary standards for carbon monoxide
or photochemical oxidants in timely fashion, it must submit a second plan
revision by December 31, 1982, which provides for attainment by
December 31, 1987. This flexibility is not available to stationary
sources. All plan revisions must, prior to attainment, provide for
"reasonable further progress" toward attainment in terms of additional
annual reductions in emissions.
For those areas which are cleaner than required by ambient standards,
implementation plans must include an elaborate program to prevent the
significant deterioration of air quality. All such "nondegradation"
areas must be designated Class I, II, or III, depending upon the degree
of deterioration that is to be allowed, and limits are assigned to
increases in pollution concentrations for each classification. Congress
specified which of these areas must be protected by the most stringent
Class I designation. All others would be initially designated Class II,
with states generally free to redesignate them as Class I or III.
Congress also specified the maximum allowable increases in concentrations
of sulfur dioxide and particulate for each classification and gave EPA
two years to come up with comparable formulas for hydocarbons, carbon
monoxide, photochemical oxidants, and nitrogen oxides.
In both "nonattainment" and "nondegradation" areas, major stationary
sources may be constructed only by permit and must, at the very least,
meet New Source Performance Standards prescribed by the law. As a general
rule, these will require application of the "best technological system
of continuous emission reduction".
(2) Responsibility and Authority
Congress has prohibited EPA from requiring the inclusion or retention of
indirect source review programs and "land-use" controls as a condition of
implementation plan approval. It also blocked EPA from imposing such
programs in implementation plans which the agency promulgates, except
with respect to major Federally funded public works projects such as
highways and airports and Federally owned and operated indirect sources.
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Any state or local government may adopt or retain indirect source review
programs, and EPA may enforce any such measure approved as part of an
implementation plan, but the state involved will always be free to suspend
or revoke indirect source review at any time.
The states may petition EPA to publish or revise national New Source
Performance Standards for sources of pollutants which may have been over-
looked or when new technology would dictate a more stringent standard.
The purpose of this provision, of course, is to allow any state to adopt
stringent standards without fear that an affected company will seek an
"air pollution haven" in some other state.
Governors are given new authority to suspend portions of transportation
control plans and will have more say in revision of air quality control
region boundaries, redesignation of nondegradation areas and other aspects
of that program, and certification of coal conversion orders. Governors
may also issue extended compliance orders to stationary sources, unless
EPA objects for cause and may even temporarily suspend implementation plan
provisions in the event of a bona fide energy emergency.
Few restrictions are placed on a state's right to impose more stringent
requirements than might be prescribed by EPA, and governors may insist
on the use of locally mined coal under certain conditions. All Federal
facilities must comply with both substantive and procedural requirements
of Federal, state, regional, and local air pollution control laws and
regulations.
Local and regional officials must be brought into state decisions re-
garding transportation controls, preconstruction review, nonattainment,
and nondegradation through a "satisfactory process of consultation" which
is prescribed in the state implementation plan. Enforcement authority
for implementation plans promulgated by EPA may now be delegated to
local governments.
(3) Special Considerations
Congress realized that certain portions of the private sector had its
problems meeting the 1970 requirements. As a result, several industries
were singled out for special consideration including the automobile
industry, nonferrous smelters, fossil fuel-fired plants prohibited
from burning oil or natural gas, etc. In many instances, Congress
reduced the compliance requirements for small installations. In most
of the remaining cases, this special consideration was usually a waiver
from the time deadlines for compliance and not from the ultimate
requirement for compliance.
(4) New Tools for EPA
Amendments to Sections 111 and 112 of the original Act allow EPA to set
design, equipment, work practice or operational standards to control
emissions of criteria pollutants from new stationary sources and of
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hazardous emissions from any source. These standards may only be
imposed when it is not feasible to establish a more traditional emission
standard, and they must be changed to emission standards whenever
possible. Alternative methods of emissions reduction which are equally
effective may also be used with EPA's approval.
With respect to hazardous pollutants, these standards must be adequate,
in EPA's judgment, to protect public health with an "ample margin of
safety." For new or modified sources, such standards must reflect the
"best technological system of continuous emission reduction" which—taking
into account costs, energy requirements, and health and environmental
impacts other than air quality—EPA determines to be "adequately demon-
strated." Proper operation and maintenance requirements must be included
in the standards.
Under Section 113 of the original law, injunctive relief was the only
civil remedy a court could impose. The new law authorizes courts to
impose civil penalties up to $25,000 per day of violation, taking into
account the seriousness of the violation and the economic impact of the
fine on the violator.
To limit any abuse of EPA's enforcement powers, Congress allowed courts
to award litigation costs to defendants against whom EPA brings a
frivolous or otherwise unreasonable action. However, courts would have
to find an EPA rule "arbitrary and capricious" before it can be overturned.
Other new regulatory tools include waivers of emission control deadlines
for innovative technology for both stationary and mobile sources, and
sanctions pertaining to nonattainment of environmental regulations.
Another provision seeks to supplement standard regulatory procedures by
bringing public pressure to bear on state and local governments. States
must include in their implementation plans effective measures to notify
the public when air pollution levels exceed primary standards and to edu-
cate the public as to the hazards involved and corrective measures avail-
able.
Increased reliance on Presidential authority is also provided where
standard regulatory procedures could lead to stalemate—as in settling
disputes between governors and Federal land managers over variances for
Class I nondegradation areas; regulating radioactive pollutants other-
wise governed by energy authorities; disapproving EPA aircraft emission
standards found unsafe by the Secretary of Transportation; and declaring
an energy emergency so severe as to warrant suspension of state imple-
mentation plan requirements.
(5) Shifts in Strategy
Section 405 of the new Act requires EPA, in consultation with the Council
of Economic Advisers, to conduct a comprehensive investigation into
"economic measures" to supplement existing regulatory authorities, pro-
vide incentives for additional emission reductions, and "serve as the
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primary incentive for controlling air pollution problems not addressed by
any provision of the Clean Air Act (or any regulation thereunder)." The
overall study is due in two years, but EPA will have only one year to
assess the feasibility of establishing an emission charge on oxides of
nitrogen from stationary sources. In addition to this study of economic
incentives, new Section 120 gives EPA only six months to publish regu-
lations requiring stationary sources to pay "noncompliance penalties"
for failure to meet certain emissions standards by July 1, 1979, in most
cases. The penalty is designed to assure that no company will profit
from delaying control expenditures and thereby obtain a competitive
advantage over companies which have Installed controls. Penalties are
determined by administrative process, based on the cost of compliance,
plus any additional economic value resulting from the delay, minus
expenditures for interim control expenditures.
Both EPA regulations and specific penalties may be reviewed by the Federal
courts, but the noncompliance penalty is in no way the same as a court-
imposed fine. In fact, the law explicitly states that noncompliance
payments shall be imposed in addition to civil or criminal fines.
Section 129 of the new law ratifies, by statute, the basic EPA "emissions
offset" policy. This emissions offset policy represented an "interpretive
ruling" on existing law when EPA first formally introduced it in 1976.
This policy allows new stationary sources in nonattainment areas only
when pollution from existing sources in the area has been reduced to
more than compensate for the new emissions. This policy would remain in
effect until July 1, 1979, although Congress allowed for exceptions and
waivers under certain circumstances. By July 1, 1979, the objectives
of EPA's emission offset policy must be incorporated into the state
implementation plan process. In effect, no major source may be constructed
in a nonattainment area unless combined emissions from existing sources,
new minor sources and the proposed major source will be sufficiently
less than total emissions from existing sources, as to represent
reasonable further progress toward attainment of standards. An alternative
formula appears to allow construction of new major sources which do not exceed a
maximum allowable increase in emissions, as specified in the implementation
plan, and any new major source must comply with the lowest achievable
emission rate. The implementation plan itself must provide for attain-
ment of primary standards as soon as possible, but not later than
December 31, 1982, for most pollutants, and five years later for carbon
monoxide and photochemical oxidant.
2. Specific Federal Provisions Affecting Copper Smelters
The Clean Air Act Amendments of 1970 and 1977 establish four principles
that are particularly relevant to air pollution control in copper
smelting. They are:
2
• National Ambient Air Quality Standards must be met at all times
by the use of permanent emission reduction technology. Dispersion
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by any means, most notably by use of tall smoke stacks, and production
curtailment (to reduce emissions under adverse meteorological condi-
tions) are not acceptable means of achieving ambient air quality
standards;
• All new, reconstructed and modified production equipment must meet
New Source Performance Standards. All new sources must employ at
least NSPS calibre technology;
• Smelting activity cannot lead to significant deterioration of
existing air quality in regions which are cleaner than the ambient
standards; and
• In areas which have not attained ambient standards, several pre-
conditions must be met before undertaking the modification of an
existing emission source or the construction of a new emission
source.
a. Emission Reduction
At the time of the Clean Air Act of 1970 only one of the domestic
smelters was able to meet the National Ambient Air Quality Standard for
sulfur dioxide without resorting to dispersion and production curtailment
techniques (Supplementary Control Systems). Most other smelters were only
capturing 17 percent to 40 percent of the sulfur dioxide generated during
production, whereas capture rates in excess of 90 percent were typically
required to prevent ambient violations.
The cost, economic impact and technical difficulty of immediately achieving
the sulfur dioxide standard were viewed by EPA as severe. The Agency
developed the Tall Stacks Policy in part to permit, on a temporary basis,
the use of Tall Stacks and Supplementary Control Systems (SCS) to achieve
ambient standards. The Tall Stacks Policy provided that an existing
smelter could utilize tall stacks and SCS to meet ambient standards so
long as it employed Reasonably Available Control Technology, and conducted a
research and development program leading to eventual attainment of NAAQS
through permanent control alone. New smelters could not rely on Tall
Stacks or SCS to meet ambient standards.
Reasonably Available Control Technology (RACT) was defined as control of
at least all strong sulfur dioxide gases (approximately 4-5 percent 50^) by
a double absorption acid plant, if these gases were not being treated, or
control by a single acid plant if such a system were already being utilized.
By comparison to the New Source Performance Standards (discussed below),
the Tall Stacks Policy permitted the continued use of uncontrolled sources
of weak gas streams (namely, multiple-hearth roasters and reverberatory
furnaces) and allowed the use of the lower efficiency single absorption
acid plant. Weak gases cannot be treated by the conventional autothermal
acid plants used in the industry. To ensure that the pollution control
equipment, once installed, was being effectively utilized, a RACT mass
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emissions limitation (RACT "bubble") was established for each smelter.
The RACT emissions limitation was calculated assuming capture of sulfur
by the required control equipment at capacity production. Because the
RACT emissions limit was calculated at capacity production, this mass
emissions limit did not by itself adversely affect the utilization of
existing capacity. However, because RACT emissions at capacity pro-
duction levels were often sufficient to violate NAAQS for sulfur dioxide,
the smelters were not able to operate at the RACT mass limit at all times.
This meant that the effective capacity of many smelters was reduced.
Once established, the RACT emissions limit could not be increased.3 The
policy implied that most smelters were operating under an emissions
ceiling that could not increase to accommodate physical or operational
changes. Further, the RACT bubble could decrease either because the
EPA determined that incremental pollution control equipment was
reasonably available or because changes were made to the smelter which
made once-and-for-all emissions reductions possible.
The Tall Stacks Policy was ambiguous in defining when (and under what
conditions) smelters would be required to attain ambient standards solely
by use of constant controls. It also did not address whether an average-
sized smelter using NSPS caliber technology could meet ambient standards
using permanent controls alone. Finally, the policy did not directly
address the role that fugitive emissions might play in NAAQS violations
and the means available for preventing these violations.
The Clean Air Act Amendments of 1977 have resolved most of these un-
certainties. First, an ultimate emission limitation is established at a
level sufficient to ensure NAAQS are met at all times without the use
of dispersion techniques or production curtailment. This ultimate
emissions limit is to be calculated assuming stack heights of two-and-
one-half times building height or less for stacks built after 1970.
Generally, this is equivalent to a stack height of about 300 feet. For
operational purposes, smelters can employ a stack of any desired height.
Thus, the Amendments require the establishment of ultimate sulfur
dioxide emissions limitations for every smelter. If a state fails to
establish such an ultimate emissions limit in a SIP, EPA is required to
do so. These limits are to be met once established, unless the smelter
receives a primary nonferrous smelter order (NSO).
The NSO is essentially a five-year variance, renewable once, which allows
a smelter to operate using reasonably available control technology
together with tall stacks and SCS. Only those copper smelters that are
technically or economically unable to meet the ultimate emissions limit
for sulfur dioxide are eligible to operate under a NSO. Upon termination
of the NSO, the smelter must either be achieving the ultimate emissions
limit or close. As a condition of operating under a NSO the smelter
must install as much pollution control equipment as it can afford, must
continue R&D on emissions reduction technology, and must achieve ambient
air quality standards. In addition, the smelter is subject to the RACT
emissions limit throughout the period of the NSO. If a smelter cannot
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afford any sulfur dioxide control (this is claimed to be the case at two
smelters) an NSO may still be granted. This is a potentially significant
change from the 1970 Amendments which have been interpreted by some
courts as requiring some degree of permanent control before temporary
measures to meet ambient standards could be allowed.
In short, the Clean Air Act Amendments of 1977 require every domestic
smelter to meet ambient standards solely with emissions reduction equip-
ment. This requirement is to be met no later than January 1, 1988. In
the interim, EPA is charged with ensuring that all smelters make the
fastest economically and technically feasible progress toward meeting the
ultimate emission limitations'.
b. New Source Performance Standards
New Source Performance Standards (NSPS) refer to regulations applicable
to the building of new plants or to major modifications of existing
plants. The Clean Air Act Amendments of 1977 do not materially affect
the NSPS applicable to copper smelters.* The NSPS for copper smelting
apply to "facilities" (major pieces of process equipment) and do not
directly apply to the source or smelter complex per se. Thus, the
standards specify the maximum emissions rates allowed from process
equipment. Although the smelter emissions rate consistent with New
Source Performance Standards can be deduced from detailed knowledge of
the smelter's process equipment, configuration, and charge characteristics,
there is no necessary relationship between this emissions rate and the
ultimate emissions rate (discussed above) since that limit is based on
ambient air quality and not on technology.
The NSPS require that any new, reconstructed or modified smelting furnace,
roaster or converter may not emit gases which contain sulfur dioxide in ex-
cess of .065 percent (by volume). Essentially this means that the gases
from any production facility subject to the standard must be treated by a
double absorption acid plant. Alternatively, the standard requires that the
pollution control system must remove at least 99.6 percent of the sulfur
dioxide generated during the production process. Reverberatory furnaces
are exempt from NSPS only during periods when the smelter is processing
impure concentrates.
Excepting the single exemption for some reverberatory furnaces (noted
above), all new roasters, smelting furnaces, and converters must meet
NSPS. This requirement holds for all such facilities regardless of whether
the new equipment replaces or augments pre-existing process equipment.
A facility is considered to be reconstructed, and therefore subject to NSPS,
if (1) the capital cost of new components exceeds 50 percent of the (fixed)
capital cost of a comparable new facility and (2) it is technically and
economically feasible to meet the applicable performance standard. The
NSPS require smelter owners and operators to notify EPA of any potential
reconstruction and to provide detailed information regarding the con-
templated action. The Agency is required to determine within 30 days of
notification whether the proposed action constitutes a reconstruction.
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If a facility is modified, it must meet NSPS. Any physical or operational
change to a facility is a modification if (1) emissions from the facility
increase and (2) total emissions from the smelter as a whole increase.
Both criteria must be met in order for a facility to be modified. For
example, if an emissions increase from a smelting furnace were totally
offset by an emissions reduction from the converters, the furnace would
not be modified and would not, therefore, be subject to NSPS. However,
if the emissions increase from the furnace were not offset elsewhere in
the smelter, the furnace would be modified.
If a smelter is subject to a RACT emissions limit that cannot be increased
(this is or will be the case at most smelters), then the modification
provisions have vacuous application. Since such sources cannot increase
emissions, there is no way that the modification provisions could
independently apply. For these smelters the reconstruction and new con-
struction provisions of NSPS are the only provisions that could result
in more stringent control of smelter emissions than the smelter-wide RACT
limit.
To date, the modification, reconstruction and new equipment provisions of
the NSPS have not forced the upgrading of pollution control equipment at
any existing smelter.
c. Prevention of Significant Deterioration
In 1974, EPA promulgated regulations to prevent the significant deterior-
ation (PSD) of air quality in areas where the air is cleaner than is
required by the National Ambient Air Quality Standards. (This is approx-
imately 75 percent of the United States' land area.) The EPA regulations
affected 19 categories of industrial sources commencing construction or
modification after June 1, 1975. Although EPA's specific regulations were
upheld by the D.C. Court of Appeals in 1976, the PSD concept has received
extensive scrutiny by Congress, and the Clean Air Act Amendments of 1977
include strong PSD provisions.
The PSD provisions contained in the 1977 Amendments are similar to the
earlier EPA regulations in that they establish three area classifications
designed to correspond to the change in air quality intended for an area.
The classifications of air quality levels are based on how much increase
(over the air quality as of January 6, 1975) will be permitted in ambient
concentrations of particulate matter and sulfur dioxide. The allowable
increase in concentration is referred to as an Increment. Briefly, the
classifications are:
• Class I where practically any air quality deterioration
would be considered significant;
• Class II where deterioration in air quality that would
normally accompany moderate growth would not be
considered significant; and
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• Class III where more extensive Industrial growth would be accepted.
In no event is a source permitted to cause or contribute
to air quality levels exceeding the National Ambient Air
Quality Standards.
EPA initially designated all areas of the country as Class II, allowing
States to redesignate areas, including Federal lands, either Class I
(pristine) or Class III (greater economic growth).
The Amended Act differs from the EPA regulations in the sources and
pollutants covered, the numeric limits for each class, class designations,
control technology requirements, and application and review requirements.
The Amendments:
• Cover additional source categories and all sources with the poten-
tial to emit more than 250 tons per year.
• Tighten the Class II sulfur dioxide increment and adopt an incre-
ment approach to Class III.
• Designate as Class I all International Parks, National Wilderness
Areas and National Memorial Parks over 5,000 acres, and all
National Parks over 6,000 acres (approximately 130 total areas).
• Authorize the Governor (with the concurrence of the Federal Land
Manager) to grant a variance to the Class I increments for up to
18 days per year.
• Require best available control technology for new and modified
sources, determined on a case-by-case basis5 and applicable to all
pollutants subject to regulation under the Act.
• Require permit applicants to demonstrate compliance with PSD
air quality increments to be preceded by an analysis of existing
air quality at the proposed site and to analyze the air Quality
impacts of growth associated with the applying facility.6
• Require public hearings on the air quality impacts of the pro-
posed source, alternatives thereto, and control technology
requirements.
In November 1977, EPA proposed revisions to the PSD regulations to
reflect the requirements of the 1977 Amendments. The EPA regulations
serve as a guideline to the States and apply to all sources commencing
construction prior to approval of a State PSD program.
Associated with PSD measures in the Act is a provision to protect
visibility in Federal Class I areas. This section of the 1977 Amendments
directs EPA to develop regulations to prevent any future (and to remedy
any existing) impairment of visibility in mandatory Class I areas. The
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visibility requirements apply to any source which began operating in the
past fifteen years and may require retrofit with the best available control
equipment. The EPA regulations are to be developed in consultation with
the Department of Interior and the States and are to be published by
August 1979.
d. Nonattainment
Parts of the country which have not achieved ambient air quality are the
nonattainment areas. An area may be shown to be a nonattainment area
by monitored air quality data or by air quality modeling. Since most
existing copper smelters are not at the ultimate emissions limit but are
using RACT and SCS to achieve ambient air quality, the areas in which
these smelters are located will be designated nonattainment areas with
respect to sulfur dioxide emissions.
The 1977 Amendments require SIP revisions (by-July 1, 1979) which would
provide for the attainment of primary standards by December 31, 1982.
This SIP revision is a precondition for the construction or modification
of major emission sources in nonattainment areas after June 30, 1979.
The Amendments require such a SIP to provide for annual incremental re-
ductions in emissions via the adoption, as a minimum, of RACT as
expeditiously as possible. The SIPs must also contain a comprehensive
emissions inventory for existing sources and proposed new sources. They
must also contain emission limitations and compliance schedules.
The construction and operation of a new or modified emission source will
require a permit. Prior to the issuance of such a permit, it is necessary
to conduct an analysis of alternative sites, sizes, processes and
environmental control techniques.
The "emissions offset" policy also applies so that total emissions in a
region after the construction or modification of a facility must be lower
than the prior emissions so that there is reasonable progress towards the
attainment of standards. Alternately, if the construction of a new or
modified source results In a net increase in emissions, this increase has
to be within the allowance permitted for such a pollutant in a SIP which
would achieve ambient air quality by 1983. Finally, such a source should
comply with the "lowest achievable emission rate" (LAER).
3. Summary
Copper smelters are potentially subject to four emissions limitations.
These emission limitations differ by stringency, by method of calculation
and by applicability, i.e., whether they apply to the smelter as a whole
or to individual pieces of equipment. They are the ultimate emissions
limit, LAER, BACT and RACT. New Source Performance Standards are usually
the same as BACT or a little less stringent because of the time lags in
NSPS revisions. NSPS apply only to major pieces of process equipment.
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All smelters are required to achieve an ultimate emissions limit
sufficient to prevent NAAQS violations at all times and without resorting
to dispersion or SCS (production curtailment). This ultimate emission
limit is calculated by diffusion modeling and is dependent on the allowable
stack height, the weather and topography in the vicinity of the smelter
and smelter size. It generally requires over 90 percent capture of S02.
The other emissions limits are technology-related and depend on the
processing equipment used at a particular smelter. In increasing order
of stringency, they are RACT, BACT and LAER. RACT (control of strong
S02-containing streams) at existing smelters can achieve about 50-70
percent sulfur capture. BACT (for non-reverberatory smelting and dual
absorption acid plants) can achieve over 90 percent control. LAER could
achieve additional pollution control beyond BACT via the control of
fugitive emissions, weak gas scrubbing, etc. Generally, since existing
smelters are in non-attainment areas, LAER will apply if these smelters
are modified. For the construction of new smelters, LAER, BACT or NSPS
may apply depending on whether such a new smelter would be located in a
Class II or Class III area, or because it is needed to comply with the
ultimate emissions limitation.
i
If, for technical or economic reasons, an existing smelter is unable to
achieve immediately the ultimate emissions limitation, it may continue
to operate under a Nonferrous Smelter Order (NSO). As a condition for
obtaining an NSO, the smelter must install the most control equipment
consistent with its technical and economic circumstances. The NSO would
specify a RACT emissions limitation predicated on capacity production
and full, effective utilization of the existing pollution control system
(if any). The RACT emissions limitation establishes a ceiling on emissions;
it is not a license to emit at the specified rate. Put differently,
the smelter is still required to employ dispersion and production curtail-
ment techniques to prevent ambient violations during the life of the NSO.
Upon termination of the NSO, the smelter would have to comply with the
ultimate emissions limitation or close.
C. WATER POLLUTION
1. Background
a. Water Pollution Control Prior to 1972
Until 1972, the Federal approach to water pollution was embodied in two
pieces of legislation:
• the Refuse Act of 1899; and
• the 1948 Federal Water Pollution Control Act (including Amendments
passed in 1956, 1965, 1966, and 1970).
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The Federal Water Pollution Control Act (FWPCA) was essentially the
Federal Government's first venture into what was previously almost
exclusively a state and local matter. It asserted that the primary
responsibility for pollution control remained with the states and gave
the Federal Government authority principally for investigations, research,
and surveys.
Amendments to the Act in 1956 and thereafter increased the scope of
Federal activity in two key ways: first, authorization was made for
Federal financial support of municipal water treatment plants; second,
a complex procedure was established for Federal regulation of waste
discharge through enforcement actions against individual polluters.
Interstate polluters were the initial targets of these actions, but
eventually authorization was broadened to include both inter- and
intrastate pollution.
The FWPCA originally focused on the maintenance of ambient water quality
standards; allowable discharges were related to the estimated assimi-
lative capacity of a receiving stream or lake. Enforcement was slow
and cumbersome, involving conferences and long waiting periods. As
a result, the Act's provisions were the basis of only three civil
court actions brought against polluters before 1972.
The Refuse Act of 1899 was an obscure law passed as part of an appro-
priation act for construction and repair work on rivers. It forbade
discharge of any refuse matter (excluding that from municipal sources)
into the nation's navigable waters without a permit issued by the Chief
of the United States Army Corps of Engineers. The Act was generally
unenforced until 1970; thereafter, as concern with pollution increased,
the Government began bringing both criminal and civil lawsuits against
individual polluters, basing its authority on a 1960 Supreme Court
decision which held that, under the Refuse Act, the United States could
sue industries to stop them from discharging pollutants into navigable
waters without a discharge permit. The Act became unimportant following
passage of the FWPCA Amendments of 1972, which included provisions
which required permits for all industrial and municipal dischargers.
b. Federal Water Pollution Control Act Amendments of 1972
The Federal Water Pollution Control Act Amendments of 1972 represented
a significant policy departure from prior Federal Government approaches
to correction of the national water pollution problem. The amended law
embodied several significant alterations in the specific objectives,
Implementation, and enforcement procedures of the Federal Government's
antipollution program for the nation's waterways.
As amended, the law aimed "to restore and maintain the chemical, physical,
and biological integrity of the Nation's water". As national goals
achieved this objective, it called for eliminating pollutant discharges
altogether by 1985, and, whenever attainable in the interim, achlevine
water quality, providing for protection and propagation of fish, shell-
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fish, and wildlife and for recreation In and on the water by 1983
(Section lOla). The law did not, however, actually mandate attainment
of these objectives and goals. The no-discharge goal was mandated by
1983 only for categories and classes of nonmunicipal dischargers for
which it was "technologically and economically achievable".
Prior law related pollution requirements to a goal of making individual
waters clean enough to support one or more beneficial uses—such as
fishing, swimming, boating and water supply for homes, farms, and
industries—in each case determined by the states to be desirable and
feasible. This approach recognized that different waters would, as
a practical matter, support different combinations of uses which In
turn would require different ambient water quality conditions.
By contrast, the amended law primarily focused, for the purpose of
policy objectives, on reducing pollutants rather than on water
quality per se.
In several respects (e.g., citizen suits, monitoring, retention of local
authority) the provisions of the FWPCA roughly paralleled those of the
Clean Air Act. The Water Act's special provisions are discussed below.
(1) Establishment of Water Quality Standards
The 1972 Amendments provided that EPA and the states establish water
quality standards for the nation's navigable waters. These, however,
are secondary, rather than principal criteria for regulating pollution
in the nation's waterways. The amended Act no longer focused princi-
pally on ambient quality and assimilative capacity of receiving waters.
but instead directed EPA and the states to establish discharge
requirements for individual industrial and municipal polluters.
By June 1974, the initial process of reviewing and revising interim
standards was completed. In October 1974, EPA proposed water quality
criteria defining maximum limits of acceptability for chemical and
physical constituents in United States waters. These criteria are
intended to form the scientific basis for any future revision of water
quality standards, and in particular the establishment of the 1983
interim goal of providing for the protection and propagation of fish,
shellfish, and wildlife and for recreation in and on the water. EPA
emphasized, however, that decisions on standards and control measures
must also consider the economic and social Impact of controlling water
pollutants and the practicality and enforceability of the standards and
control measures.
(2) Establishment of Effluent Limitations
As mentioned above, the amended Act directed the EPA and the states
to establish discharge requirements for industrial and municipal plants
as the principal means for regulating water quality. The predominant
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Influence behind this approach was the universal recognition that
basing compliance and enforcement efforts on a case-by-case judgment of
a particular facility's Impacts on ambient water quality Is both scien-
tifically and administratively difficult. To minimize the difficulties
in relating discharges to ambient water quality, the law required
minimum effluent limitations for each category of discharger, based on
technological and economic feasibility, regardless of receiving water
requirements.
Three critical provisions of the 1972 Amendments governed the establish-
ment of effluent standards for water quality control.
First, a 1977 deadline was set for achieving "effluent limitations for
point sources, other than publicly owned treatment works,...which shall
require the application of the best practicable control technology
currently available..." (Section 301b). This has been called the
best-practicable-technology (BFT) standard.
Second, a 1983 deadline was set for achieving "effluent limitations for
categories and classes of point sources, other than publicly owned
treatment work, which...shall require application of the best available
technology economically achievable for such category or class, which
will result in reasonable further progress toward the national goal
of eliminating the discharge of all pollutants...such effluent limita-
tions shall require the elimination of discharges of all pollutants
If the Administrator finds...that such elimination is technologically
and economically achievable for a category or class of point sources..."
(Section 301b). This has been called the best-available-technology
(BAT) standard.
Third, in establishing guidelines for BFT and BAT, EPA was charged to
take into account "the age of equipment and facilities involved, the
process employed, the engineering aspects of the application of various
types of control techniques, process changes, non-water quality environ-
mental impact (including energy requirements), and such other factors
as the Administrator deems appropriate..." (Section 301b). In addition,
in determining BPT, but not BAT, the Administrator was to consider "the
total cost of application of technology in relation to the effluent
reduction benefits..." The use of the term "economically achievable"
in the BAT definition, however, does Introduce similar economic con-
siderations.
Thus, technology and cost considerations are mandatory in the establish-
ment of BFT and BAT limitations. In addition to these considerations,
formal public hearings must, by law, be held in conjunction with the
establishment of water-quality-related limitations more restrictive
than BAT requirements (i.e., limitations imposed where water quality
standards are not satisfied by generally applicable minimum effluent
standards). These hearings are to focus upon the "reasonable relation-
ship of the economic and social costs and the benefits to be obtained
(by the proposed effluent limitation)" (Section 302b).
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The Act does not specify that effluent limitations should consist of
single numbers (vs. a range) for each industry category, though in
practice state authorities and EPA have generally preferred to use single
numbers in establishing effluent guidelines.
(3) Establishment of New Source Performance Standards (NSPS)
In addition to issuing effluent guidelines for existing point sources,
under the amended Act, EPA must set special effluent standards for new
industrial point sources.
The Act implied that process units, as well as entire plants, were
subject to new source effluent standards. Distinctions in the setting
of new source standards among classes, types, and sizes of facilities
were allowed by the terms of the Act.
Best available technology, along with considerations of cost, non-
water-quality environmental impact, and energy requirements formed the
basis for the New Source Performance Standards. Permits granted on
this basis exempt permittees from compliance with any more stringent
standards for up to 10 years.
Whether a facility is deemed an existing source or a new source is
important for two reasons. First, New Source Performance Standards are
for the most part stricter than 1977 standards for existing sources
because it is assumed that the latest technology is more easily built
into a new facility. Second, the new source permit is issued for a
longer period than other permits, thus reducing the potential for
periodic tightening of permitted effluent levels. EPA has to prepare
and circulate environmental impact statements on major new source
permit actions and in the process should review all aspects of the
siting decision for the source.
(4) Establishment of Toxic and Pretreatment Effluent Standards
The EPA Administrator must publish a list of toxic pollutants and
effluent limitations or prohibitions for them. Toxic pollutants or
priority pollutants are defined as those which, when assimilated either
directly from the environment or indirectly by ingestion through food
chains, will cause death, disease, behavioral abnormalities, cancer,
genetic mutations, physiological malfunctions, or physical deformities
in any organism or its offspring. Spills of toxic or other hazardous
materials are now subject to the same regulatory framework—for preven-
tion and Federal cleanup costs—that previously existed only for oil
spills.
The criteria for these standards are to be developed so as to protect
any potentially affected organisms in any receiving waters. Economic
considerations are absent from this statutory standard-setting procedure.
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In July 1973, EPA designated 12 chemicals used in manufacturing as toxic
water pollutants, including the pesticides aldrin, dieldrin, endrin, DDT
and its derivatives DDE and DDD; the pesticide compound toxaphene; cadmium,
mercury and cyanide; and the industrial chemicals benzidine and PCB
(polychlorinated biphenyls). These pollutants are toxic in very low
concentration, with the exception of benzidine, which was included because
of its ubiquity and known carcinogenic properties. EPA is currently
developing effluent standards governing the discharge of these and other
toxic pollutants. EPA has been studying additional chemicals such as
arsenic, selenium, chromium, lead and asbestos for possible inclusion on
the list.
The Administrator must also issue pretreatment standards requiring an
industrial facility discharging into a municipal sewage treatment plant
to pretreat its effluent so that it does not interfere with the operation
of or pass through the plant without adequate treatment. Because roughly
one half of all industrial facilities discharge their wastes into
municipal systems, pretreatment standards are considered essential to
achieving control over Industrial effluents.
2. Specific Federal Provisions Affecting Copper Mining, Smelting and
Refining
a. Best Practicable Technology Currently Available (BPT)
These effluent limitation guidelines have to be met by 1977 by industrial
dischargers of wastewater pollutants. Only point sources and identifiable
outfalls such as pipes and sewers are affected by these guidelines.
The copper mining and milling sector was divided into three categories
for the purpose of BPT Guidelines.
• Copper mines require "lime and settle" treatment of all wastewater
discharges.
• Copper mines that include leaching have to meet a zero discharge
requirement.
• Copper mines that include froth flotation facilities require lime
and settle treatment of all wastewater discharges.
The copper smelting and refining sector was divided into three categories
for the purpose of BPT guidelines.
• Primary smelters and adjoining refineries have to meet a zero
discharge requirement. Excess rainwater can be discharged after
lime and settle treatment.
• Primary refineries in net evaporation areas have to meet a zero
discharge requirement.
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• Primary refineries in net rainfall areas can discharge wastewater
after a lime and settle treatment.
t In addition, the secondary copper industry has to meet a zero
discharge requirement.
b. Best Available Technology Economically Achievable (BAT)
These effluent limitation guidelines have to be met by 1983 by industrial
dischargers of wastewater pollutants.
The copper mining and milling sector was divided into two categories.
• Copper mines will require lime and settle treatment of all waste-
water discharges.
• Copper mines with flotation or leaching facilities have to meet
zero discharge.
In the copper smelting and refining sector, the BAT requirements are
the same as the BPT requirements discussed above.
c. New Source Performance Standards (NSPS)
These effluent limitations guidelines have to be met by new sources
constructed after the guidelines were in effect. In all cases, NSPS
are the same as the BAT guidelines discussed above.
D. OTHER REGULATIONS NOT CONSIDERED IN THE STUDY
The copper industry is affected by governmental regulations of various
types on the Federal and State level. Some of these regulations have
been in existence for a long time and therefore their effect remains
embedded in both the historical data and in the future projections as
estimated by the econometric model. An example would be the regulations
of the Internal Revenue Service. There also exist more recent regulations
many of which have been proposed and others that are anticipated over
the impact analysis period of 1974-1987. While these regulations fall
into a broad "environmental" category, many of them will not be admin-
istered by the EPA. These regulations are expected to impact the copper
industry in some fashion over the analysis period. Other regulations,
which could affect the copper industry, are either being developed or are
too new to allow detailed analysis of their economic impacts.
The following Acts and Regulations have not been considered in the
analysis.
1. New Ambient or Emission Standards for Elements Such as Lead and Arsenic
Depending on the nature of these standards, the compliance cost would
vary widely. A differential impact within the industry is expected since
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Tacoma, Anaconda and El Paso handle a feed material containing signi-
ficant amounts of arsenic compared to the remaining smelters and Asarco-
El Paso combines copper smelting and lead smelting at the same location.
2. Revised Effluent Limitation Guidelines for Toxic or Priority Pollutants
3. Limitations on Non-Point Sources of Aqueous Effluents Such as Seepage
from Tailings, Ponds, Etc., Which Might be Required for Several
Reasons Including the Safe Drinking Water Act
4. The Solid Waste Disposal Act
5. Auxiliary Regulations or Administrative Interpretations
Those which can have a significant impact are those governing plant up-
sets or the ability to maintain production when the pollution control
equipment is being repaired; regulations covering the methods sampling
and for data analysis (e.g., six-hour running averages versus fixed time
averages), sampling techniques (e.g., opacity caused by acid mist is
measured as a particulate) and so on.
6. Regulations Under the Occupational Health and Safety Act on In-Plant
Emissions of Inorganic Arsenic, Sulfur Dioxide, Lead, Etc.
7. Federal and State Land Management and Withdrawal Regulations
8. MESA Health and Safety Standards
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CHAPTER IX
NOTES
1. Based on Journal of Air Pollution Control Association, 27-10, October,
1977, pp. 943-7.
2. The primary ambient air quality standards for sulfur dioxide are 80 micro-
grams per cubic meter-annual arithmetic mean - and 365 micrograms per
cubic meter-maximum 24-hour concentration not to be exceeded more than
once per year. The secondary standard is 1,300 micrograms per meter
maximum 3-hour concentration not to be exceeded more than once per year.
3. The primary ambient air quality standards for particulate matter are
75 micrograms per cubic meter-annual geometric mean - and 260 micrograms
per cubic meter-maximum 24-hour concentration not to be exceeded more than
once per year. The corresponding secondary standards are 60 and 150
micrograms per cubic meter.
4. If an existing smelter were using Best Available Control Technology or
BACT (defined to be the same as NSPS in the Tall Stacks Policy) such a
smelter could use unlimited stack height, but no allowance for SCS in
calculating the ultimate emission limit for that plant. Since unlimited
stack height was also permitted for dispersing RACT emissions, this meant
that the maximum permissible emission for a BACT smelter would be less
than the RACT emissions limit.
5. Code of Federal Regulations, Vol. 40, 60.160 - 60.166, inclusive, subpart
P. The 1977 Amendments do explicitly require periodic review of the NSPS.
6. The Clean Air Act Amendments of 1977 amended the New Source Performance
Standard provision (Section 111) to require EPA to upgrade each standard
to reflect the best system of continuous emission reduction that is
economically achievable. Best Available Control Technology may be even
more stringent than NSPS.
New and modified major sources require permits before they can be
constructed.
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X. PRODUCTION COST AND CAPACITY IMPLICATIONS
OF ENVIRONMENTAL REGULATIONS
A. INTRODUCTION
The purpose of this chapter is to describe the implications of environ-
mental regulation for production costs and for the maintenance and growth
of industry capacity over the period 1974-1987.
Section B presents our estimates of the costs borne by industry as a
consequence of Federal environmental regulation. As noted in Chapter IX,
the scope of the analysis does not include all Federal environmental
regulation, but rather concentrates on those associated with the Clean
Air Act Amendments of 1970 and 1977 and the Federal Water Pollution Control
Act. These Acts and their implementing regulations currently account
for the preponderance of environmental costs faced by the copper industry.
The costs of meeting these regulations as estimated in this report include
the capital, operating and maintenance costs that would be incurred by
the industry over the period 1974-1987 for pollution control. These
estimates exclude other costs that result from regulations such as an
increase in business risk, disruption of the normal capital budgeting and
investment planning process, changes in the legal and administrative costs
of doing business, etc. While the estimation of costs through 1977 is a
fairly straightforward procedure in the sense that published data and
engineering cost.analysis provide good estimates, the projection of
incurred costs requires information on the extent and rate of compliance,
the cost and availability of production and pollution control technology,
and industry growth (contraction). The fundamental compliance assumption
underlying the cost estimates is that all smelters will continue to rely
on acid plants, tall stacks, and SCS to meet National Ambient Air Quality
Standards during the considered period. The corresponding technological
assumption is that there will be no fundamental change in the relative
cost and nature of pollution control technology, and, therefore, the
industry will continue to use acid plants for control of strong gas streams
and improved collection and tall stacks for the dispersal of weak gas streams.
Various capacity growth scenarios were examined. The cumulative capital
investment is estimated to range (depending on the particular growth
scenario) between $1.7 billion and $1.9 billion in 1974 dollars over the
period 1974-1987. Cumulative operating cost is estimated to range between
$1.0 billion and $1.1 billion in 1974 dollars over the same period. It
is important to note that 30-40 percent of the estimated capital costs
have already been incurred. The conversion of reverb smelters to alternative
smelting technology (mandated by the Clean Air Act Amendments of 1977)
represent a major portion of the future cost. By comparison, operating and
maintenance costs are estimated to steadily increase from about $42 million
a year in 1977 to $90 million a year in 1987. It is important to note that
these expenditures will not be sufficient for the smelters to meet the
ultimate emissions limit in all cases. In other words, while this
expenditure will enable the smelters to switch to non-reverberatory smelting
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techniques and achieve a higher level of emissions control, the smelters
will not 'always achieve ambient air quality through the use of permanent
emission controls alone plus the use of new stacks that are no taller
than two-and-one-half times building height.
In a capital-intensive, mature industry like copper, decisions on capacitv
change are motivated by a set of complex considerations. This complexity has
increased substantially as a result of recent requirements for case-by-
case review, analysis of alternate sites, etc. Section C examines how
environmental, regulations affect the maintenance and expansion of copper
smelting capacity. We conclude that existing smelters are faced with a
variety of economic, environmental and technical constraints which, taken
together, essentially preclude growth at existing reverberatory smelters
before 1985 and allow for only limited growth, if any, at non-reverberatory
smelters. Because of the long lead times required to completely rebuild
existing facilities around a non-reverberatory smelting process or to
construct entirely new smelters, major increments of capacity will be
available only after 1985.
These conclusions result from a detailed examination of the technical,
economic, and legal environment facing new and existing smelters. They
do not flow from the investment sector of the econometric model described
in Chapter XI. The investment model seems to provide a reasonable
explanation of capacity formation in a world where incremental expansion
of existing production facilities is both economic and legal. In
particular, it provides a good explanation of growth prior to active
Federal involvement in limiting environmental pollution. However, the
investment model does not capture the technology forcing nature of Federal
pollution control efforts and the differential situation of individual
smelters, which is crucial to the legality and profitability of invest-
ment in the context of Federal environmental regulation.
In view of these complexities, we cannot postulate a unique growth
scenario for the industry up to 1987. We have, therefore, analyzed
several combinations of capacity expansion paths, recognizing that not
every path is equally plausible but that each path is a reasonably
plausible response to the external market and regulatory constraints.
The components of these paths are the following: 1) all existing smelters
will be In compliance with the requirements of the 1977 Amendments by
January 1, 1988; 2) some smelters will choose to shut down instead of
complying with the ultimate emission requirements; 3) one or more grass-
roots smelters will come onstream during the period 1985-1987; 4) additional
leach-electrowinning capacity will be brought onstream during 1978-1987;
and 5) four non-reverberatory smelters that are at or close to complying
with the New Source Performance Standards (Inspiration, Hidalgo, Anaconda,
and Kennecott) will be allowed to increase capacity without installing
Incremental pollution control beyond NSPS.
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B. AIR AND WATER POLLUTION CONTROL COST ESTIMATES
This part describes the procedure used to estimate air and water pollution
control costs over the period 1974-1987.
The costs of meeting pollution control regulations, as estimated in this
report, include the capital, operating and maintenance costs associated
with pollution control equipment that would be incurred by the industry.
These estimates exclude other costs that result from regulation such as
an increase in business risk, disruption of the normal capital budgeting
and investment planning process, changes in the administrative and legal
cost of doing business, etc. Any production losses associated with the
operation of pollution control systems are, under the approach adopted
here, treated as reductions in productive capacity. In particular, the
value of production losses is not added to pollution control equipment
costs to yield a "total cost" of pollution control. Instead, the economic
effect of any such production losses is reflected by changes in the price
and quantity of copper production.
The value of by-product recoveries associated exclusively with pollution
control (sulfuric acid is the leading example) is treated as a credit
against the operating cost of pollution control equipment. This con-
vention reflects the judgment that pollution control equipment would not
be installed as an incidental part of a profitable by-product recovery
venture. By contrast, European and Japanese smelters have traditionally
found pollution control via the manufacture of sulfuric acid to be
profitable because of credits from by-product sales. United States
smelters are isolated and transportation costs to distant markets have
limited the potential for profitable recovery of sulfuric acid. Thus,
prior to 1970, the Japanese and European smelters manufactured sulfuric
acid from smelter gas in almost all cases, whereas United States smelters
did so only if nearby acid markets were available. It should be noted
that the total cost of complying with regulations, while indicative of
the industry's obligation, is not sufficient as an input into an economic
impact analysis. These costs affect production costs only when they are
incurred and the timing of these costs affects the nature and magnitude
of the economic impact results.
1. Historical Costs (1970 to 1977)
Historical costs were derived after a procedure involving: 1) an industry
survey; 2) compilation of pollution control equipment inventories; 3)
review of engineering, trade journal, and government literature regarding
pollution control equipment costs (capital, operating and installation);
and 4) validation (and adjustment) of the estimates generated in the first
three steps after industry review or engineering cost analysis when data
sources conflicted.
Despite precautions, we do not believe these or any other estimates are
exact. The scope for differing judgments regarding partitioning between
the pollution control and production costs are large; complete coverage
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of all costs is probably impossible; and company data, when accessible,
are not designed to unambiguously identify pollution control expenditures.
Nevertheless, we believe that researchers who follow our procedures and
adopt our cost conventions would arrive at similar conclusions.
Originally, we conducted an industry survey which sought data on actual,
planned, and anticipated pollution control expenditures. Companies were
asked to provide sufficient information regarding pollution control
costs to allow Independent evaluation and to distinguish between Federally and
locally mandated costs. All the major firms were contacted. The survey
results were disappointing. The responses received covered only about
half the industry and the data that was provided was highly aggregated
in most cases. However, the survey provided some useful information.
It established that almost all mandated pollution control costs were
related to Federal programs; state and local regulations seemed to require
minimal additional expenditures. Unfortunately, the data lacked
sufficient coverage and detail to permit generalization to the industry
as a whole.
An alternative approach proved more successful. The first step was to
identify the installation of pollution control equipment after 1970 .
This inventory was constructed after a careful review of Annual Reports,
10-K financial reports (annually filed by Corporations with the
Securities and Exchange Commission), trade journals, and government
reports. In addition, we directly contacted corporate officers to
confirm published information or for supplemental information. Having
identified the stock of pollution control equipment and changes in the
stock, we employed the above sources, engineering cost estimating formulas,
and the survey results to derive industry-wide capital and operating
costs. The final cost estimates were reviewed by government and industry.
Table X-l shows these estimates.
2. Projected Costs (1978-1987)
In order to project incurred pollution control costs, it is necessary to
know the size of the industry and the nature and extent of compliance with
air and water pollution control costs. Various growth scenarios were
considered. The basis for these growth scenarios is discussed in Part C,
below.
The following compliance assumptions are made in all cases:
• Smelters will not embark on expansions permissible under NSO's if these
expansion routes are inconsistent with the achievement of ambient air
quality via permanent controls in 1988.
• No reverberatory furnace smelter will convert to an alternative
smelting technology before 1985.
• Neither Kennecott at Ely nor Fhelps Dodge at Douglas will control
sulfur dioxide emissions; they will either remain open until 1988
or shutdown in 1983.
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TABLE X-l
ESTIMATED HISTORICAL POLLUTION CONTROL COSTS
(Millions of 1974 dollars)
Operating and
Year Capital Expenditures Maintenance Costs
1970 20.9 17.7
1971 30.0 15.9
1972 146.4 37.5
1973 204.6 37.4
1974 226.0 59.6
1975 240.8 52.0
1976 156.0 55.3
1977 90.0 70.1
NOTES;
alncreases in total annual variable costs due to pollution
abatement and control, estimated at 0.5c/lb. in 1970 and
1971, l.Oc/lb. in 1972 and 1973 and 1.8c/lb. in years
1974-1977. The estimates given here are obtained by
multiplying production levels in these years (domestic
refined copper production from domestic and foreign ores,
as reported by the U.S. Bureau of Mines, adjusted for
electrowinning capacity) by the per unit (c/lb.) cost
estimates.
SOURCE: Arthur D. Little, Inc. estimates.
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• All operating smelters will install technology for collection of
fugitive emissions.
• No reverberatory furnace smelter will either upgrade its acid plants
or add acid plant capacity.
• Four non-reverberatory smelters (inspiration, Hidalgo, Kennecott-
Garfield, and Anaconda) will either expand capacity by 1981 or
maintain current capacity; Garfield and Anaconda would have to upgrade
their acid plants to NSFS caliber before an expansion is permitted.
• Applicable BPT and BAT effluent guidelines will be met at all mines,
mills, smelters and refineries, as required.
In view of the Clean Air Act Amendment's requirement for meeting ambient
standards by 1988 and the continuing litigation and rulemaking involving
individual smelters, the assumptions require further explanation.
In the context of present technology, the 1977 Clean Air Act Amendments
require almost all smelters to employ non-reverberatory furnaces and/or
weak gas scrubbing to meet ambient standards. (An exception is the
White Pine smelter, a small smelter which employs concentrates of low
sulfur content. This smelter can meet ambient air quality standards with-
out employing any emission control technology). If a smelter did not
satisfy this requirement by 1988, it presumably would have to close. We
consider weak gas scrubbing to be prohibitively expensive. For example,
the cost of S02 control using acid plants is about 1 to 2 C/lb. of 862
removed. The corresponding cost for weak gas scrubbing is 5 to 7 C/lb.
of S&2 removed . We believe that weak gas scrubbing costs could be even
higher. It appears to us that the industry would prefer a process change
to non-reverb technology over end-of-pipe treatment such as weak gas
scrubbing.
The first assumption (that smelters will not embark on expansion routes
permissible under NSO's if these routes are inconsistent with 1988 goals),
reflects the capital intensity of smelting process changes and the long
time horizon over which such changes are utilized. This implies that any
changes which will continue the reliance on reverb smelting will not be
undertaken.
The assumption that no reverberatory smelters convert to alternate
technology before 1985 does not necessarily imply that these smelters
would not comply with the Act. Smelters could still meet the 1988 date
(when the second and final NSO would expire) by completing all requisite
engineering and design work by 1984 and commencing conversion in 1985.
These would be about the latest possible dates consistent with meeting
the Act's requirement. Because of the decidedly unfavorable economics
of conversion (see Part C, below), we do not anticipate large expenditures
for conversion before 1985.
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Without passing judgment on their economic condition, we do not expect
that Kennecott at Ely or Phelps Dodge at Douglas will invest in sulfur
dioxide control. Both companies have repeatedly claimed that sulfur
dioxide control was uneconomic at these smelters and that they would
close the smelters rather than invest in sulfur dioxide control. Lacking
evidence to the contrary, we believe it prudent to assume these smelters
will continue to operate without sulfur dioxide control as long as
possible. For a sensitivity analysis, we have considered a case where
these smelters close in 1983 at the end of the first NSO on the basis
that their application for the second NSO would not contain any plans
for complying with the requirements of the Act by 1988 and would be
denied for that reason.
We do expect that all operating smelters will invest in fugitive emission
control systems. Some smelters (for example, Garfield and Asarco at El
Paso) have already installed such systems to avoid sulfur dioxide and
particulate violations that are traceable to fugitives. In addition,
effective fugitive control appears to be essential to limiting ambient
concentrations of lead and arsenic. Both lead and arsenic will be regu-
lated. Of course, there is no way of knowing if the fugitive emissions
system described below would meet currently undefined standards for these
substances.
At the present time, there are four non-reverberatory smelters in the
United States. They are: Inspiration, Phelps Dodge-Hidalgo, Kennecott-
Garfield, and Anaconda. The first two are in compliance with NSPS and
the latter two could meet NSPS by upgrading their acid plants from
single absorption to double absorption. If these four plants at NSPS
were meeting their ultimate emission standard, they might be allowed to
expand without incremental pollution control as long as the emissions'
increase did not exceed that allowed under PSD regulations. If these
smelters at NSPS were not achieving their ultimate emissions standard,
they would be in a non-attainment area. They could expand only by
emissions tradeoffs against other sources or by demonstrating that they
are at the lowest achievable emissions rate (LAER). For a sensitivity
analysis, we have considered a case where these smelters are allowed to
expand by 1981 without having to install emission reduction equipment
beyond NSPS.
The assumption that no reverberatory furnace smelter will upgrade its
acid plant per se is somewhat arbitrary but reflects our view that in
comparison with the uncontrolled reverb emissions, the improvement to
be achieved via acid plant upgrading is marginal. The alternative is to
attempt to predict the outcome of the untried NSO process where such an
upgrading could be mandated.
Taken together, these assumptions imply that there will be little addi-
tional permanent control of smelter emissions beyond that currently
employed, excepting improved collection of fugitive emissions and perhaps
improved pollution control at Anaconda and Garfield.
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With this background, the estimation of operation and maintenance (O&M)
costs for air pollution is straightforward. We assume that fugitive
control systems will rely on building enclosure, especially of the con-
verter aisle, and secondary hooding of process equipment. The collected
gases would be filtered in a baghouse and exhausted via the main stack.
This system roughly corresponds to the type of fugitive control system
used in some foreign smelters. Definitive estimates for the control of
converter aisle emissions are not available. Our order-of-magnitude
estimates for a secondary and tertiary gas collection system and treatment
by a baghouse suggest a range from $10 and $20 million per 100,000 tons/
year of capacity or about $300 million for the entire industry. This
Investment was spread uniformly over the eight-year period (1979-1986).
The direct O&M costs for fugitives control are shown in Table X-2. The
fugitive gas stream is essentially at ambient temperatures and is much
larger than the other streams from the process units which will also be
exhausted via the main smelter stack. As a consequence, the stack gas
will require reheating to increase buoyancy and achieve the proper degree
of dispersion necessary to meet NAAQS. Table X-2 shows two estimates for
the O&M costs of fugitives control; the first assumes that this reheating
will be achieved with waste heat and the second assumes that the reheating
is achieved with clean fossil fuels.
O&M costs associated with a double absorption acid plant are shown in
Table X-3. These costs are about 1.95$/lb. of copper. As shown in
Table X-2, the O&M costs for fugitive control range between .65C and
2.3c/lb. of copper depending upon the reheating technique used. The sum
of these operating costs is 2.7 to 4.3c/lb. We have used the significantly
lower cost associated with the first approach in the Impact analysis and
used the latter value in the sensitivity analysis, because it is not
certain that reheating is required in all cases and because waste heat
could be used. The 2.7c was normalized and rounded off to 2.5c/lb. to
account for our assumption that neither Douglas nor McGill will install
acid plants.
These unit costs are multiplied by production estimated in the model to
yield total O&M costs in a given year.
Water pollution costs beyond 1975 were estimated for meeting effluent
limitations guidelines (BPT and BAT levels) for point-source discharges.
3
There are two basic sources of cost data: the Guidelines Documents
for the copper mining, milling, smelting and refining sectors; and a
study by the American Mining Congress, "Study of the Cost of Compliance
with Federal Water Pollution Control Act" (1976).
The costs for meeting BPT and BAT requirements are given as:
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TABLE X-2
OPERATING AND MAINTENANCE (O&M) COSTS FOR
FUGITIVES CONTROL
(at a 100,000 ton/year smelter)
A. Capital Investment $=15 Million
B. O&M Costs
Electricity--34 Million kWh
@ 1.5e/kWh
Labor—1 man/shift @ $10/hour
Supervision—@ 15% Labor
Maintenance supplies—@ 4%
Capital Investment
Plant overhead—100% Labor
and Supervision
Reheating~2. 2xl06 Million
Btu/year @ $1.50/Million Btu
C. Unit Costs
$/ton of copper
C/lb. of copper
$/Year
Without
Reheating
$ 510,000
79,000
12,000
600,000
91,000
1,292,000
12.92
0.65
With
Reheating
$ 510,000
79,000
12,000
600,000
91,000
3.300.000
4,592,000
45.92
2.30
SOURCE: Arthur D. Little, Inc. estimates.
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A.
B.
C.
TABLE X-3
OPERATING AND MAINTENANCE (O&M) COSTS FOR A DA
ACID PLANT ON CONVERTER GAS
Capital Investment $=30 Million
O&M Costs
Power —250 kWh x 1.5e/kWh
Fossil fuela for reheating—1 Million
Btu x $1.50
Labor—6 men/shift @ $10/hour
Supervision—@ 15% labor
Maintenance supplies—@ 4% Capital
Investment
Plant overhead—100% Labor and
Supervision
Total
Unit Costs
$17.50
Ton Acid
3 Tons Acid
Ton Sulfur
31 S
25 Cu
= $39.02/ton Copper
or 1.95c/lb. Copper
$/Ton Acid
$ 3.75
1.50
2.50
0.38
6.44
2.88
$17.45
$17.50 (rounded)
x 0.60 S Recovery
NOTES;aSome data in the published literature, "Energy Use Patterns
in Metallurgical and Nonmctallic Minerals Process—Phase 4",
PB 245 759, is over twice the numbers used here.
SOURCE; Arthur D. Little, Inc., estimates.
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(Millions of 1974 Dollars)
Capital Annualized
Investment Costs
Guidelines Documents 6.6 1.47
American Mining Congress 267.0 158.70
We found several errors in the Guidelines Document which indicate that
those costs could be low. On the other hand, we have not been able to
independently derive the American Mining Congress numbers. It is
possible that they contain costs for the control of non-point source
discharges, which were not considered in the Guidelines Document.
We have used the following cost figures for control of point-source
discharges:
Capital Investment (1979-1985) - $20 Million
O&M Cost = O.lC/lb. Copper
The total cost estimates over the period 1974-1985 are shown in Table X-4.
C. MAINTENANCE AND EXPANSION OF CAPACITY
The objective of this section is to explain the plausible range of growth
scenarios considered for impact analysis. Part 1 examines whether
existing capacity can be maintained in view of environmental regulations
and the financial state of some smelters. This discussion leads to a
quantification of existing capacity which would likely be maintained
through 1987. Part 2 examines potential growth through 1987, which
could be achieved by modification and reconstruction of existing smelters
or by the construction of new smelters. The total potential capacity is
the sum of baseline capacity and the capacity increments available from
new and altered facilities. Part 3 aggregates the results of the pre-
vious parts to define the capacity scenarios.
All four stages of primary copper production (mining, milling, smelting
and refining) are affected by Federal environmental regulations. Mining
and milling are affected most by water and solid waste regulations;
smelting by air regulations; and refining by water regulations. The
discussion of capacity focuses exclusively on the smelting stage of
production because, although environmental regulations increase the cost
of production in mining, milling and refining (which would tend to reduce
capacity formation), the cost increases are not large and the currently
applicable Acts and regulations do not require fundamental changes in
production technology.
Our review of the applicable regulations and associated compliance costs
indicates that Federal pollution regulations are unlikely to change directly
and significantly the economics of expansion for these stages of production.
This is not to say that the prospects for investment in mining and re-
fining are independent of the growth or contraction of smelting capacity.
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TABLE X-4
ESTIMATES OF POLLUTION ABATEMENT AND CONTROL EXPENDITURES
BY THE UNITED STATES COPPER INDUSTRY". 1974-1987
(In millions of 1974 dollars)
Tear
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1974-
1987
1978-
1987
CONSTRAINED CAPACITY
Capital Expenditures
Non-reverberatory
Related Capital
Expenditures
226.0
240.8
1S6.0
90.0
60.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
-
1,092.8
380.0
Reverbera tory
Conversion
Investment6
-
-
-
-
-
-
-
-
-
156. 5
156. 5
156.5
156.5
156.5
782.5
782.5
Total
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
196.5
196.5
196.6
196. 5
196.5
1,875.3
1.162.5
Operat ing
and
Maintenance
Costs6
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.6
90.0
89.8
90.1
90.2
90.0
1,103.0
905.2
TOTAL
283.4
290.1
204.8
132.3
158.0
128.2
129.5
129.8
129.6
286.5
286.3
286.6
286.7
246.5
2,978.3
2.067.7
REDUCED CAPACITY
Capital Expenditures
Non-reverberatory
Related Capital
Expenditures
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
-
1.092.8
380.0
Reverberatory
Conversiog
Investment
-
-
-
-
-
-
-
-
-
126.7
126.7
126.7
126.7
126.7
633.5
633.5
Total
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
166.7
166.7
166.7
166.7
126.7
1,726.3
1.013.5
Operating
and
Maintenance
Costs
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.9
78.6
78.4
78.5
78.5
78.4
1,045.6
847.8
TOTAL
283.4
290.1
204.8
132.3
158.0
128.2
129.5
129.8
129.9
245.3
245.1
245.2
245.2
205.1
2,771.9
1,861.3
D
•W
(E
3
NOTES: See Table XII-2, page XII-11.
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In fact, the cost methodology partially recognizes their interdependence
by assuming that relative capacity ratios are maintained across the
stages of production. Smelting is singled out for special examination
because the nature and costs of compliance are such that capacity main-
tenance and expansion at this crucial stage of production could be
significantly affected. Put another way, if the supply of refined copper
over time is directly affected by environmental regulation, it will be
manifest by bottlenecks in smelting.
1. Capacity Maintenance
Existing smelter capacity can decrease over time because of:
• smelter closure;
• declining productivity of production inputs, especially
deterioration of capital equipment; and
• inability to produce at nameplate capacity because of changes
in operating practice, e.g., breakdown of permanent emission
control equipment or production curtailment to meet ambient
air quality standards.
Two old smelters (Phelps Dodge at Douglas, Arizona, and Kennecott at
Ely, Nevada), representing 9 percent of domestic capacity, appear to
be in danger of closing. Prior to the passage of the Clean Air Act
Amendments of 1977 their operators claimed that these smelters would
close rather than install sulfuric acid plants to control sulfur dioxide
emissions. Kennecott did close its Ely smelter for several months,
allegedly in response to impending pollution control requirements.
The smelter was reopened following a District Court ruling in favor of
Kennecott.
The Clean Air Act Amendments of 1977 would allow both smelters to
continue operating without sulfur dioxide control systems if the alter-
native were closure. This exemption does not apply to other air
pollutants. However, even assuming that neither must now install sulfur
dioxide control equipment, continued operation of these facilities
is debatable. Consequently, in order to bound the range of probable
growth estimates, we alternatively assume both smelters close, in one
case, and both remain open, in another. We assume in the first case
that these smelters would close in 1983, at the expiration of their
first NSO. This assumes that their application for a second NSO would
not contain any plans for complying with the 1988 requirements via
permanent emission control and would be denied for that reason.
There is a finite probability that other smelters will close permanently
under present air pollution and health-and-safety regulations. Forth-
coming OSHA in-plant arsenic regulations would appear to affect the
Tacoma, Anaconda, and El Paso smelters more severely than the other
smelters. Likewise, EPA's forthcoming ambient lead standard could affect
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most smelters to varying degrees. Because these regulations have not yet
been published it is premature to speculate on their closure implications,
if any. For analyzing the effect of capacity reduction, we assume a case
where one other smelter, in addition to Douglas and Ely, will close in
1983.
Existing capacity could be affected by falling productivity of labor and
capital. Although labor productivity has failed to Increase over the
last few years, there is little evidence to suggest a permanent decline
in labor productivity. Furthermore, one would expect changes in labor
productivity per se to affect production or output but not capacity.
New Source Performance Standards are relevant to 16 replacement and
overhaul of deteriorating process equipment. Under certain conditions,
process equipment cannot be overhauled unless additional pollution con-
trol equipment is also installed. Because of NSPS, firms, in principle,
could decide to forego the cost of overhaul and replacement so as to
avoid additional pollution control expenditures. Through this mechanism
the effective capacity might decrease through time. However, we believe
that NSPS will have no measurable impact on the preservation of existing
capacity. Most process units subject to NSPS (multi-hearth roasters,
reverberatory furnaces and converters) are relatively simple pieces of
process equipment. Excepting serious accidents, all can be, and are,
maintained indefinitely at design specifications through normal repair
and maintenance. Consequently, the preservation of existing capacity
would rarely, if ever, invoke the reconstruction or new equipment pro-
visions of the NSPS. It is, therefore, assumed that New Source Performance
Standards will not affect the rated capacity of any existing domestic
smelter.
The utilization of existing capacity can be seriously affected by the
need to meet ambient air quality standards. It is quite common for some
smelters to reduce operations during periods of adverse meteorological
conditions (for example, inversions) • There is no definitive data to
allow precise estimates of the capacity impact of employing production
curtailments to achieve sulfur dioxide standards. Our discussions with
industry representatives suggest that at smelters employing the control
of strong streams, the use of SCS results in an effective decrease in
capacity of about 10 percent. For the purposes of a sensitivity analysis,
we have assumed a 10 percent reduction in capacity.
It should be noted that the effect of ambient standards on effective
(usable) capacity depends on the monitoring strategy adopted by pollution
control agencies. Because fugitive emissions follow paths different from
stack emissions, monitors sited to measure stack emissions do not
necessarily record the ambient impact of fugitive emissions. To date the
practice has been to monitor primarily for stack rather than fugitive
emissions, because these emissions account for over 90 percent of total
emissions. There is some scattered evidence, from diffusion modeling by
EPA and industry, suggesting that fugitives may be leading to frequent
ambient violations. This evidence has not been sufficient to lead to
major changes in the monitoring strategy. If additional data indicate
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that fugitives are a serious problem, the implications for existing ef-
fective capacity are unclear. Depending on the frequency of the ambient
violations, and the techniques to alleviate these violations, the capacity
impact could vary over a wide range.
In summary, we expect that existing industry capacity will be maintained
through the period of this analysis. The major uncertainties are:
• whether three smelters will close;
• the precise effect on effective capacity of employing production
curtailments to meet ambient standards;
• the effect of fugitive emissions on ambient air quality (and there-
for on capacity); and
• the development of new EPA and OSHA standards.
In all but the latter two cases, sensitivity analysis is used to assess
the quantitative effect of alternative assumptions.
2. Capacity Expansion
An Increase in primary copper capacity downstream of mining and milling
can be achieved in four ways:
• Construction of new greenfield smelters (i.e., smelters in new
locations which were previously undeveloped);
• Alteration of existing smelters to achieve expanded throughput
(this can be coupled with the replacement of obsolete capacity,
in some instances);
• Hydrometallurgical processing; and
• Increasing the copper content of the smelter feed material.
This section examines potential capacity expansion from new and modified
smelters. Other means of increasing refined copper production, for example,
through hydrometallurgical processing of oxide or sulfide ores or
through increased reclamation of scrap, offer limited opportunities for
increased production above current levels. In addition, there is little
possibility of significantly increasing the copper content of the
smelter feed material since current beneficiation techniques routinely
produce copper concentrates that approach the theoretical compositions
of the copper sulfide minerals.
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a. New Smelters
The copper industry has traditionally preferred to rely on incremental
expansion at existing sites rather than to construct new smelters. In
the last 20 years, only one new smelter, Phelps Dodge's Hidalgo, New
Mexico smelter, has been built in the United States. Nevertheless, new
smelters can provide major capacity increments and cannot be ignored as
a potential source of growth.
As discussed in Chapter (IX, new smelters must meet New Source Performance
Standards, and be able to meet Ambient Air Quality Standards solely
through the use of constant emission control equipment with no allowance
for tall stacks. Emissions cannot exceed the allowable PSD increment for the
area in which such a smelter would be located. These requirements would cer-
tainly make it impossible to build a new reverberatory smelter (something
nominally permitted under NSPS for smelting of impure concentrates)
unless cost-effective weak gas scrubbing systems were available.
Non-reverberatory furnace smelters achieve a much higher level of
emissions control and consequently, much lower stack emissions. Assuming
that all emissions are treated in NSPS calibre equipment, the stack
emissions could still violate ambient standards under certain meteoro-
logical conditions; for example, conditions that cause fumigation.
Assuming that such meteorological conditions need not be used in the
calculation of the ultimate emissions limit, the stack emissions would
not violate ambient standards and such smelters would neither exceed the
Class II significant deterioration increments nor, with careful siting,
would they impinge on Class I areas.
A potential problem is that it is extremely difficult to capture all
emissions. A new smelter employing NSPS calibre control technology,
secondary hooding, and building enclosure could still emit about 3
percent to 4 percent of the sulfur dioxide in the form of low-level
fugitives. For a standard sized smelter, preliminary diffusion modeling
indicates this emissions rate would violate the ambient sulfur dioxide
standard for several kilometers around the smelter. If further research
were to validate the preliminary analysis, and if fugitives could not be
economically controlled, new smelters could not be built.
There exist newer continuous processes that eliminate the conventional
converter aisle which is the major source of fugitive emissions.
However, these processes cannot be used in this mode for the bulk of
the concentrates produced in the United States.. Some processes (e.g.,
Mitsubishi) are more flexible in this regard than others. Based on
this and the fact that monitoring data on fugitives is unavailable, we
assume that environmental regulations will permit new smelter construction.
Assuming that new smelters can be constructed, the effect of environmental
regulation on new construction is limited to increasing the timing, the
capital, operating, and locational cost of new smelters. A major smelter
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construction project requires the following steps:
• decision that extra capacity is needed;
• prefeasibility studies—preliminary evaluations of several
alternatives;
• process design and detailed engineering of the selected approach;
• construction;
• startup and shakedown; and
• bringing the plant to full capacity.
Construction alone typically takes three years and startup and shakedown
generally takes a year. The Inspiration and Anaconda smelters, which
converted, to electric furnaces, have experienced major delays in achieving
reliable production. Given the present depressed state of the copper
industry and the fact that there are no firm plans for any new smelter
construction in the United States, we do not expect new smelters to come
on-stream and reach rated capacity until 1985.
In order to bound the range of likely possibilities, It is first assumed
that no smelters are constructed until 1987. As an alternative, it
is assumed that one large (200,000 short tons/year) smelter comes
on-line and achieves full capacity in 1985 and another smelter of
the same size begins operations in 1987.
b. Expansion of Existing Capacity
EPA policy makes a sharp distinction between smelters using dispersion
techniques and smelters using emission controls alone for meeting ambient
standards. A reverberatory furnace smelter (which relies on SCS and
dispersion) cannot increase emissions beyond the RACT limitation contained
in its Nonferrous Smelter Order. A non-reverberatory furnace smelter
using NSPS caliber technology could or could not increase its level or
emissions depending on the ultimate emissions limit and its location in
an attainment or nonattainment area; or in a PSD Class II or Class III
area. EPA review and approval would be required before such an expansion
is undertaken. We assume that such approval could be obtained as long as
the resultant emissions increase is consistent with the nonattainment
provisions of the 1977 Amendments.
c. Expansion at Non-Reverberatory Smelters
The four non-reverberatory smelters (Inspiration, Hidalgo, Anaconda,
and Garfield) could increase their capacity after some investment in
production equipment (mainly oxygen plants for oxygen enrichment) and
pollution control equipment (upgrading of acid plants to NSPS calibre
at Anaconda and Garfield).
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Our order-of-magnitude estimates of the expansion potential at each of
these smelters is as follows:
• Inspiration; This smelter has had operating problems with the
electric furnace and has not operated at its rated capacity on
a sustained basis. Our understanding is that these operating
problems have been solved. The smelter employs NSPS calibre
production and pollution control technology. Our estimate of
the near-term capacity expansion potential is a maximum of 10
percent (15,000 tons/year).
• Anaconda; The Anaconda electric furnace has started up recently
and has also not operated on a sustained basis. The smelter
requires upgraded and expanded acid plant capacity before it is
a NSPS smelter. Our estimate of the near-term expansion poten-
tial, after the noted pollution control investment, is a maximum
of 10 percent (25,000 tons/year).
• Hidalgo; This Outokumpu flash smelter has started up recently
and has not operated at the rated capacity on a sustained basis.
In principle, an Outokumpu flash smelter can Increase its capacity
by oxygen enrichment of furnace gases. We estimate that Hidalgo's
capacity could be increased by about 30 percent (30,000 tons/year)
if oxygen enrichment is used.
• Garfield; This Noranda smelter is being started up. In principle
a Noranda smelter can increase its capacity by oxygen enrichment
of furnace gases. We estimate that Garfield1s capacity could be
increased by about 20 percent (50,000 tons/year) in this fashion.
The smelter would have to upgrade its acid plant to NSPS calibre
before this expansion is possible.
In total, these smelters have a near-term capacity expansion potential
of about 120,000 short tons per year. It is difficult to estimate
precisely when (and if) this capacity increment would be realized. The
NSO has not yet been used, and, in two cases, expansion is contingent
on additional pollution control investment. For the purpose of
sensitivity analysis, we assume that each of these smelters will expand
as indicated by 1981.
Other smelters might convert from reverberatory furnaces to alternative
smelting technologies. Were this to happen, each converted source
would qualify as an NSPS smelter; in addition, the conversion itself
would allow major capacity increments within the RACT emissions limi-
tation. We do not expect conversions to be complete before 1985
primarily because conversions require five to seven years from planning
through sustained production.
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In addition, the economics of conversion are not currently favorable.
The economic criteria for replacement of existing technology with a
competing technology of the same scale is that the annualized cost
(annualized capital plus O&M) of the competitor is less than the variable
cost of existing technology. In 1974 dollars, the annualized cost of
flash, electric, and Noranda smelters ranges between 13 and 17c/lb. of
blister copper for standard size smelters (100,000 short tons/year).
The variable costs of existing reverberatory furnace smelters range
between 6 and 8 C/lb.7
d. Reverberatory Furnace Smelters
The traditional approach to incremental capacity expansion at reverberatory
smelters was (1) to increase throughput by improving materials handling
techniques, (2) to add additional furnaces, roasters, and converters, and
(3) to increase the capabilities of individual pieces of process equip-
ment, generally through reconstruction**. These straightforward techniques
are no longer permitted because they would lead to increased emissions.
A smelter cannot, for example, simply add a new converter (controlled to
NSPS standards) if the new converter's emissions would not be offset
elsewhere at the source. The addition of a new reverberatory furnace
would, likewise, by illegal even if the smelter were processing impure
concentrates. Improvements in materials handling, while reducing costs,
cannot be realized as capacity expansions unless some means is found to
avoid increasing smelter emissions.
The use of these methods is constrained by numerous environmental regu-
lations (see Chapter IX). Those of most importance are:
• emissions at the source cannot increase; and
• all new and reconstructed equipment must meet New Source
Performance Standards.
Because emissions at the source cannot increase, the modification pro-
visions have no additional implications for the legality and expansion
of capacity at reverberatroy furnace smelters.
The only relevant options in the context of the emissions limitation
are those that increase capacity without increasing emissions. In the
remainder of this section, we examine specific expansion techniques
which are technically available to industry. The alternatives are9:
• installing fluid bed roasters at green charge smelters;
• converting an existing single acid plant to a double acid
plant and, simultaneously, altering existing production
equipment to increase throughput.
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• increasing the reverberatory furnace smelting rate by 20 percent
using preheated or oxygen enriched combustion air; and
• converting multi-hearth roasters to fluid bed roasters;
• gas blending.
The first option would be available for the four green charge smelters.
Acid plant conversion is applicable to five reverberatory smelters.
Oxygen enrichment is potentially applicable to all eleven reverberatory
furnace smelters, including White Pine. With the possible exception of
fluid bed roasters, there is no question that these expansion techniques
are consistent with current environmental regulations. The issue is
whether these routes are viable from the viewpoint of smelter management.
An expansion at RACT smelters of about 50 percent is possible by changing
from green charge smelting to calcine smelting. The fluid bed roasters
required under this approach would be controlled by double acid plants.
Because calcines are smelted, reverb emissions per ton of charge would
decrease, permitting an increase in smelting rate without increasing
emissions. The 50 percent increase is calculated from the fact that
typical green charge reverbs require 6 MMBtu of fuel per ton of charge,
whereas, calcine charge reverbs require about 4 MMBtu/ton of charge. In
order to achieve this capacity increase, significant alterations would
be necessary in materials handling ahead of the roasters, significant
changes in the reverbs to process calcines and to allow for proper
stag/matte separation, and perhaps additional converter capacity. Such
alterations might constitute a "reconstruction" of the reverb since
the cost of these alterations could easily exceed 50 percent of the
cost of a brand new facility. If so, NSPS would apply to the reverb.
Such an occurrence would make this avenue of expansion infeasible.
Even if the reverb would not be considered to have undergone a "recon-
struction", it is debatable whether industry would utilize this approach
for capacity expansion. Some of the copper companies with experience
with fluid bed roasters consider them to be unreliable and requiring a
high degree of maintenance. In the United States, there are four green
charge smelters would could utilize this approach. However, two of these
belong to companies who already have poor operating experience with such
roasters. More important, such an alteration would seem to commit the
smelter to the indefinite future use of reverb smelting. In view of the
1988 requirements of the Act, a decision in favor of roast-reverb smelting
would put the smelter in the risky position of assuming that cost-effective
weak gas scrubbing techniques will becom available by 1988. Alternative
assumptions under which such a decision could be made are even more
uncertain; e.g., that the investment could be recouped before 1988 or that
the requirements of the Act will be modified by the Congress before 1988.
It, therefore, appears to us that that expansion plan, even if permitted
by EPA, would not be employed by domestic smelters.
The second approach would be to convert single absorption acid plants to
double absorption. This would provide a quantum of reduced emissions that could
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be used to allow an equivalent increase in emissions from production
equipment. However, this approach only allows for a 6 to 7 percent
increase in capacity. We believe that this capacity increment is too
small to interest most smelters.
The third approach would be to use oxygen enrichment or preheating of
combustion air to increase the smelting rate. The smelting rate could
increase by 20 percent and reverberatory furnace emissions would increase
by a similar amount. The ten Western reverberatory smelters could not
achieve a significant capacity increment by this approach because con-
verter emissions could not be reduced sufficiently to achieve the
necessary offset.
The three Asarco smelters using multiple-hearth roasters are not likely
to convert to fluid bed roasters because of the nature of the charge
materials handled by these smelters. Even if such a change were
technically feasible, a capacity expansion is blocked because reduced
emissions from new roasters cannot be used to offset an increase in
emissions from existing reverbs.
Finally, gas blending (e.g., the blending of weak reverb or multi-hearth
roaster gases with somewhat stronger, but viable, converter gases) is not a
cost-effective approach. Acid plants at smelters using converter gases
alone consume considerable fuel to compensate for the fluctuations in the
strength and volume of converter gas. The blending of a much weaker
stream from reverbs or multi-hearth roasters can only increase the fuel
use in an acid plant and magnify the problems that currently occur with
converter gases alone. Because of these operating problems, this approach
has not usually been used. It was used on a temporary basis in Japan
during a major smelter alteration. In the United States, attempts at
gas blending at Ajo were quite unsuccessful inspite of the fact that DMA
scrubbing was included for concentrating
To summarize, we believe that the probability of capacity expansion at
existing reverberatory furance smelters through 1985 is extremely low.
The RACT emissions limitation and the NSPS do not preclude expansion
per se. However, the few expansion routes that do remain are either
uneconomic or technically dubious or both.
3. Specific Industry Capacity Growth Scenarios
The discussion in this Chapter has shown that small incremental expansions
at existing smelter sites as a means of capacity expansion would have to
be ruled out. Further, major new capacity is not likely to come on-stream
before 1985. Meanwhile, minor relief can be expected via additional
growth in hydrometallurgical processing, which is based on the exploit-
ation of the relatively small oxide deposits, and possibly via expansion
at the four non-reverberatory furnace smelters (Inspiration, Anaconda,
Hidalgo, and Garfield) if they upgrade to NSPS caliber control technology.
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Major increments in smelter capacity are possible after 1984, either
via conversion of existing smelters to non-reverberatory technology or
by the construction of new grassroots smelters. Finally, all smelters
will have to move towards full compliance with the requirements of the
Clean Air Act by 1988 or close down at that time or even earlier.
These possibilities may be explored more systematically as follows, by
examining the various combinations or permutations of the available
capacity expansion paths, recognizing that not every path is equally
plausible.
The various paths can be listed as follows:
• Path A; All existing smelters will be in compliance by January 1,
1988.
• Path B; One or more of the existing smelters will be closed down
sometime during this period, while all others will be in
compliance by January 1, 1988.
• Path C; One or more new (grassroots) smelters will come on-stream
during the period 1985-1987.
• Path D; Additional electrowinning capacity will be brought on-stream
over this period (i.e., 1978-1987).
• Path E; Four non-reverberatory furnace smelters (Inspiration,
Anaconda, Hidalgo, and Garfield) will increase their
combined effective capacity by about 120,000 annual
short tons of refined copper equivalent production
(NSPS expansion).
It can be seen that Paths A and B are mutually exclusive (i.e., they
are "pure" cases), while Paths C, D, and E are each (at least on the
face of it) non-conflicting with either Path A or with Path B. Hence,
the following sixteen (16) combinations of paths appear, in principle,
possible:
A ACD BC BCD
B ACE BD BCE
AC ADE BE BDE
AD ACDE BCDE
AE
From among these sixteen (16) alternative combinations through which domestic
primary smelter capacity might effectively expand (change) over roughly
the next decade, we have selected two as the most plausible for the
purpose of economic impact analysis (AD and BD), which, respectively, are
labeled "Constrained Capacity" and "Reduced Capacity." These two basic
scenarios, plus other less plausible scenarios, are defined as follows:
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a. Constrained Capacity
This scenario assumes that none of the existing smelters will shutdown;
all smelters currently employing reverberatory furnaces will make
progress towards compliance by January 1, 1988, and that the bulk of the
smelter conversion costs would be incurred during the second NSO period
(i.e., 1984-1987); and that no new (greenfield) smelter capacity will be
coming on-stream during this period, and only marginal electrowinning
capacity is expected to be introduced over the five-year period, 1983-
1987.
b. Reduced Capacity
This scenario, which is the more severe, assumes that three smelters
(Phelps Dodge-Douglas, Kennecott-McGill, and Asarco-Tacoma or an equivalent
smelter) will close down in 1983, for various reasons. These three
smelters have a combined capacity of 268,000 annual short tons of refined
copper equivalent production (i.e., Douglas, 90,000; McGill, 78,000; and
Tacoma, 100,000 annual short tons). As under the Constrained Capacity
scenario, no new (greenfield) smelter capacity will be coming on-stream
during this period, and only marginal electrowinning capacity is expected
to be introduced during the five-year period, 1983-1987.
c. Sensitivity Analysis Scenarios
These cover the following options:
• NSPS Expansion; This scenario assumes that an expansion of 120,000
tons/year is possible at the four non-reverberatory smelters by 1981
by investing in pollution control (acid plant upgrading) and pro-
duction equipment (mainly oxygen plants).
• Grassroots Expansion; This scenario assumes two new grassroots
smelters will come on-stream, one in 1985, and the other in 1987,
with capacities of 200,000 tons/year (each).
• Effect of SCS; This scenario assumes a 10 percent reduction of
existing capacity because of the use of SCS.
d. Discussion
The NSPS expansion scenario has been termed a "sensitivity analysis"
scenario because of a number of unknowns: a necessary improvement in
the copper market; and a resolution of the uncertainties surrounding
the NSO process under which such an expansion would take place.
Capacity expansion via grassroots smelters is also a "sensitivity
analysis" scenario because of the following reasons. In order for new
smelters to be ready and operating by 1985-1987, the decision to build
would have to be made soon. An affirmative decision, however, is not
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likely, in view of the currently depressed market conditions facing the
copper industry and increasing price competition from abroad, even if
some improvement in these conditions were expected soon. Second, even
ignoring these factors, the timing and magnitude of investments in new
smelters are not, in reality, likely to remain completely Independent of
compliance assumptions and other events affecting the industry.
The capital investment for a 200,000 tons/year smelter and associated
mining, milling, and refining facilities will be about a billion
dollars. The scale of such investments, even If reduced by some margin,
is sizeable for any given individual firm. This is not to say that a
new entrant into the copper industry (e.g., an oil company) or one of the
present primary copper producers will not undertake investments of this
magnitude. Alternatively, a group of firms may invest jointly. Since
we have also assumed that the present firms make steady progress towards
compliance and are in compliance by January 1, 1988, sizeable smelter
conversion costs would be incurred by these firms during 1984-1987.
In view of these costs, it would be less likely for these firms, in
general, also to make major investments in new smelters at the same time.
The untried NSO process, capital requirements for major smelter conversion,
or for grassroots smelters, the current depressed condition of the copper
market and increasing price competition from abroad, etc., introduce
complexities which stand In the way of any unique capacity growth scenario.
The discussion in this section has delineated central tendencies or main
directions, keeping in mind that exceptions may and do occur.
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CHAPTER X
NOTES
1. The United States copper smelters started the installation of
pollution control equipment shortly after the passage of the
1970 Clean Air Act Amendments. We chose the 1974 to 1987 period
as the impact analysis period with 1974 as the base year. This
approach therefore emphasizes future impacts without altogether
ignoring the past. The effect of pre-1974 expenditures is felt
during the impact analysis period in the form of annual fixed
costs. (See Table XII-3).
2. J. C. Mathews, et. al.. "S02 Control Processes for Nonferrous
Smelters" January 1976. PB 251 409. This reference states
that "the cost profile, both capital and operating, is not a
total confirmation of the cost of providing an overall S02
control system, but rather an order-of-magnitude indication of
the "grassroots" costs of installing a particular control system".
3. Development Document for Interim Final Effluent Limitations
Guidelines and Proposed New Source Performance Standards—Primary
Copper Smelting and Refining EPA 440/1-75/032-b February 1975.
4. As pointed out in Chapter IX, the RACT emissions limitation is
calculated at capacity output. This mass limit does not, therfore,
constrain the use of existing capacity; the problem is that
emissions of this magnitude would often lead to violations of
ambient air quality standards.
5. The assumptions used in the model were: Uncaptured fugitive
rate - 400 Ib/hr S02 EPA valley model; E or F stability,
u = 2.5 raps, 22.5° sector average or EPA PTDIS model C or D
stability, u = 5 mps.
6. For example, the Garfield smelter utilizes the Noranda process
but retains the separate converting step to prevent the carry-
over of bismuth to blister copper.
7. Environmental Considerations of Selected Energy Conserving
Manufacturing Process Options, Vol. XIV, EPA-600/7-76-034n.
December 1976.
8. The remaining possibility, increasing the copper content of the
feed materials, has reached its technological limit as discussed
in Chapter VI.
9. Weak gas scrubbing is ignored because it is expensive.
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XI. METHODOLOGY FOR IMPACT ANALYSIS
A. INTRODUCTION
The purpose of this chapter is to describe, in general terms, the
methodology used to translate the direct capacity and cost effects
(see Chapter X) into changes in all pertinent economic variables, such
as prices, output, consumption, employment and international trade.
A detailed description of the methodology, prepared for the technical
specialist, is presented in the Technical Appendix.
Economic impacts are typically measured as differences from a set of
baseline forecasts. The baseline forecasts trace out the values that
the pertinent economic variables would take, over a period of time,
in the absence of a regulation. With a given regulation, the
increased costs of production due to compliance cause these same
economic variables to take new values, away from baseline conditions.
The differences are attributed to the regulation and provide measures
of the economic impact. Other effects of the regulation, such as
plant closures and community impacts, are typically considered specifically,
after industry-wide impacts are assessed. Since, however, plant closures
could affect industry's productive capacity, allowance must be made in
the impact analysis methodology to assess the direct and indirect
effects of compliance costs on the growth in the industry's productive
capacity. In fact, a slowdown in the industry's productive capacity
may lead to far more serious economic impacts than could be attributed
to cost increases alone. This link between compliance costs and the
growth in an industry's productive capacity, which is difficult to
quantify and often missing in past economic impact studies, is
extremely important to impact analysis.
It is important to note, again, that the costs of complying with a
regulation defined narrowly to include both capital (fixed) costs and
variable costs, are separate from and provide inputs into an economic
impact analysis. As a result of costs of compliance, a firm's or
industry's costs and production are affected. For example, if, in
the short-term, only additional capital (fixed) costs are incurred,
then the firm's (or industry's) average fixed cost and average total
cost schedules (functions) will shift upward, but its marginal cost
and average variable cost schedules will remain unaffected.
Alternatively, if only the variable costs (operating and maintenance
costs) are increased due to compliance, then the average total cost,
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average variable cost, and marginal cost schedules are shifted upward,
with no change in the average fixed cost schedule. This case is
perfectly analogous, in the short-run, to the case of a specific tax
levied on a firm's or industry's output. In general, both fixed and
variable costs increase because of compliance. Then, the average total
cost, average variable cost, marginal cost and average fixed cost
schedules all shift upward. One needs to consider the market structure,
production technology, demand schedules and other factors within a
unified framework to translate these shifts in cost into impact results.
The unified analytical framework can take the form of a "partial
equilibrium" or a "general equilibrium" approach. In principle, a
"partial equilibrium" approach would be appropriate if we are looking
at an industry, where economic impacts are basically highly localized.
On the other hand, a "general equilibrium" approach becomes more and
more appropriate if the particular industry or group of industries
in question would be expected to have a fairly widespread or sizeable
effect on the economy as a whole.
Development and application of a model which provides a unified
analytical framework is usually necessary for economic impact analysis.
This is primarily because model building forces one to think clearly
about and account for all the important interrelationships involved
in a problem. Different classes of models can be constructed for
purposes of forecasting or policy analysis, each involving a different
degree of complexity and each presenting a different level of
comprehension about the real world processes that are being modeled.
With or without quantitative models, the basic analytical issue is
to assess to what extent a regulation or set of regulations
will influence a set of pertinent economic variables, at the national,
industry and regional levels.
For impact analysis in this study, we have developed and used an
econometric model of the United States copper industry. In general,
an econometric model is a representation of the real world constructed
in such a way that the response of the particular economic system under
consideration, in this case the United States copper industry to
external stimuli (external shocks) can be investigated under the
equivalent of "laboratory conditions".
Econometric models attempt to capture causal (structural) relationships
pertaining to a commodity, industry, market or economic system, in
the form of a system of equations. An econometric model typically
comprises behavioral equations, technical relations and accounting
relationships. The model contains endogenous variables (e.g., prices,
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output, etc.) whose values are to be explained by the model and
exogenous variables (e.g., compliance costs, macroeconomic activity
levels, etc.) whose values are determined outside the model.
The model we have developed and used for impact analysis was designed
and constructed after a careful review of alternative modeling
approaches (e.g., time-series, process economics, industrial dynamics,
optimization models) and following a close examination of existing
models of the copper industry.
Typically, time-series (or purely statistical) models are not appropriate
for impact analysis, basically because they require no knowledge of or
concern for real world causal relationships. Process models, which
basically concentrate on the industrial production process, are quite
useful for quantifying in detail how compliance costs affect production
costs; however, in such models, market dynamics receive little emphasis
(alternatively, it is difficult to fully incorporate market dynamics
into such models).
These same observations also hold for optimization models (i.e., a
variety of mathematical programming models, such as linear programming,
etc.). These models, which can require quite extensive process
economics and technical data, provide a powerful analytical approach
for studying complex production processes (e.g., chemicals and
petrochemicals, etc.) and could be useful for impact analysis if the
emphasis is on assessing optimal (e.g., overall cost minimizing)
response strategies on the part of a technologically complex industry
faced with compliance costs affecting many products and production
processes.
Next, the industrial dynamics approach (also known as "systems
dynamics"), allows for explicit consideration of all known negative
and positive feedback relationships, as well as time delays, in a
system, and thus provides, on the surface at least, an ideal analytical
framework for impact analysis. This modeling approach is, however,
highly controversial, basically because it provides no safety check
on the reasonableness of the individual relationships that make up
the model. Further, the theoretical foundations of many of the
relationships contained in such models have been found lacking.
Econometric models, by contrast, are essentially free of these two
basic shortcomings generally associated with the industrial dynamics
approach, and, in addition, allow for the consideration of many
simultaneous real-world relationships within a unified, interdependent
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framework. We hence selected the econometric modeling approach for
analyzing the economic impact of environmental regulations on the
United States copper industry.
A survey of existing econometric models or analyses of the copper
industry, reported in the Technical Appendix, led us Immediately to
the conclusion that their design did not permit an analysis of the
economic impact of environmental regulations and, further, their
structure could not be readily and satisfactorily modified for impact
analysis. Moreover, they were basically static models which failed
to capture the dynamics of the industry's investment in productive
capacity and, further, the behavior of the producers with respect to
their production and pricing decisions, in view of their existing
productive capacity, their cost functions, and changes in their cost
functions over time resulting from new capacity creation. In other
words, these models failed to consider the relationship between
market clearing, which is essentially a short-run process and the
creation of new capacity, which represents the adjustment process
between the short-run and the long-run. In short, the existing
models uniformly displayed serious shortcomings in accurately and
realistically dealing with the supply side of'.the market. Consequently,
we attempted in our own work to rectify these deficiencies by
constructing an econometric model of the United States copper industry,
COPMOD I, which represents an Integrated modeling effort, bringing
together process engineering, econometrics and financial analysis.
B. A NONTECHNICAL OVERVIEW OF THE MODEL
1. Summary
Figure XI-1 presents a simplified flow diagram of the structure of the
econometric simulation and Impact analysis model of the United States copper
Industry (COPMOD I) developed as part of this study for impact analysis
purposes. The model is designed, estimated and programmed to simulate
the Industry's growth and evolution annually through 1987 under base-
line conditions as well as under alternative environmental policy
scenarios. COPMOD I considers within an interdependent framework,
such variables as demand (paying attention to substitution from other
materials such as aluminum) costs of production facing the producers,
prices, investment and.international trade. Costs of production are
directly factored Into the model through engineering cost functions
so that technological developments as well as compliance costs af-
fecting the industry can be readily assessed. Although the overall
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FIGURE XI-1
SIMPLIFIED FLOW DIAGRAM OF THE ECONOMETRIC SIMULATION MODEL
OF THE UNITED STATES COPPER INDUSTRY
INVESTMENT MODULE
(Smmir/Rfltintrv)
Pollution AbMimint Imtimini
• Supply el Pruiwv Rriinttf Cu
from US Mint Produtinn
• Nil Aitir Ti« Incwni
• CwUlCluruCoff tenon
• GrouBoDk Vaiuiol AMII
FINANCIAL MODULE
Conuiiinev Crnek on Mm/Mill
NfM PrOOlKint CapKllV
ProduCK P«l
-5al«
- Ari* r«« Income
V UtillMllOfl
I
- Debt/Equity R««
- Dwrtim Piymtmi
oi DrtHfEnuiiv R««
IL«M*«*I Chieti imtrm
Dtbi • Eauilv mdpiuiiiil«n del
- SMBfiO^rv Hff iMd Cy Prlet
-ScrwPrlet
OuMtltln
- Tout Comunvtkifi
- Tout RilkHd Coppw ProdWllon
- Prfcurv Rifliwd COM* Pnducinn
tUIliwd Ooppw
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model specifically deals with both the primary producers and with the
secondary copper industry (and the interaction between the two sectors),
its major focus is directed at the primary producers, with careful
attention paid to their discretionary pricing and output behavior.
Given that inevitably a range of possible price and output outcomes
can be expected in Imperfectly competitive markets purely on theo-
retical grounds, we have chosen to "bound" the "solution space" of
possible (and most plausible) outcomes analytically In our own
modeling work. The pricing strategies or behavior utilized In the
model identify, first, the "most likely" or "normal" behavior in a
given year and, second, define reasonably solid bounds around that
"most likely" or "normal" pricing behavior.
2. Model Components
The model contains three basic components (modules)
- The Market Clearing Module
- The Investment Module
- The Financial Module
Briefly, the Market Clearing Module considers for each year the dif-
ferent factors affecting copper prices, production levels, fluctua-
tions in inventories, consumption levels, and international trade.
These factors are considered simultaneously, by taking into account
the costs of production of the primary producers, available smelter/
refinery capacity, and the supply response of the secondary producers.
The market is cleared in each year through materials balancing and
price equilibrium equations. That Is, the equations making up the
Market Clearing Module analyze the industry by focusing on the sources
of copper and uses of copper and how sources and uses are brought
into equilibrium.
In the model, "market clearing" is achieved with a system of simul-
taneous equations. The module has two versions—linear and nonlinear.
The first version in essence ignores capacity constraints and, in
spite of its simplicity, is not very useful for this reason.
In the linear case, for instance, demand curves may Intersect cost
or supply functions beyond capacity, resulting in untenable forecasts
of both prices and production levels. By contrast, the nonlinear
version, among other things, is able to incorporate short-run cap-
acity constraints by allowing production costs to rise steeply as
"name plate" capacity is approached. Hence, the nonlinear version,
which represents a more reasonable approximation of the variables
and relationships being modeled, represents by far the more useful
analytical system. All the model results presented in this report
are based on the nonlinear version.
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The Investment Module, based on the results of the Market Clearing
Module plus other variables simulates for each future year the in-
dustry's expenditures on new plant and equipment and for replacement
investment and thus estimates how smelter/refinery capacity changes
each year.
The capital expenditures associated with both capacity expansion and
replacement investment, along with other increases in fixed costs
due to mining and milling investment, as well as pollution abatement
investment, are translated into changes in the production costs of
the primary producers. This module thus serves as a "hinge", con-
necting the solutions of the Market Clearing Module for successive
years.
The Financial Module uses the results of both the Market Clearing
Module and the Investment Module to analyze the financial perform-
ance of the primary producers as a group, in terms of such standard
financial indicators as cash-flow (depreciation, after tax income,
dividends, debt-retired, external financing required, etc.); flow
of funds (source vs. uses); leverage checks; changes in debt and
equity in capitalization, etc. Although this module of the model
is not fully simultaneous with the other two modules, it is de-
signed to permit an external check on the overall performance of
the entire model. Once the model is solved for the entire fore-
cast period (i.e., 1974-1985), external checks are performed on
the model's results, focusing directly on the industry's overall
financial performance. These external checks include an analysis
of the exogenously specified mining and milling investment behavior
in terms of various measures of profitability, given the price
forecasts. Likewise, overall cash-flow and flow-of-funds (sources
vs. uses) analyses are performed, by analyzing financial data com-
puted directly from the model's results, as well as on the basis of
detailed historical industry-wide and specific company-by-company
financial data. Thus, for example, if these external checks in-
dicate possible overinvestment at the mining and milling level,
the exogenously specified mine and mill investment would be re-
duced until the results, judged by their financial implications,
appear the most plausible.
3. Model Results
The Market Clearing Module yields forecasts for the following major
variables, among others, which are jointly-determined:
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• total consumption of refined copper and its equivalent
• changes in inventory stocks (additions, reductions), primary
producers
o changes in inventory stocks (addition, reductions), semi-
fabricators
• changes in invnetory stocks (additions, reductions), secondary
refiners
• net international trade (net exports, net Imports)
• production of primary refined copper by the domestic primary
producers (from domestically mined copper, imported concentrates,
plus scrap) sold basically at domestic primary producers'
prices
• production of secondary refined copper from scrap sold on the
"outside" market
• production of scrap copper which is used directly
• price of primary refined copper (domestic producers' price,
in cents per pound)
• price of secondary refined copper sold on the "outside"
market
f price of copper scrap
The following major variables are specified outside the Market Clearing
Module and, hence, are exogenous to the model:
• Federal Reserve Board•industrial production index for manufactured
durable products
• industrial production index for manufactured durable products
in other OECD countries
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• LME copper price (varied over a wide range for sensitivity
analysis)
• price of aluminum clippings (used as a surrogate for aluminum
transaction prices, in order to gauge possible substitution of
aluminum for copper)
• United States Government stockpile (net additions to or net
sales from)
e average (unit) variable cost of production for the primary
producers, at all levels of production (i.e., average variable
cost function)
• average fixed costs of production for the primary producers,
at all levels of production (i.e., average fixed cost function,
from the Investment Module)
• beginning-of-year domestic primary copper smelter/refinery
capacity (from the Investment Module)
• dummy variables for strikes and expected strikes
4. Microeconomlc Considerations Incorporated Into the Model
The effect of a regulation on product price and quantity depends on
industry pricing behavior. Industry pricing behavior, in turn,
is conditioned by industry or market structure. Consequently, at
least three issues need to be addressed: (a) what is the relation-
ship between industry/market structure and industry pricing behavior,
(b) how is the copper industry's structure and pricing behavior
characterized, (c) how is the copper industry's pricing behavior
handled in the model?
a. Industry/Market Structure and Pricing Behavior
Analysis of the structure of an industry/market requires the
examination of three interrelated areas: (a) structure, (b) conduct
(behavior), and (c) performance. The three areas or concepts are
interrelated in that the structure of a market is generally under-
stood to determine the conduct (i.e., pricing behavior) of the
participants in the market, and the conduct, in turn, is believed
to determine the performance (e.g., financial) of the participating
firms.
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Various criteria are typically used in defining the structure of an
industry. The basic criteria are the existence and closeness of
substitutes and the extent to which the participating firms in the
industry take into account the reactions of competitors. The latter
criterion is closely related to the number of firms in the Industry
and the degree of differentiation of the product.
The two polar extremes in the range of market structures are "perfect
competition" and "monopoly".
"Perfect competition" is characterized by
• a very small number of firms (buyers and sellers) where each
firm accounts for an extremely small share of the market;
• a homogeneous or standardized product is involved;
• the numerous buyers and sellers are well-informed about
product quality and about each other's prices;
• the entry of new firms into the industry/market is free and
easy (i.e., there are no "barriers to entry").
In such a situation, individual firms have no influence over the
going market price; each firm is a "price taker" and decides only
how much to produce and sell, under prevailing prices, given its
cost structure. Each one firm acts atomistically, that is, it
decides its level of output Ignoring the others in the industry.
Since the products of the firms are perfect substitutes for one
another the price-elasticity of demand facing the individual firm
in infinite (i.e., the demand function facing the firm is
horizontal).
It is important to note that very few actual markets can meet the
definition of perfect competition. Also, the word "competition"
is used in a special sense. In the words of Dakar Morgenstern1
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Competition means struggle, fight, maneuvering, bluff,
hiding information—and precisely that word is used to
describe a situation in which no one has any influence on
anything, where there is ni gain, ni perte, where everyone
faces fixed conditions, given prices, and only has to
adapt himself to them so as to attain an individual maximum
which may even be zero as in the case of profits.
In contrast, in the case of a "monopoly", there is only one firm in
the industry and there are no close substitutes for the product of
the monopolist. The demand of the monopolist coincides with the
industry demand, which has a finite price elasticity. Entry is
blockaded.
Another market structure, "monopolistic competition" is defined by
the case where there is a very large number of firms, but their
product is somewhat differentiated. Hence, the demand facing
the individual firm is not perfectly elastic (as is the case under
"perfect competition") but its price elasticity is high due to the
existence of the close substitutes produced by the other firms in
the Industry. Despite the existence of close substitutes, each
firm acts atomistically ignoring the competitors' reactions
because there are too many of them and each one would be very little
affected by the actions of any other competitor.
Finally, another market structure is the "oligopolistic" market,
meaning a market with "few sellers"2. Oligopolies can be of two
types: when the products are fairly homogeneous or standard, we
have a "pure oligopoly"; when the products are differentiated we
have a "differentiated oligopoly". In the latter case the
elasticity of the individual market demand is smaller than in the
case of the pure or homogeneous oligopoly. Because an oligopolistic
market is characterized by relatively few sellers who are conscious
of their interdependence, they typically have some influence on
market prices, however small. Since the number of firms is small,
the selling price and output decisions or actions of any one firm
will depend on and will affect -the policies of its rivals.
The oligopolist is like a person who is playing chess: before
taking any action, he must consider the possible reactions on
the part of his opponent and how to counter them.
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Given that there is a very large number of possible reactions of
competitors, the behavior of firms may assume various forms and
their decisions may depend on the ease of entry and the time lag
which they forecast to intervene between their own action and the
rivals' reactions. Thus, there are various models of oligopolistic
behavior, each based on different sets of assumptions on the reaction
patterns of rivals. In oligopolistic markets, barriers to entry,
determined by the size of investment required for a minimum efficient
scale of operations, is typically not as easy as under perfect or
monopolistic competition.
For an industry characterized as perfectly competitive, the industry
supply curve (under the usual behavioral rule of profit maximization)
is the horizontal summation of the marginal cost curves of in-
dividual firms. Thus a unique, deterministic solution is obtained
for price and output at the intersection of the supply and demand
curves.
For a monopolist, the output and price, again, is uniquely deter-
mined by the intersection of the marginal cost, MC, and marginal
revenue, MR, curves. These points can be readily verified by
consulting an elementary text on microeconomics.
In oligopolistic markets, by contrast, microeconomlc theory no
longer supports the concept or use of a supply function. Deter-
ministic market solutions, based upon the supply and demand func-
tions alone, are no longer possible and a range of possible price
and output solutions can be expected on purely theoretical grounds.
b. Copper Industry Structure and Pricing Behavior
As indicated before (Chapter III - The Structure of the United States
Copper Industry) the domestic copper industry can be segmented into
"primary" and "secondary" sectors, for analytical purposes, on the
basis of the pricing behavior of the firms on the sellers' side.
By this criterion, the primary sector consists of firms which sell
the bulk of their refined copper output (mostly from mined copper
but also including some refined from scrap) on the basis of a
commonly-followed domestic producers' price. Firms in the secondary
sector, on the other hand, are those which sell their copper output
regardless of its form (i.e., whether refined or scrap) and regard-
less of its origin (i.e., whether processed from mined copper—
from domestic or foreign source— or refined from scrap) on the
basis of one or several "outside market" prices.
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The "outside market" in the United States consists of a subset of
secondary or custom smelters/refiners selling on the "outside"
market, the producers/sellers of non-refined scrap, and the merchants
who import copper-containing materials in various forms for toll
smelting/refining and for sale on the outside market. In the model,
we have assumed that these sectors of the "outside market" are
"workably" competitive .
Within the United States copper industry, the primary producers
may be labeled oligopolistic based on the fact that there are only.
about eleven such producers, vertically integrated to varying degrees.
Another factor which would support such a classification is the
existence of the producer price for copper as separate from a world
"market" price for copper, which is represented basically by the LME
copper price. The historical relationship between the domestic
primary producers' prices and the LME prices (i.e., the existence
of a two-price system for copper) has been discussed at length
in Chapter VIII—Prices. Also, earlier, the relationship bewteen
the domestic copper industry and the world copper industry was
discussed in Chapter V—Relationship to the World Industry.
c. How Pricing Behavior is Treated in the Model
Such characteristics of industry structure notwithstanding, there is
no consensus view of pricing in the domestic copper industry. Some
respected researchers (e.g., Charles River Associates, Inc.) view
the industry as competitive. Despite the small number of domestic
primary producers, these researchers believe that the international
market for copper, competition from secondary suppliers and the
lack of tariff barriers force domestic producers to act like pure
competitors. Others have viewed the industry as being monopolistic
and still others have stressed the apparent indeterminacy of pricing
patterns.
The adherents to the "perfect competition" model may have a point
in terms of how the world copper market seems to operate during
periods periods of economic downturn (i.e., during demand slack
periods). But even here it represents an oversimplification, in
view of the continued prevalence of the two-price system during such
periods. In general, we do not believe such a pricing model, despite
its analytical convenience, realistically comes to grips with the
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vexing analytical problem before us. We further reject the "monopoly"
pricing model as simply not credible at all, based on plenty of
available evidence. Only under extreme demand-crunch conditions
does the industry appear to have moved, however slightly, in the
direction of monopoly pricing. Based on our historical model
simulations, we cannot find any evidence of a consistent tendency
toward monopoly pricing.
In modeling the behavior of the primary producers, we have chosen a
"parametric" approach where we define several pricing strategies in
order to define the parameters or outer boundaries of possible
outcomes and assess the sensitivity of the market results to variations
in behavioral parameters. The following three points define these
parameteric solutions:
• Average variable cost pricing (AVC = AR, where AVC is the
average variable cost schedule and AR is the net demand schedule
facing the primary producers): This defines general pricing
behavior mostly during demand-slack periods when member firms
tend to operate well below designed capacity and when they are
particularly susceptible to pricing discipline breakdowns;
• Full cost pricing (ATC = AR, where AR is as defined and ATC is
the average total cost schedule facing the primary producers):
This represents the industry's "normal" pricing behavior; and
• Implicit monopolistic pricing (obtained via the intersection
of the marginal cost, MC and marginal revenue, MR, schedules):
This represents the industry's "theroetically possible" pricing
tendency during extreme "demand-crunch" periods.
As noted earlier, the first and third solution points provide the most
plausible theoretical boundaries of the expected market solutions
with respect to prices and output. Another possible solution point
is given at MC = AR, since under "normal" market conditions there
would be little micro-theoretical reason for firms to produce to the
right of the intersection of the MC and AR schedules (i.e., in this
region, marginal cost would exceed price). However, such a solution
point, while reasonable from a theoretical standpoint, appears to
have very little, if any, practical currency in terms of the actual
pricing decisions of the firms in the industry and would, at any rate,
provide only a marginal improvement over the range of solutions that
can be expected.
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The "normal" pricing "rule" used by the primary producers can best be
characterized as "full cost pricing"4 (or "average cost pricing"),
including a target or desired rate of return on investment. By this
formulation, price is set equal to average total cost, ATC, where
average total cost includes average operating costs (i.e., average
variable costs) plus average fixed costs which include a target or
desired rate of return on investment. The desired or target rate of
return on investment can be thought of as that return required £o
maintain and expand the capital stock of the primary producers^. in
a public utility sense, that target rate of return is the "fair rate
of return" required to attract sufficient new capital".
While "full cost pricing" appears to realistically characterize the
pricing strategy of an oligopolistic firm or group of firms in
"normal" years, with "normal" demand and supply conditions, there
are going to be short-run conditions that deviate such a pricing
strategy from its target. For the primary producers, such develop-
ments as a collapse in world demand, international competition, or
competition from secondary supplies could and do prevent the primary
producers from realizing the expected "full cost pricing" strategy.
Consistent with this view, the lower bound on price in a given year
has been identified as the equality of price and average variable
costs (AVC). At this point, the unit price is covering average
operating costs alone without any fixed cost coverage. While this
lower bound reflects a possibility in the short-run, a firm or group
of firms cannot price at this lower bound for very long without
going bankrupt. Such a situation would occur during a demand-slack
period •
The short-run upper bound upon price identified for our analysis is
the "monopolistic" point determined by the intersection of primary
sector's marginal cost and marginal revenue curves. Of course, this
is a theoretical upper bound only in the hypothetical sense that per-
fect collusion exists, that profit sharing agreements were operative
and worked perfectly and that the marginal cost curve fully articulates
this collusive behavior. As a matter of fact, the simulation results
of the model indicate that the "monopolistic" price solutions
are considerably above the "full cost pricing" solution in most years.
At any rate, it was not expected that the primary producers would
gravitate consistently to a short-run collusive monopolistic price
solution, both because of legal reasons and because of the real con-
cern about the threat of long-run substitution from aluminum. However,
this upper bound has been included for theoretical reasons, if not
for its practical significance.
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5. Treatment of Pollution Abatement Expenditures in the Model for
Impact Analysis Purposes
Pollution abatement expenditures are introduced into the model as
follows. Average variable costs (i.e., the operating and maintenance
costs) associated with pollution abatement are introduced directly
by shifting-up the average variable cost function facing the primary
producers. Pollution abatement capital expenditures, meanwhile, are
introduced directly into the Investment Module, by year of expenditure
(i.e., dollar outflow); these expenditures are annualized internally
by the model through the use of capital charge coefficients. It
should be noted, in this context, that the Investment Module separately
keeps track, in a bookkeeping sense, of three different types of
capital stock (i.e., gross book value of assets) and capital flows
(i.e., annual capital charges or annual fixed costs): investments
made before 1974, new investments made thereafter for productive
capacity expansion and replacement, and pollution abatement investment.
These three different investment streams are separately handled,
annualized and then combined to determine, annually, total fixed
costs facing the primary producers. These total fixed costs are next
transformed into an average fixed cost function (i.e., unit fixed
cost at all levels of production) which contains an expected rate
of return on invested capital. This, combined with the average
variable cost function (exogenous to the model, as defined above),
yields the average total cost function (i.e., total unit cost of
production, including both fixed and variable costs, at all levels
of production) facing the domestic primary producers each year.
In short, the model is designed in such a way that both the cost and
the capacity effects of environmental regulations on the United States
copper industry can be readily measured annually over a period of years.
6. Simplified Demonstrations of How Cost and Capacity Change Due to
Environmental Regulations Affect Prices and Production Levels
As mentioned above, the effects of environmental regulations on prices
and production levels depend on the pricing behavior of the firms in
an industry, which in turn is conditioned by the structure of the indus-
try or the relevant market for the product in question. The response
of a monopolist, for example, would be quite different from that of firms
under perfect competition. It is necessary, therefore, to specify an
appropriate microeconomic model of price determination, in order to deal
effectively with the simultaneous or interdependent adjustment process
in demand, supply (costs), and prices.
The precise effects of increased production costs due to environmental
controls, ignoring for the moment capacity effects, depend upon the demand
and supply elasticities of the firms in the industry. The greater the
elasticity of demand (other things being equal), for example, the less
price will rise as new costs are incurred. With negatively sloped demand
curves, an upward shift in production costs would, in the general case,
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lead to an increased price and to a reduction in the number of units
purchased (and, therefore, to a reduction in production). In general,
whether and to what extent increased costs can be "passed on" depends
on the demand and supply elasticities.
Economic impact analysis through the specification of such a unified
microeconomic model of price-output determination is generally not a
trivial problem analytically, in view of the fact that many market struc-
tures which exist in reality cannot be neatly categorized into the text-
book polar cases of perfect competition and monopoly.
Also, short-run effects need to be analytically distinguished from long-
run effects. Further, whether the Industry is characterized as one
having increasing returns to scale (i.e., a doubling of all inputs may
lead to more than a doubling of output), constant returns to scale (i.e.,
a doubling of all inputs leads only to a doubling of output) or decreas-
ing returns to scale (i.e., a doubling of all inputs may lead to less
than a doubling of output) requires attention. Moreover, how industry
structure in the rest of the world affects price-output determination in
the industry domestically deserves emphasis. Finally, if the industry or
market may include a number of submarkets, such as the workably competitive
"outside" market in the case of the U.S. copper industry, the analysis be-
comes even more complicated, for example, as one attempts to trace through
the interaction between the primary producers and the participants on the
"outside" market in terms of their respective price-output determination
behavior.
These analytical complications are ignored in the simplified demonstration
given below to illustrate with the aid of graphs how cost and capacity
changes due to environmental regulations affect prices and production levels.
We assume average cost pricing and, in order to keep the graphical presen-
tation at an intelligible level, we suppress all but the primary producers
sector of the model. This necessarily distorts the precise way the model
works, but, we feel, adequately communicates the main ideas. The graph-
ical analysis first examines shorter-term effects and then looks at longer-
term dynamic effects.
a. Short-run Effects
We start with the case where the existing capacity is fixed and there is no
shift in the demand function facing the firms in the industry. We first
consider the case where pollution control costs consist only of capital costs
(i.e., investment in plant and equipment). This is shown in Figure XI-2A.
The short-run is typically defined as any time interval during which the
existing productive capacity is, for all practical purpose, fixed. This
varies from industry to industry. In the copper industry, for example,
incremental smelter capacity expansion at existing sites can take place
over a relatively short period of time, such as a year. However, it would
take five-to-seven years for a minimum efficient size "greenfield" smelter
to be brought on-stream. Hence, the "short-run" and "longer-run" designations
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FIGURE XI-2A
EFFECTS OF POLLUTION CONTROL CAPITAL (FIXED) COSTS
ON INDUSTRY COST SCHEDULES.
— Before
— After
/ Total Cost (1C*)
Total Cost (TC)
$/unit
Variable Cost (VC)
Fixed Cost (FC*)
Fixed Cost (FC)
Quantity
AR
ATC
AVC
Quantity
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used here refer, respectively, to time intervals defined with some
flexibility (e.g., "short-run": at least a year; "longer-run": at least
a few years).
A firm's or industry's cost functions show various relationships between
costs and the level of output. Total fixed costs (FC) are the total
obligations per period of time incurred for fixed Inputs (capital
charges, including the depreciation of buildings and equipment, property
taxes, etc.). Since the quantity of the fixed inputs is fixed (by
definition), the total fixed cost will be the same regardless of output.
Total variable costs (VC) are the total costs incurred for variable inputs
(e.g., labor, energy, etc.). They increase as the level of output increases,
since larger output levels require larger inputs of the variable factors
of production, which mean higher variable costs. Total costs (TC) are
the sum of total fixed costs and total variable costs.
There are three average cost functions derived from these three aggregate
cost functions, by dividing them by output. Thus, average fixed cost
(AFC) is obtained by dividing total fixed cost (FC) by output, q (i.e.,
FC/q). The average variable cost (AVC) is total variable cost (VC) divided
by output. The average total cost (ATC) is total cost (TC) divided by
output. It should be noted that average total cost (ATC), as defined
here, includes a rate of return on investment. Finally, the marginal
cost (MC) is the addition to total cost resulting from the additional
production of the last unit of output, given the existing capacity. These
various cost schedules are depicted in Figure XI-2A as well as in
the other accompanying figures.
Pollution control investment, appropriately annualized (see Chapter XII
for a discussion), cause an upward shift in the aggregate fixed cost
schedule facing the primary producers, as shown in the top graph. The
effect of this, as shown in the bottom graph, is to shift upward
(vertically) the primary producers' (industry) average fixed cost (AFC)
and average total cost (ATC) schedules (functions). The magnitude of
the upward shift is greater at lower levels of production, since the
increase in fixed costs is spread over fewer units produced. The pre-
compliance equilibrium price (p ) and output (q ) solution is given at
point e. Post-compliance solution (p^, q.) is given at point u. Price
is increased by (p. - p ) cents/lb. and production is reduced by
(q - q ) short tons of°refined copper equivalent. It should be noted
that the average variable cost (AVC) and marginal cost (MC) schedules
remain unaffected. The various cost functions rise precipitously
as "nameplate" capacity is approached, consistent with the law of
diminishing marginal returns (i.e., if equal increments of a factor
input, such as labor or energy, are added when the quantities of other
factor inputs, such as plant capacity, are held constant, the resulting
increments of product will decrease beyond some point; that is, the
marginal product of the input will diminish). As capacity is approached,
each extra unit of output is obtained at higher cost.
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Figure XI-2B examines the case where pollution control costs consist only
of an increase in industry variable costs, resulting in an upward shift
in the aggregate variable cost schedule. To simplify matters, it is
assumed that pollution control-related variable costs vary linearly
with total output. Consequently, the absolute magnitude of the upward
shift in the industry variable cost schedule increases as output
increases (top figure). The bottom figure shows how, as a result, the
industry AVC and MC schedules shift upward. It can be seen that the
upward shift in AVC, MC, and ATC is by a constant (i.e., X cents/lb)
over all levels of output. This is perfectly analogous to the case
of an excise tax levied on output (e.g., X cents/lb.). The industry
AFC schedule remains unaffected. As before, the points e and u denote
the "before" and "after" price-output solution points; (p. - p ) shows
the increase in price, Ap, and (qQ - q^ shows the reduction in output,
-Aq.
Finally, Figure XI-2C combines the results of Figures XI-2A and XI-2B. As a
result of the upward shifts in both fixed cost (FC) and variable cost
(VC) schedules, AFC, AVC, MC and ATC schedules all shift upward; this
shift, however, is .asymmetrical for the AFC and ATC schedules, reflecting
the fact that (AFC* - ATC)/q increases as q (output) is reduced. The
same holds true for (ATC* - ATC)/q; in the limit, the per unit upward
shift in the ATC schedule approaches the per unit upward shift in AVC
or MC (i.e., AVC* - AVC/q).
As before, the pre-compliance market equilibrium is at point e and post-
compliance equilibrium at point u; correspondingly, p.^ and q are the
new price and quantity solution points.
b. Longer-run Effects
The longer-run, dynamic effects of pollution control capital and operating
costs are shown in Figures XI-3A, XI-3B and XI-3C. In all three figures
the top graph shows the "expected" normal longer-run industry adjustment
process: (a) demand shifts out from ARQ to AR-, and (b) industry
productive capacity is no longer assumed constant but it is allowed to expand.
Corresponding to capacity expansion, the relevant industry cost functions
shift out to the right. The points o and u denote, respectively, the
short-run and longer-run price-output solutions pQ qQ and p^ q^. It
should be noted that p, is greater than p , reflecting the underlying
assumption of an increasing cost industry (i.e., increases in output
through the expansion of the existing productive capacity require higher
costs, given the state of the available technology, due, in this case,
mostly to the deteriorating ore grade).
The top graph in Figure XI-3A depicts what might be called generalized
"baseline" conditions. Corresponding to the secular shift in demand
and the expansion in productive capacity, output increases from qQ to q^
and price increases from p to p.. The bottom graph in Figure XI-3A,
meanwhile, shows a case whire the industry faced pollution control
costs (both capital and variable) and where environmental regulations do
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FIGURE XI-2B
EFFECTS OF POLLUTION CONTROL OPERATING
(VARIABLE) COSTS ON INDUSTRY COST.SCHEDULES
$/unit
/ Total Cost (TC*)
Total Cost (TC)
Variable Cost (VC*)
Variable Cost (VC)
Fixed Cost (FC)
Quantity
qiqo
Quantity
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FIGURE XI-2C
EFFECTS OF POLLUTION CONTROL CAPITAL AND OPERATING
COSTS ON INDUSTRY COST SCHEDULES77
Total Cost (TC*)
Total Coat (TC)
Variable Cost (VC*)
Variable Cost (VC)
— Fixed Cost (FC*)
Fixed Cost (FC)
Quantity
$/unit
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FIGURE XI-3A
EFFECTS OF POLLUTION CONTROL CAPITAL AND OPERATING
COSTS ON INDUSTRY COST SCHEDULES. WITH
CAPACITY EXPANSION AND SHIFT IN .DEMAND
$/unit
PI
Po
MCj
Without pollution control
$/unit
With pollution control.
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FIGURE XI-3B
EFFECTS OF POLLUTION CONTROL CAPITAL AND OPERATING
COSTS ON INDUSTRY COST'SCHEDULES. WITH
CONSTRAINED CAPACITY AND SHIFT IN DEMAND
ATCi
Without pollution control.
With pollution control
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FIGURE XI-3C
EFFECTS OF POLLUTION CONTROL CAPITAL AND OPERATING
COSTS ON INDUSTRY COST SCHEDULES, WITH
REDUCED CAPACITY AND SHIFT IN DEMAND
$/unit
MCj
ATC,
Quantity
ARi
AVC0=MC0=AVC1=MC1
AVCe=MCB=AVCa=MCq
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not in any way constrain or impede capacity expansion. The short-
run cost schedules are denoted by the subscript "o", the longer-run
cost schedules by the subscript "1" and the altered cost schedules
due to pollution control costs are identified by the superscript "*".
The "generalized baseline" price-output solutions are given at point o
(short-run) and u (longer-run); the after-compliance solutions are
given at points r (short-run) and s (longer-run). In the longer-run,
output is reduced from q. to q* while the price increases from p to p*.
Figure XI-3B depicts the case where the implementation of the enivronmental
regulations directly or effectively constrains expansion in the industry's
productive capacity. With capacity constrained and an upward shift in
the relevant cost functions due to pollution control, the new longer-run
price-output solution is given at point m, where q* amount is produced
and the price has increased to p$ (note that p* > p* , where p* is as
given in Figure XI-3A). The solution given at point n (p2, q2T shows
the unlikely longer-run case where capacity remains constrained by
the environmental regulations but no compliance costs are incurred. It
should be noted that this leads to only marginally improved conditions;
this is because the effects of constraining growth in productive capacity
readily predominate, compared to the effects of compliance costs taken
by Itself.
Finally, Figure XI-3C depicts a case where the implementation of the
environmental regulations effectively leads to a reduction in the
available productive capacity and where the industry is still faced with
pollution control costs.
It is assumed in the bottom graph that the reduction in productive
capacity does not alter the industry AFC, AVC, MC and ATC schedules;
only,the AVC, MC and ATC schedules rise sooner. The post-compliance
longer-term solution is given at point w, corresponding to p§ and q§.
The new "equilibrium" price, p*, is higher than pi (given in Figure 3B).
Again, it can be seen that if environmental regulations effectively
lead to a reduction in the available productive capacity while no
compliance costs are Incurred — which is an unlikely event — the
impact results would not appear to be significantly different.
The illustrative microeconomlc discussion given above is, on purpose,
highly simplified, to convey via two-dimensional graphs the complex
set of relationships and dynamic processes taking place over time that
the model addresses systematically, comprehensively and in an internally
consistent way. A condensed technical summary of the model is given
next.
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C. TECHNICAL SUMMARY OF THE MODEL
This section provides a condensed technical overview of the model,
prepared for the technically-minded reader who may wish to consult
the Technical Appendix for further detail.
The discussion is organized around the following major areas:
(1) Model specification: the Market Clearing Module, the Investment
Module and their interaction;
(2) Final form of the estimated equations;
(3) Data sources and problems;
(4) Econometric estimation techniques used;
(5) Mathematical solution of the model; and,
(6) Basic differences between this and other econometric models of
the copper industry
1. Model Specification: The Market Clearing Module, The Investment
Module and Their Interaction
Two of the basic modules making up the model have been briefly intro-
duced above. Figure XI-4 shows broadly the general outlines of the
two modules and how they interact. The Market Clearing Module
analyzes the industry by focusing on the sources of copper, and
the relationships that indicate how the sources and uses are brought
into market equilibrium in any given year. The endogenous variables
measuring sources of copper include the supply of primary refined
(QPR), the supply of secondary refined (QSR), and the supply of
non-refined scrap (QSNR). The uses or demands for copper are six-
fold: demand by fabricators and semi-fabricators (QD), net exports
of copper (NE), additions to fabricator's inventories (AIF), addi-
tions of refined copper to primary refiners' inventories (AIRR),
additions to scrap to secondary refiners' inventories (AIRS) and
additions to government stockpiles (AIGOV). Of course, market
equilibrium requires that materials balancing holds each year;
Sources = Uses, or:
QPR + QSR + QSNR = QD + NE + AIRR + AIRS + AIGOV
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Arthur DLittklnc
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FIGURE XI-4
SIMPLIFIED DIAGRAM OF THE INTERACTION BETWEEN THE MARKET
CLEARING MODULE AND THE INVESTMENT MODULE: A STATIC VIEW
Ni
00
INVESTMENT MODULE
Underlying Factors Affecting Production
1) Capacity In Place
2) Financial Performance
3) Environmental Controls
4) Cost of Capital
Producer Perforraance
1) Profitability
2) Operating Rates
3) Expectations for Future
Profitability and Capacity
MARKET CLEARING MODULE
Sources
1) Supply of Primary Refined - QPR
2) Supply of Secondary Refined - QSR
3) Supply of Unrefined Scrap - QSNR
Uses
1) Demand by Fabricators and Semi-Fabricators - QD
2) Net Exports - NE
3) Additions to Fabricators' Inventories - A IF
4) Additions to Refiners' Inventories of Refined
Copper - filRR
5) Additions to Refiners Inventories of Scrap
Copper - AIRS
6) Additions to Government Stockpiles - AIGOV
Market Equilibrium
Capital Expenditures for
Capacity Expansion and
Replacement Investment
1) Materials Balancing:
QPR + QSR + QSNR - QD + NE + AIF + AIRR + AIRS + AIGOV
2) Price Equilibrium and Solutions: Scrap (RPS), Secondary
Refined (RPSR), Primary Refined (RPEMJ)
-------
Further, the real price of scrap (RPS), secondary refined copper (RPSR)
and primary producer copper (RPEMJ) must adjust to clear the market.
The Investment Module in Figure XI-4 is shown to utilize the Market
Clearing Module solution to estimate the investment behavior of the
primary producers. These results, together with other expectational
and exogenous variables, are used to determine smelting/refining capa-
city expansion. Such capacity expansion, of course, affects capacity
in place and, in turn, the cost curves of the primary copper pro-
ducers .
Figure XI-5 summarizes the time sequencing of the interaction between
the Market Clearing Module and the Investment Module. Given ex-
ogenous and predetermined variables and capacity in place at the
beginning of year t, the Market Clearing Module of the model solves
simultaneously for the thirteen (13) endogenous variables. Both
the linear and nonlinear versions of the model are designed to
yield, for any given year, three (3) parametric solution vectors
for the endogenous variables corresponding to the three (3) para-
metric points which theoretically "bound" the primary producers'
behavior and the solution space (discussed above). A solution
vector for a single parametric point includes the output of the
primary sector and the two secondary sectors, inventory changes,
net exports, consumption of copper by the fabricators and semi-
fabrlcators, and all prices in year t. Given the "most probable"
(full cost pricing) parametric solution for year t, in addition to
expectations on the part of the copper producers and the exogenous
variables, the dynamic Investment Module solves for incremental
capacity changes at the smelting and refining level during year t.
These capacity changes are estimated and introduced into the cost
curves of the primary producers for year t+1. The model then in-
corporates these changes in moving to year t+1 and simulating the
market clearing solutions for that year.
Figure XI-5 further indicates how the model deals with the short-run
and the long-run. The Market Clearing Module is essentially short-
run, where the short-run is defined as a year. Capacity is fixed
at the beginning of the year. There are no long-run cost, supply
or demand curves involved in a given year's industry simulation.
However, the sequence of short-run solutions are tied together
by the Investment Module which treats capacity as variable and
which charts the enfolding short-run over time. Thus, if one
were to trace out the cost curves of the primary sector over time
as capacity expands, the usual long-run envelope curves could be
drawn for the marginal cost and average cost curves.
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FIGURE XI-5
SIMPLIFIED DIAGRAM OF THE INTERACTION BETWEEN THE MARKET CLEARING
MODULE AND THE INVESTMENT MODULE: A DYNAMIC VIEW
Exogenous and
Predetermined
Variables (c)
i
10
O
Market
Clearing
Module:
QD(t)
RPEMJ(t)
NE(t)
QR(t)
AIF(t)
AIRR(t)
AIRS(t)
QPR(t)
RPSR(t)
QSR(t)
RPS(t)
QSNR(t)
RPFUTl(t)
Capacity in Place
at Beginning
of Period t:
K(t)
Exogenous and
Predetermined
Variables (t+1)
Exogenous and
Predetermined
Variables (t+2)
\ /
'
Market
Clearing
Module :
QD(t+l)
RPEMJ(t+l)
NE(t+l)
QR(t+l)
AIF(t+l)
AIRR(t+l)
AIRS (t+1)
QPR(t+l)
RPSR(t+l)
QSR(t+l)
RPS(t+l)
QSNR(t+l)
RPFUTl(t+l)
^3
^^. .
\
'
Market
Clearing
Module :
QD(t+2)
RPEMJ(t+2)
NE(t+2)
QR(t+2)
AIF(t+2)
AIRR(t+2)
AIRS (t+2)
QPR(t+2)
RPSR(t+2)
QSR(t+2)
RPS(t+2)
QSNR(t+2)
RPFUTl(t+2)
c
Investment
Module
K(t+l)-K(t) - F(X,Y):
Yielding K(t+l),
Capacity in Place
at Beginning of t+1
Investment
Module
K(t+2)-K(t+l) = F(X,Y):
Yielding K(t+2),
Capacity in Place
at Beginning of t+2
-------
2. The Final Form of the Estimated Equations
Tables XI-1A - XI-1C contain the final form of the estimated equations for
the linear and nonlinear versions of the model, for both the Market
Clearing Module and the Investment Module, respectively. For a
complete definition of the variables, refer to Appendix D.
Some of the more important conclusions emerging from the econometric
work can be summarized as follows:
• The analysis of demand suggests that demand on the part of
the fabricators and semifabricators is fairly price inelastic
in both the short-run and the long-run. This inelasticity
characterizes the own-price and cross-price (aluminum) elasticity
estimates. A "remodified" flexible accelerator model proves
quite useful in explaining inventory behavior. As would be
expected, discretionary inventory behavior is most evident for
the primary producers. The primary producers desire inventories
for transactions purposes, in the face of strike expectations
and for price-speculative reasons. However, their ability to
achieve desired inventory positions is constrained by the use
of the inventories to support the primary producers price (RPEMJ)
in "demand-crunch" or "demand-slack" situations. The importance
of alternative inventory motivations and the use of inventories
to support pricing decisions is much less or non-existent
for the fabricators/semifabricators and secondary refiners.
• The nonlinear and linear supply of nonreflned scrap is extremely
inelastic. The nonlinear supply curve for secondary refining
is elastic over 60-95 percent of capacity. At capacity, secondary
refined supply becomes extremely inelastic. The linear version
of secondary refined supply is also extremely inelastic.
• Smelting and refining capacity expansion on the part of the
primary producers is related to their levels of mine output
and their liquidity position as proxled by net income.
Capactiy utilization and the cost of capital affect the
capacity expansion significantly and with a time-lag.
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Arthur DLittklnc
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TABLE XI-1A
FINAL FORM OF THE ESTIMATED EQUATIONS OF THE MARKET CLEARING MODULE. LINEAR VERSION
N)
D
CT
*-»_
(L
3
Behavioral Relationships
1. Demand QD - 402.33 - 13.0839 RPBU + 45.4918 RPAL + 32.0311 TUD - 4.70229 IF(-l) + .270457 QD(-l)
(.96) (-2.41) (3.54) (5.28) (-2.131) (1.23)
2. Inventory,
Primary Producer* AIRR - .0917137 QFR 4- 2.60096 (RPFDTI - BPEHJ) - 3.24347 (RP1ME - HPBU) - 5.53020 DDKST2 - (.261623 +• 1.0) IRR(-l)
(7.81) (2.67) (-5.52) (-1.47) (-1.60)
1. Inventory, Seal-
Fabrlcators
oIF - .0274521 Q7AB * 5.18061 OSTE2 - 6.14463 DUKST2 + (.571413 - 1.0) IF(-l)
(2.48) (1.50) (-1.68) (3.19)
4. Inventory,
Secondary Refiners AIRS - .124286 QSB - .437843 (EPFUT1 - RPEHI) + 1.45349 DOMST2 + (.381028 - 1.0) IBS(-l)
(2.96) (-1.90) (.98) (2.00)
YUD
5. Bet Exports NH - 1745.3 4 3.797
6. Secondary Supply,
Refined RFSR - 11.7669 + .0182204 QSR -I- .887223 RPS + 11.7036 (QR/KAPP)
(.71) (.32)
(4.85)
(.66)
7.
Scrap
Supply,
B. Prlaary Supply.
Pareaetrle Solu-
tion Points
EPS - -26.2524 + .0779355 QSTO
(-1.56) (4.31)
a) BPEHJ(t) - KC(t) - AVC(t) - VABCOS(t)
b) RPBU(t) • XQ * Xx QPE(t) - AIC(t)
c) HRPBNJ(t) - MC(t) - ATC(t) - VARCOS(t)
9. Price Equlllbrlun.
Secondary Refined RPSR - HPBU - -4.9518 + .381203 (HPLM! - RPEHI) -f 10.7822 (QR/RAPP)
(-.32) (3.53) (-54)
10. Price Equlllbrlun
Snap RPS - RFEHJ - -28.5832 + .255106 (HPIHE - 8PEHJ) + 18.3416 (QB/KAPP)
(-2.13) (2.18) (1.07)
11. Materials
12. Identity
13. Futures Price
QD * 4IER + alP + AIRS + U60V + HE - QPB + QSR + QSNR
QSR + QPB - QE
RPFDT1 - 25.7988 4- .454706 HPLME + 1.14595 DUNST2
(3.43) (4.29) (1.04)
c statistics for HO: parameter - 0 are given in parentheses.
.92 -.286 2.16 24.5 1954-1970
(-1.23)
.67 .175 1.91 16.97 1953-1973
(.80)
.59 .38 1.87 15.6 1948-1973
(2.05)
.62 .24 1.73 16.5 1950-1973
(1.2)
111
.65 -.001
. 37 .08
-.01 -.34
0.80 .42
.85 .795
<6.28)
.59 .48
(2.63)
1-93 1951-1973
1.82 1953-1973
1.78 1953-1973
2.06 1954-1973
1.35 35.1 1950-1973
1.80 30.14 1950-1973
04
U3
US
112
S2
S3
SI
HE 3
ME2
HE1
ID1
ID2
-------
TABLE XI-1B
FINAL FORM OF THE ESTIMATED EQUATIONS OF THE MARKET CLEARING MODULE. NONLINEAR VERSION
u>
-n
o
cr
1. Demand
QD - 402.33 - 13.0839 RPEMJ + 45.4918 RPAL + 32.0311 YUD - 4.70229 IF(-l) + .270457 QD(-l)
(.96) (-2.41) (3.54) (5.28) (-2.134) (1.23)
.92 -.286
(-1.23)
2. Inventory,
Primary Producers AIRR - .0917137 QPR + 2.60096 (RPFUT1 - RPHO) - 3.24347 (RPIKE - HPBU) - 5.5302 DUHST2 - (.261623 + 1) IKK(-l)
(7.81) (2.67) (-5.52) (-1.47) (-1.60)
.65 -.001 1.93
Equation
D.W. F Sample
2..18 24.5 1954-1970 Ul
1951-1973 04
3. Inventory. Seal-
Fabricators
AIF - .0274521 QFAB + 5.18061 DSTE2 - 6.14463 DDMST2 + (.571415 - 1.0) IF(-l)
(2.48) (1.50) (-1.68) (3.19)
4. Inventory,
Secondary Refiners AIRS - .124286 QSR - .437843 (RFFOT1 - RPEKI) + 1.45349 DUMST2 + (.381028 - 1.0) IRS(-l)
(2.96) (-1.90) (.98) (2.00)
TDD
5. Het Exports BEt - 1745.3 + 3.7977 (RPUtEt - RPEMJ^ - 1179.3 ^J*~ - 32.3931 DUMST2 - 29.2512 THE
(5.7408) (1.96) (-4.8259) * (-2.6634) * (-4.8396)
6. Secondary Supply,
Refined RPSR - 44.489 - .32724 QSR + .000772421 QSR2 + .714028 RPS + 27.4509 (QR/KAPP)
(1.59)(-1.37) (1.41) (4.34) (1.81)
7. Secondary Supply,
Scrap RPS - -26.2524 + .0779355 QSNR
(-1.56) (4.31)
a) RPRMI(t) - AVC(t) - VARCOS(t) +
(QPR(t) ^.M-
e) MRPBU(t) - KC(t) - VAROOS(t) + (OPa(t) -.
8. Primary Supply.
Parametric Solu-
tion Points
9. Price Equilibrium
Secondary Refined RPSR - RPBMJ - -4.9518 + .381203 (RPUDJ - RPEMJ) + 10.7822 (QR/KAPP)
(-.32) (3.53) (.54)
10. Price Equilibrium
Scrap RPS - RPEMJ - -28.5832 + .255106 (RBLME - RPEMJ) -I- 18.3416 fQR/KAPP)
(-2.13) (2.18) (1.07)
11. Materials
Balancing
12. Identity
13. Future Prices
QD + AIRR 4- AIRS + AIF + AIGOV -f HE • QPR + QSR +•
QSR + QPR - QR
RPFDTA - 25.7988 + .454706 RPIME + 1.14595 DUMST2
(3.43) (4.29) (1.04)
.37 .08
1.B2 1953-1973 03
-.01
0.80
.88
.59
-.34
.42
.79
(6.39)
.48
(2.63)
1.78
2.06
1.91
1.80
1953-1973
1954-1973
34.43 1951-1973
30.14 1950-1973
05
02
S2
S3
SI
.67 .175
(.80)
.59 .38
(2.05)
.62 .24
(1.2)
1.91 16.97 1953-1973 ME3
1.87 15.6 1948-1973 ME2
KE1
ID1
1.73 16.5 1950-1973 ID2
HOTES: t statistics are given in parentheses for BO: parameter - 0.
-------
TABLE XI- 1C
FINAL SPECIFICATIONS FOR THE INVESTMENT MODULE
Behavioral Relationships
1.
X
"
U»
KAPPRt+1 - KAPPRt • .195771 QCUAVt + .00030014 NETAV,. + 196 .295 84 _-19 1-95 27.2
(-.86)
.35 _.47 IM 2.94
(-2.35)
HOTES: t BtatlatlCB In parentheses for HO: parameter - 0.
D
-------
In reviewing these results, a number of points should be noted:
• Significance of the estimated parameters;
Of the total number of 44 estimated model parameters, 20 are
significant at the 2 percent level, 4 at 2.5 percent, and
7 at 5 percent. Of the remainder, 7 are significant at the
10 percent level of significance, 5 at 20 percent, and one at
30 percent. Generally, no equation contains more than one
"less significant" (or "insignificant") parameter; every
coefficient that is crucial to the estimation of primary prices
and production, which are the central focus of the model, are
highly significant.
It should be noted in this connection that the reported
r-squares are, in at least three cases, quite low. These
reported r-squares are not of the usual type. The computer
software used to perform the two-stage estimates (more on
this below) reports the multiple correlation coefficient
associated with the instrumental variables rather than with
the original variables. Consequently, the reported r-square
is meaningless in the sense that it does not represent the
proportion of the total variation explained by the estimated
equation expressed in the original variables.
e Econometric criteria used;
The r-square and the t statistics are only two of the criteria
used for evaluating the statistical performance of econometric
models. In our analysis, we hence did not concentrate on these
statistics to the exclusion of all others. In order of
importance, our concerns were that (1) each equation be
theoretically plausible, (2) the sign of each coefficient be
theoretically correct, (3) the effects on estimators of serial
correlation be small, (4) the equations capture turning points,
(5) the implied speeds of adjustment be consistent with
available, but incomplete data. We then concentrated on the
r-squares and t statistics. In order to satisfy these five
stringent criteria, several alternative specifications of each
equation were examined and extensive hypothesis testing was
conducted. Although the final forms of the estimated equations
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Arthur D Little Inc
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do not, of course, satisfy all of these criteria perfectly,
the Durbin-Watson statistics are good, all coefficients are
of the correct sign and the adjustment speed appears to be
reasonable.
• Historical model simulation and performance:
The model was used to simulate the industry's growth and
evolution over the period 1964-1973. The purpose of this
exercise was not to simulate history with precision but
to verify the reliability of the model in general terms and
to assess the proximity and reasonableness of the model's
three parametric solution results. Of course, to test the
simulation powers of the model as a system, the industrial
cost curves, a key determinant of the model solutions, would
have to be adjusted to reflect the real factor prices and
capacity obtaining in each year of the simulation period.
This was not done. However, even without fine-tuning the
cost curves, the nonlinear model appears to do a creditable
job of simulating all but inventory behavior. Given the
relatively small size of the inventory changes, the poor quality
of the inventory data, and the minor role of inventory changes
in explaining primary copper prices beyond the very short-run,
it was decided that we could "make do" with these results.
One additional conclusion of this admittedly crude simulation
is that the effort devoted to developing the nonlinear version
of the model appears to have been worthwhile. The linear model,
the form most often employed in econometric work, is demonstratively
inferior.
• The Use of Dummy Variables;
The model includes a dummy variable for the occurrence and
duration of strikes. It was found that the inclusion of such
a strike variable improves some equations. Moreover, industry
representatives have indicated that, because of the nature of
the collective bargaining agreement, the timing and duration
of strikes could be predicted with reasonable accuracy. Conse-
quently, rather than ignoring it, we assumed that strikes would
occur and that future strikes would be likely to follow
historical patterns. We, however, consider this attempt to
include strike activity within the forecast period to be a
minor feature of the analysis.
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3. Data Sources and Problems
Numerous data sources have been used in model construction, including
published data from the Copper Development Association (CDA), American
Bureau of Metal Statistics (ASMS), U.S. Bureau of Mines, Engineering and
Mining Journal, results of a questionnaire survey of the industry, and the
annual company reports, among others, (e.g., such as internal ADL data
sources). The CDA time-series data on quantities (e.g., total copper
consumption, output of primary refined copper, etc.) were used, with cer-
tain modifications, mostly because this procedure provided some semblance
of accounting consistency.
The basic point to be made regarding data problems in the copper industry
is that it would take considerable effort to develop a comprehensive set
of internally consistent data accurately depicting this industry's acti-
vities. Existing data sources, are, to say the least, incomplete and in-
consistent. Hence, substantial effort had to be devoted to making sure
that the data used were largely internally consistent and of reliable ac-
curacy. Estimates of productive capacity at the mining/milling and smelt-
ing/refining levels required far greater effort than originally anticipated.
4. Econometric Estimation Techniques Used
Both the linear and nonlinear versions of the model are linear in the
parameters. Hence, linear estimation techniques were used. The data
for the estimation usually covered the period 1947-1974.
The equations in the model contain endogenous variables and a lagged de-
pendent variable on the right-hand side. The technique used in the model
recognizes both these problems. The technique is that suggested by Fair
and is essentially a combination of 2SLS and a correction for autocor-
relation. In general, the autocorrelation correction used was the
iterative Cochrane-Orcutt technique.9 There is the danger, however, that
this technique may lead to a local rather than global minimum of the sum
of squared residuals.10 When this likelihood arose, the Hildreth-Lu scan-
ning technique was used.11 The Hildreth-Lu technique, given the use of
a fairly refined grid, will give a global minimum.12 Full information
(3SLS) techniques or mixed 2SLS/3SLS techniques were not utilized, because
the increased computational and analytical effort was judged unnecessary.
At several junctures in the course of the econometric analysis, the natural
desire to fully analyze, formulate and test sharp behavioral hypotheses
could not be completely fulfilled. The greatest analytical effort and
consequently most thorough hypothesis testing has focused on demand for
refined copper by fabricators and semifabricators, inventory behavior, the
supply curves for the secondary producers, along with detailed engineering
analysis of the cost functions for the primary producer. On the whole, the
principal focus of the econometric analysis has been to develop sound
behavioral specifications into a well-functioning simulation model. As a
result, the econometric analysis was conducted until the behavioral
specifications worked well in the model.
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13
5. Mathematical Solution of the Model
In spite of their functional, as well as pragmatic* desirability,, the use
of simultaneous nonlinear equations presented solution difficulties that
were not easily overcome. Finally, a modified Newton-Raphson technique
that is insensitive to the initial guess for the root was developed and
used. It so happens that solution convergence using a Newton-Raphson
technique is highly dependent upon the initial guess for the root. It
was discovered fairly early that the use of the previous year's nonlinear
parametric solutions and/or the use of the previous year's linear model
solutions did not provide an "initial guess" good enough for convergence.
In order to annually simulate an unfolding reality over a ten-to-twenty
year period, it was hence necessary to develop a Newton-Raphson technique
that is essentially independent of the initial guess for the root. In
spite of this solution technique, the set of nonlinear equations were
found to become ill-conditioned given some extreme values of the exogenous
variables. For these reasons, the linear form of the model has been re-
tained in order to back up the nonlinear model if "convergence" or "ill-
conditioning" problems arise.
6. Basic Differences Between This and Other Econometric Models of
the Copper Industry
Before designing, econometrically estimating and making operational the
present model, an effort was made to review carefully not only past econo-
metric studies of the copper industry but also the basic facts concerning
the industry's organization, structure and operation. A critical review
of the major recent econometric studies of the copper industry has been
presented in the Technical Appendix. The modeling effort reported here
differs trom past econometric models of the copper industry in three
respects.
First, an effort is made to develop a dynamic model of the industry, by
explicitly embedding into the model the industry's smelting/refining in-
vestment behavior. Accordingly, smelting/refining capacity expansion is
made endogenous in the present model. In this way, the model explicitly
deals with the relationship between market clearing, which is essentially
a short-run process and the creation of new capacity, which represents
the adjustment process between the short-run and the long-run.
Second, going beyond the essentially static linear case, an attempt has
been made here to develop a nonlinear model of the United States copper
industry, which we feel introduces a far greater element of realism
into the modeling effort.
Third, the industry supply curve utilized in past models for the primary
producers is not supported by microeconomic theory under conditions where
(as here) the behavior of the firms in the industry is not characterized
by perfect competition. Hence, an explicit attempt has been made here to
deal with the problem of a non-existent industry supply function by taking
two direct approaches. First, attention is focused on the cost schedules
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of the primary producers, by estimating engineering cost functions and by
building a link between capacity expansion and shifts in these cost func-
tions. Secondly, the "parametric approach" is introduced to bound the
model's solutions in any given year, as explained above.
Two additional points may be noted in this connection. First, the treat-
ment of secondary copper in past studies, where all secondary copper is
classified into old and new scrap, ignores the distinction between secon-
dary refined copper and nonrefined scrap, which we have tried to retain
in our analysis. Further, the categorization of ASARCO as a secondary
refiner displays a basic confusion not only between custom-refining and
toll-refining but also concerning ASARCO's role in the domestic copper
industry. Quite apart from its role as a producer of secondary refined
copper, ASARCO's activities have in the past included the smelting and
refining of its own mine output, as well as custom and toll smelting/re-
fining.
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CHAPTER XI
NOTES
1. Oskar Morgenstern, "Thirteen Critical Points in Contemporary
Economic Theory: An Interpretation", The Journal of Economic
Literature. Vol. X, No. 4, (December 1972), p. 1163.
2. Oligopoly is probably the main market structure of the business
world, a fact noted to the surprise of many in 1939 by Hall and
Hitch as part of the studies of "The Oxford Economists Research
Group." See R. L. Hall and C. J. Hitch, "Price Theory and Busi-
ness Behavior," Oxford Economic Papers (1939); reprinted in T.
Wilson and P. W. S. Andrews (eds.)» Studies in the Price Mechanism
(Oxford University Press, 1951).
3. For some discussion of this concept, see J. M. Clark, "Toward
a Concept of Workable Competition," The American Economic Review,
June 30, 1940, pp. 241-256 J. M. Clark, Competition as a Dy-
namic Process (Washington, D.C.: The Brookings Institution,
1961); C. E. Ferguson, A Microeconomic Theory of Workable Com-
petition (Durham: Duke University Press, 1964); or F. M. Scherer,
Industrial Market Structure and Economic Performance (Chicago:
Rand McNally, 1971), pp. 33-38.
4. For a discussion and bibliography on "full cost pricing", see
F. M. Scherer, Industrial Market Structure and Economic Per-
formance (Chicago: Rand McNally, 1971) pp. 173-179, 223-224, 290,
305-306; and Edwin Mansfield, Microeconomic Theory and Applica-
tions (New York: W. W. Norton and Co., Inc., 1975)
5. For greater elucidation of the use of a target or desired rate
of return see Lanzillotti, op. cit.; A. D. H. Kaplan, J. B.
Dirlam and R. F. Lanzillotti, Pricing in Big Business (Washing-
ton, D.C.: The Brookings Institution, 1958), Scherer, op. cit.,
Chapters 6-9.
6. See Scherer, op. cit.. Chapter 22; and Alfred Kahn, The Economics
of Regulation, Vols. 1 and 2 (New York: John Wiley and Sons,
1970).
7. In a dynamic model, even this lower bound could be broken.
8. R. C. Fair, "The Estimation of Simultaneous Equation Models with Lagged
Endogenous Variables and First Order Serially Correlated Errors,"
Econometrics. Vol. 38, May 1970, pp. 507-516.
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NOTES
(Continued)
9. D. Cochrane and G. H. Orcutt, "Application of Least Square Regres-
sions to Relationships Containing Autocorrelated Error Terms,"
Journal of the American Statistical Association, Vol. 44, 1949,
pp. 32-61.
10. R. S. Pindyck and D. L. Rubinfeld, Econometric Models and Economic
Forecasts, (New York: McGraw-Hill, 1976), pp. 111-112.
11. Hildreth and J. Y. Lu, "Demand Relations with Autocorrelated Dis-
turbances," Michigan State University. Agricultural Experiment
Station, Technical Bulletin 276. November, 1960.
12. R. S. Pindyck and D. L. Rubinfeld, op. cit., p. 112.
13. For a more detailed discussion, refer to Supporting Paper 6: "Mathe-
matical Solution of the Model," given in the Technical Appendix.
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XII. ECONOMIC IMPACT ANALYSIS
A. INTRODUCTION
This chapter presents an assessment of the economic impact of the
presently promulgated air and water pollution abatement and control
regulations on the United States copper industry over the period
1974-1987. As noted earlier, the objective of economic impact analysis
is to identify and assess what effects, if any, environmental
regulations would have on such key economic variables as prices,
output, consumption, investment, employment and international trade,
among others. It is also important to analyze the impact of compliance
on the industry's structure, by considering effects on the degree of
competitiveness or concentration, including effects on the international
competitive position of the domestic industry. Finally, it is necessary
to identify possible plant closures and assess regional or community
impacts.
One main causal route through which environmental regulations may lead
to such economic impacts is the additional cost borne by the industry
to meet environmental regulations. The costs of compliance with
environmental regulations, defined narrowly to include both capital
expenditures (fixed costs) and operating and maintenance expenses
(variable costs), cause an upward shift in the industry's pertinent
cost schedules, thus ultimately affecting prices, production, and the
whole range of economic variables indicated earlier. How precisely
compliance costs affect production costs (or supply) becomes, there-
fore, analytically important for an economic impact analysis1. Compliance
costs, serving generally as the central causal instrument, hence
represent an input into economic impact analysis; compliance costs and
economic impacts are, in this sense, not synonymous.
Another route through which environmental regulations may lead to such
economic impacts is by adversely affecting, directly or indirectly,
expansion in the industry's productive capacity. The promulgated
environmental regulations may directly affect capacity growth by
specifying in technical detail the conditions under which the industry
may or may not expand existing capacity or build new capacity.
Also, the effects on capacity growth may take a slightly indirect
form, with potentially equal consequences: compliance costs may
cause the actual shutdown of plants or may slow down capacity growth.
Alternatively, the uncertainty caused by the evolving nature of
environmental regulations plus costs of compliance may together impede
capacity growth by influencing the timing of investment as well as
perceptions concerning the riskiness of investment.
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In the case of the domestic copper industry, the direct capacity-
constraint or capacity-reducing influences of environmental regulations
compound the economic impacts of compliance costs as such.
To recapitulate further, it is generally necessary to develop a model
of the real world (i.e.,. the industry under consideration) which can
be used for impact analysis. This is primarily because model building
forces us to think clearly about and account for all the important
interrelationships involved in a .problem within a unified, internally
consistent analytical framework. With or without models, the basic
analytical issue at hand is to assess to what extent compliance with
environmental regulations will influence the course of a set of
pertinent economic variables (at the national, industry and regional
levels), over a period of time in the future. Therefore, economic
impacts are typically measured as differences from a set of baseline
forecasts. Baseline forecasts trace out the values that all pertinent
variables would take,-over a period of time, in the absence of
environmental regulations (or at least in substantial absence of
environmental regulations). With the regulations, both because of
increased costs of production due to compliance costs and the direct
and indirect adverse effects on capacity growth, the same variables
would take new values, over the same time period. The differences
are attributed to the environmental regulations.
We have assessed the economic impacts of the presently promulgated air
and water regulations on the United States copper industry by
developing and using an econometric model of the United States copper
industry. A general description of this model has been presented
in Chapter XI. A detailed description of the model is given in a
separate volume prepared as a technical appendix to this report .
The model is currently programmed to simulate the growth and evolution
of the industry year-by-year through 1987. The model is used to
develop annual forecasts over the period 1974-1987, which defines
the impact analysis period, under baseline conditions as well as under
alternative environmental scenarios. Under baseline conditions, the
model internally (endogenously) forecasts the industry's smelting/refining
capital expenditures for both replacement and expansion and therefore the
industry's smelter/refinery capacity growth. Under environmental
scenarios, smelter/refinery capacity growth is no longer internally
forecasted by the model for reasons detailed in Chapter X and summarized
below. For impact analysis it was necessary to conduct a smelter-by-
smelter analysis outside the model, develop alternative compliance and
capacity growth scenarios, build the results into the model and sub-
sequently use the model to determine the economic impacts of both
compliance costs and direct effects on capacity growth simultaneously.
What the model does for impact analysis purposes, therefore, is simply
to spell out in comprehensive quantitative terms the implications of
both compliance costs and direct effects on capacity growth.
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In the rest of this chapter, our aim is to present and interpret main
economic impacts of alternative environmental scenarios. To this end,
we start with a definition of the baseline conditions and forecasts
which provide a point of reference for impact analysis. Following this,
we defined several environmental scenarios (e.g., "constrained capacity",
"reduced capacity") for economic impact and sensitivity analysis. These
environmental scenarios basically represent alternative pictures as to
the industry's ability to change domestic smelter capacity during the
impact analysis period under the presently promulgated environmental
regulations. A discussion of the economic impact results under these
environmental scenarios, using the model, is presented next. We then
discuss the sensitivity of the impact results to alternative sets of
assumptions on capacity growth and compliance costs.
The impact results derived (quantitatively) from the model have broader
implications or raise other issues that we have attempted to identify
next. These broad issues/implications, some of which would be of
obvious policy concern, are identified by reference to three major
areas: (a) the present regulatory environment, (b) issues pertaining
to the growth of the domestic copper industry, and (c) international
economic implications.
Appendix D contains model printouts giving baseline forecasts and the
results of the key scenarios tested.
B. BASELINE CONDITIONS AND FORECASTS
Baseline conditions, or forecasts, help define the growth, evolution
and performance of the United States copper industry, over the impact
analysis period, in the absence (or substantial absence) of the
presently promulgated environmental regulations and, hence, provide a
point of reference from which comparisons can be made in order to
gauge the relative and absolute magnitude of economic impacts.
Before presenting the baseline forecasts, a number of points relating
to the definition, interpretation, and analytical use of baseline
conditions deserve emphasis. These points refer to (1) how baseline
conditions help measure impacts, (2) what they include or exclude in
terms of environmental regulations, (3) how the impact analysis period
is defined, and (4) exactly how the baseline conditions are defined
in terms of the assumptions made on macroeconomic growth and related
factors.
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1. Use of Baseline Conditions in Impact Analysis
We should note immediately that many baseline forecasts are possible
for the future, each representing a particular combination of an
expected set of circumstances. For this reason, a given set of baseline
forecasts should be viewed not as the only or even as the most likely
future state of the world but rather as a fairly reasonable approximation
of a generally plausible future picture of the world which can be used
as a benchmark for comparison, keeping in mind that many other and
perhaps equally plausible future states of the world may be possible.
Further, it is important to bear in mind that when economic impacts are
measured as differences from a given set of baseline forecasts,
expressing these differences in absolute terms could magnify the
impacts if, for example, higher baseline conditions are hypothesized
(e.g., higher macroeconomic growth, etc.). Conversely, the opposite
effect, too, could potentially result. In short, to minimize potential
misuses of the baseline concept in impact analysis, emphasis is generally
put not on absolute differences from baseline conditions but on relative
(percentage) differences.
Keeping these two basic points in mind, the model was run under numerous
baseline scenarios before it was used for impact analysis, to safeguard
against any systematic bias in the measurement of impacts. To this end,
we have specifically examined the following:
• alternative macroeconomic recovery and growth scenarios ("slow",
"moderate", "robust"), including expected economic recovery and
growth in Europe;
• alternative sets of forecasts of LME refined copper prices, con-
sistent with the forecasted macroeconomic conditions (both in the
United States and Europe) and reflecting expected growth in mined
copper output in the rest of the world;
• alternative estimates of unit costs of production, as well as a
close analysis of increases in costs of production at production
levels near full capacity (e.g., in the region beyond roughly
86 percent of installed capacity);
• alternative mining/milling investment levels, estimates of the cost
of capital, target rates of return, machinery/equipment retirement
rates, capital charge coefficients on existing and new (both
productive and pollution control) investment; and,
• alternative estimates of future aluminum production costs and prices,
particularly in view of the threat of the cartelization of bauxite
and the energy content of aluminum production.
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We have generally found the model's results to be directionally correct,
consistent with theory, and extremely stable, under a broad range of
assumptions/conditions. The impacts measured in relative terms are
found to be generally similar under alternative combinations of
baseline conditions, incorporating "high", "low", and "standard"
macroeconomic growth scenarios.
2. Environmental Regulations Included under Baseline Conditions and
Related Issues
The baseline forecasts assume the existence of National Ambient Air
Quality Standards (NAAQS) but the absence of additional restrictions
regarding how such standards might be achieved. This means, in other
words, nominal industry compliance with NAAQS, through minimal
permanent control and extensive use of SCS, but no constraints on
the modes of capacity growth. As a related matter, the baseline costs
for new capacity assume that this capacity would be built with acid
plants for controlling strong streams, but without other pollution
control measures. Pollution control costs are hence treated as part
of the cost of production.
3. Definition of the Impact Analysis Period
Definition of the impact analysis period also specifies the period
over which baseline conditions need to be hypothesized. Typically,
the impact analysis period pertains to the future, not to the past.
However, in this case, the impact of environmental regulations in
past years could not be entirely ignored. Hence, the impact analysis
period was defined as the 1974-1987 time span, where 1974, the base
year in our analysis, is also the start of the impact analysis period.
The year 1987 represents the terminal year of the second Nonferrous
Smelter Order (NSO) period as specified under the Clean Air Act
Amendments of 1977.
This provides both a practical and a theoretical compromise; while it
correctly emphasizes future impacts, it does not altogether ignore
impacts created in the past. At the same time, it recognizes the near
intractability of ascertaining clearly the impacts created in the past,
especially before 1974, given the presence of many intervening factors
which are not at all easy to disentangle. For example, industry
representatives have indicated that the unprecedented price increases
and the consequent shortage mentality in 1974 might not have occurred
(or would have occurred to a much smaller degree) if the industry's
investment resources were not diverted during and prior to this period
into unproductive pollution abatement investment. Unfortunately,
such propositions are not amenable to unambigious analysis or proof.
Consequently, that part of the baseline model simulation which
specifically covers the 1974-1977 period is only an attempt at
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determining the course of evolution the industry would have followed
over these years, in the substantial absence of environmental regulations
but given the macroeconomic and related conditions which have, in fact,
prevailed.
At any rate, the 1974-1987 period allows for a sufficiently long time
horizon, as far as the future is concerned (i.e., 1978-1987) for
spelling out in reasonable detail the short, intermediate and long-
term implications of the presently promulgated environmental regulations.
Such a definition also adequately accounts for the industry's long-run
adjustment process, in terms of productive capacity expansion, in view
of the fact that it would probably take as long as seven years for a
minimum efficient size smelter to be brought cm-stream.
4. Assumptions on Macroeconomic Growth and Related Factors
The macroeconomic growth scenario that is assumed generally reflects
moderate and steady growth in overall economic activity in the United
States. The European economies, meanwhile, are expected to follow a
slightly slower recovery and growth path, lagging the United States.
Appendix D contains a tabulation of the numerical values assumed for
all the exogenous variables in the model in defining the baseline
conditions, including the assumed macroeconomic growth rates (i.e.,
growth in the industrial production index for manufactured durable
goods), the LME copper prices, future aluminum prices, industry
average variable costs, industry mine/mill investment, and others.
The assumptions made on these exogenous variables are generally
congruent with each other (e.g., all else being equal, low LME prices
would be consistent with slow economic recovery in Europe).
5. Baseline Forecasts
Baseline forecasts for the United States copper industry reflecting
the above considerations are tabulated in Table XII-1, for such
selected variables as total copper consumption, net imports,
production of primary refined copper, secondary refined copper supply
(transacted on the "outside" market), total production of scrap
copper that is directly consumed, prices of domestic primary refined
copper, secondary refined copper prices (translated on the "outside"
market), and prices of scrap copper. Also tabulated are employment,
total effective domestic smelter/refinery capacity and capacity
utilization rates.
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TABLE XII-1
TABULATION OF BASELINE FORECASTS FOR THE UNITED STATES
COPPER INDUSTRY FOR SELECTED VARIABLES. 1974-1987
(Selected Years)
(All dollar figures in 1974 prices; quantities are in thousands of short tons.)
Description of variables _ 1974 _ 1977 __ 1979 ___ 1981 _ 1983 _ 19JJ5
Total copper consumption" 3,397.8 3,455.1 3,792.4 4,027.3 4,221.8 4,567.9 4.864.3
Net imports6 167.1 239.6 274.3 361.5 356.0 513.8 571.2
Primary refined copper production8 1,792.7 2,060.7 2,191.6 2,314.7 2,477.5 2.688.4 2,897.3
Total quantity of scrap generated
(which is directly consumed) 1,229.5
Primary^refined copper prices
Total employment
85.2
29.5
77.2
88.5
69.6
236.3 243.0 243.9
874.2 1,078.0 1,118.3
56.4 68.9 72.9
58.2 75.6 78.2
41.9 57.8 60.9
250.0
1,153.9
76.6
80.5
63.7
248.5
1,136.2
74.8
79.3
62.3
252.1
1,159.0
,,..
80.8
64.1
Primary smelter capacity (thou-
sands of short tons of cop- ... . Bno i o A« •> t inn n
per production per year) 1,992.0 2,380.5 2,506.0 2,615.2 2,808.1 3,056.2 3,300.0
Capacity utilization (%) 90.0 86.6 87.5 88.5 88.2 88.0 87.6
6 45,902 51,410 54,551 57,428 61,302 63,338 71,094
NOTES;
Domestic production of refined copper by primary producers, from all sources (domestically mined copper,
imported ore/concentrate/blister/scrap, domestically generated unalloyed scrap): although it contains
some secondary refined copper, it Is exclusive of secondary refined cutout produced bv secondary refiners.
Net of exports.
clncludes primary and secondary refined copper, directly consumed scrap and imoorts.
dRefined copper from scrap sold on the "outside" market.
eTotal full-time equivalent employment (number of persons) including mining and milling, smelting and
refining employment at all domestic primary producer facilities; employment bv secondary smelters/refiners
is excluded.
SOURCES: COPMOD I (i.e., the acronym used for the Econometric Simulation and Imoact Analysis Model of the
U.S. Copper Industry ,-developed as part of this project) refer to Chanter XI for a general descriotlon
and to the Technical Appendix accompanying this volume for a detailed description of this model).
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C. ALTERNATIVE ENVIRONMENTAL AND INDUSTRY CAPACITY GROWTH SCENARIOS
FOR ECONOMIC IMPACT ANALYSIS
This section discusses, in less technical terms than in Chapter X, the
impact of the presently promulgated air and water pollution control
regulations on domestic primary smelter capacity growth over the next
decade, with the purpose of defining alternative capacity growth
scenarios for economic impact analysis.
1. Domestic Primary Smelter Capacity Growth in the Past:
A Recapitalization
Chapter VI contained a detailed description of the pattern of domestic
primary smelter capacity expansion in the past. The basic conclusion
emerging from this discussion was that the domestic copper industry
has traditionally preferred incremental expansion at existing sites,
rather than the construction of new (greenfield) smelters. The lead
time required for planning, engineering, construction, shake-down and
start-up for small expansions at existing sites is about two-to-three
years while that for new (greenfield) smelters is about seven years,
given the current state of the industry.
2. Impact of Regulations on Domestic Primary Smelter Capacity
Growth in the Future; Main Conclusions
Chapter X presented a detailed discussion of the impact of the Clean
Air Act (including the Clean Air Act Amendments of 1977) on modes of
capacity growth in the industry. Two major conclusions pertaining to
smelter capacity expansion were drawn from this discussion. First,
existing regulations do not allow for small expansions of the type
used traditionally by the industry. Second, while there are some
uncertainties, the regulations appear to allow the construction of NSPS
caliber (or better) smelters in new locations and also in existing
smelter locations. However, because of the lead time requirements,
major new capacity of this type is not likely to come on-stream before
1985. Furthermore, the reverb-based smelters will have to undergo
major alterations to non-reverb technology by 1988 or shut down.
These major findings indicate that the currently promulgated environ-
mental regulations will effectively constrain domestic capacity growth
until 1985. In the interim, minor increases in capacity are expected
for hydrometallurgical processing of oxides and expansion at non-
reverb smelters.
3. Plausible Patterns of Domestic Primary Smelter Capacity Growth
in the Future: An Exploration of Alternatives
Between now and January 1, 1988, various possibilities exist for the
expansion (or contraction) of the smelting capacity in the copper
industry. These possibilities are listed below. It should be noted
that every available capacity expansion path is not equally plausible.
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The various paths are:
• All existing smelters will be in compliance by January 1, 1988;
• One or more of the existing smelters will be closed down sometime
during this period, while all others will be in compliance
by 1988;
• One or more new (greenfield) smelters will come on-stream during
the period 1985-1987;
• Additional electrowinning capacity will be brought on-stream
over this period (i.e., 1978-1987); and,
• Four nonreverberatory furnace smelters (Inspiration, Anaconda,
Hidalgo, and Garfield) will be permitted to increase their
combined effective capacity by about 120,000 annual short tons
of refined copper equivalent production as long as they use
NSPS caliber technology.
Two additional channels relating to copper supply have been omitted
from this list: secondary copper (i.e., refined scrap or scrap that
is directly consumed) and imports. Both of these supply channels are
treated endogenously in the model; the secondary sectors enter the
model as two supply equations and imports are handled through a
"net exports" (or "net imports") equation.
4. Definition of Basic Capacity Growth Scenarios for Economic
Impact Analysis
As noted in Chapter X, there are many alternative routes through which
domestic primary smelter capacity might effectively change over the
next decade. From these we have selected two capacity change routes
as the most plausible for the purpose of economic impact analysis.
They are labeled "Constrained Capacity" and "Reduced Capacity".
These two basic scenarios are defined as follows:
a. Constrained Capacity
This scenario assumes that none of the existing smelters will shut
down; all smelters currently employing reverberatory furnaces will
make progress towards compliance by January 1, 1988 and that the
bulk of the smelter conversion costs would be incurred during the
second NSO period (i.e., 1984-1987); and that no new (greenfield)
smelter capacity will be coming on-stream during this period, and
only marginal electrowinning capacity is expected to be introduced
over the five-year period 1983-1987 (20,000 annual short tons of
refined copper equivalent per year; 100,000 annual short tons
cumulatively over the five year period).
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b. Reduced Capacity
This scenario, which is Che more severe, assumes that three smelters
(i.e., Phelps Dodge-Douglas, Kennecott-McGill, and Asarco-Tacoma or
an equivalent smelter) will close down in 1983, for various reasons
noted in Chapter X. These three smelters have a combined capacity of
268,000 annual short tons of refined copper equivalent production
(i.e., Douglas 90,000; McGill 78,000; and Tacoma 100,000 annual short
tons). As under the Constrained Capacity scenario, no new (greenfield)
smelter capacity will be coming on-stream during this period, and only
marginal electrowinning capacity is expected to be introduced during
the five-year period 1983-1987 (same as under Constrained Capacity).
c. Capacity Growth Scenarios for Sensitivity Analysis
As noted below, a series of sensitivity tests were performed by
modifying the Constrained Capacity and Reduced Capacity scenarios.
The various sensitivity test scenarios are defined in detail below.
These sensitivity tests incorporated the following principal modes
of capacity growth:
• NSPS Expansion: This assumes that the four non-reverb smelters
will be permitted to expand by 1982 by a cumulative total of
120,000 annual short tons of refined copper equivalent.
• New Smelters: This assumes two new (greenfield) smelters will
come on-stream, the first in 1985 and the second in 1987, each
with a capacity of 200,000 annual short tons of refined copper
equivalent.
• Effect of SCS: This assumes a 10 percent reduction in existing
reverb-based capacity because of the use of SCS.
D. DISCUSSION OF ECONOMIC IMPACTS UNDER "CONSTRAINED CAPACITY" AND
"REDUCED CAPACITY" SCENARIOS
The model has been used to measure economic impacts under the Constrained
Capacity and Reduced Capacity scenarios, as defined above. Model
results under the two capacity scenarios, together with assumptions
on exogenous variables, are presented in Appendix D, which also contains
the baseline forecasts.
Estimated pollution abatement and control capital expenditures, as well
as operating and maintenance costs, over the period 1974-1987 under the
environmental scenarios just described, are given in Table XII-2.
Capital expenditures for pollution abatement and control undertaken
in a given year do not necessarily measure actual costs incurred in
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TABLE XI1-2
ESTIMATES OF POLLUTION ABATEMENT AMD CONTROL EXPENDITURES
BY THE UNITED STATES COPPER INDUSTRY*1. 1974-1987
(In millions of 1974 dollars)
Year
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
198S
1986
1987
.974-
1987
19 78-
L967
CONSTRAINED CAPACITY
Capital Expenditures
Non-reverberatory
Related Capital
Expenditures
226.0
240.8
156. 0
90.0
60.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
-
1,092.8
380.0
Reverberator?
Conversion
Investment0
-
-
-
-
-
-
-
-
-
156.5
156.5
156.5
156.5
156.5
782.5
782.5
Total
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
196.5
196.5
196.6
196.5
196- 5
1,875.3
1.162.5
Operating
and
Maintenance
Costs6
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.6
90.0
89.8
90.1
90.2
90.0
1,103.0
905.2
TOTAL
283.4
290.1
204.8
132.3
158.0
128.2
129.5
129.8
129.6
286.5
286.3
286.6
286.7
246.5
2,978.3
2,067.7
REDUCED CAPACITY
Capital Expenditures
Non-reverberatory
Related Capital
Expenditures
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
40.0
-
1,092.8
380.0
Reverberatory
Conversion
Investment
-
-
-
-
-
-
-
-
-
126.7
126.7
126.7
126.7
126.7
633.5
633.5
Total
226.0
240.8
156.0
90.0
60.0
40.0
40.0
40.0
40.0
166.7
166.7
166.7
166.7
126.7
1,726.3
1,013.5
Operat ing
and
Maintenance
Costa
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.9
78.6
78.4
78.5
78.5
78.4
1,045.6
847.8
TOTAL
283.4
290.1
204.8
132.3
158.0
128.2
129.5
129.8
129.9
245.3
245.1
245.2
245.2
205.1
2,771.9
1,861.3
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NOTES;
aNot including secondary smelters/refiners.
Figures given here refer to expenditures (dollar outflows), not to
increased fixed costs. In the model, these investment figures are
translated into annualized fixed costs through the use of capital
charge coefficients (refer to Arthur D. Little, Inc., Econometric
Simulation and Impact Analysis Model of the U.S. Copper Industry.
Technical Appendix to this report.
Estimated by using the following formula:
s ..nr e
Irc = u • (Kn - Kj - K0)
where
Irc : reverberatory conversion investment in year t (t = 1983,
* .... 1987), in millions of 1974 dollars:
u : reverberatory conversion investment per unit of capacity
(assumed at about $600 per annual short ton of refined
copper equivalent production; this cost assumption, which
represents only a rough first approximation, requires a
more detailed case-by-case examination);
K8 : total United States smelter capacity at the beginning of
0 1978 (i.e., year "o"), defined in terms of annual short
tons of refined copper equivalent production (annual short
tons) including electrowinning capacity (estimated at
2,326 annual short tons);
Knr : nonreverberatory smelter capacity at the beginning of
0 1978 (estimated at 746,000 annual short tons), consisting
of the following:
Phelps Dodge-Hidalgo (100,000 annual short tons)
Kennecott-Garfield (280,000 annual short tons)
Anaconda-Anaconda (216,000 annual short tons)
Inspiration-Inspiration (150,000 annual short tons);
Ke : total estimated other smelter-equivalent capacity (basically
0 electrowinning) at the beginning of 1978 (estimated at
276,000 annual short tons);
T : period of years during which conversion investment would
be assumed to take place (assumed to be five years; the
1983-1987 period is assumed as the most likely period for
such investment to take place; it is further assumed that
such investment will be spread equally over each year
during this period).
XII-12
Arthur D Lit tie Inc
-------
Same as Note "c", except that the reverberatory conversion investment
given here exclude three smelters with reverberatory furnaces which
are assumed to be closed down in 1983 (these are: Phelps-Dodge,
90,000 annual short tons; Kennecott-McGill, 78,000 annual short tons;
and Asarco-Tacoma, 100,000 annual short tons, or an equivalent smelter)
see the accompanying text for more detail.
Increases in annual variable costs due to pollution abatement and
control, estimated at about 1.8 cents per pound over the period
1974-1977 and 2.5 cents per pound therefater. The estimates given
here are obtained by multiplying the refined copper equivalent
smelter production levels (adjusted for electrowinning capacity) by
1.8c/lb. for years 1974-1977 and by 2.5c/lb. for years 1978-1987.
The production data used for years 1974-1977 refer to actual domestic
refined copper production levels (from domestic and foreign ores),
as published by the United States Bureau of Mines; the data for years
1978-1987 are the model forecasts of domestic refined copper
production levels by primary producers (under the two basic
environmental impact scenarios).
SOURCE; Arthur D. Little, Inc.
XII-13
Arthur D Little Inc
-------
TABLE XII-3
X
M
M
I
I
D
c:
f+
r>
TRANSLATION
OF
ESTIMATED
UNITED STATES
POLLUTION ABATEMENT AND CONTROL CAPITAL EXPENDITURES BY THE
COPPER INDUSTRY INTO ANNUALIZED FIXED COSTS, 1970-1987.
(Pollution Abate
Years When
Fixed Costa
Are Faced
1970
1971
1972
1973
1974
1975
1976
1977
197B
1979
1980
1981
1982
1983-
1984
1985
1986
1987
1970
20.9
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
0.63
0.63
0.63
0.63
0.63
1971
30.0
5.10
5.10
5.10
5.10
5.10
5.10
5.10
5.10
5.10
5.10
5.10
5.10
5.10
0.90
0.90
0.90
0.90
1972
146.4
24
24
24
24
24
24
24
24
24
24
24
24
24
4
4
4
.89
.89
.89
.89
.89
.89
.89
.89
.89
.89
.89
.89
.89
.39
.39
.39
1973
204
34.
34.
34.
34.
34.
34.
34.
34.
34.
34.
34.
34.
34.
6.
6.
.6
78
78
78
78
78
78
78
78
78
78
78
78
78
14
14
Bent
1974
226.0
38
38
38
38
38
38
38
38
38
38
38
38
38
6
1. a.1
.42
.42
.42
.42
.42
.42
.42
.42
.42
.42
.42
.42
.42
.78
L« _u
(in millions of 1974 dollars)
"CONSTRAINED CAPACITY" SCENARIO
and Control Expenditures, by Year in which such expenditures are incurred)
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
240.8 - 156.0 90.0 60.0 40.0 40.0 40.0 40.0 196.5 196.5 196.5 196.5 156.5
40.94
40.94 26.52
40.94 26.52 15.30
40.94 26.52 15.30 10.20
40.94 26.52 15.30 10.20 6.80
40.94 26.52 15.30 10.20 6.80 6.80
40.94 26.52 15.30 10.20 6.80 6.80 6.80
40.94 26.52 15.30 10.20 6.80 6.80 6.80 6.80
40.94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 33.41
40.94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 33.41 33.41
40.94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 33.41 33.41 33.41
40.94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 33.41 33.41 33.41 33.41
40.94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 33.41 33.41 33.41 33.41 26.61
.j.i r»ko» «,«...ii.ati>m ia eomnuted internally}, reflect the following major assumptions:
Annualized
Fixed Coats
By Year8
3.55
8.65
33.54
68.32
106.74
147.68
174.20
189.50
199.70
206.50
213.30
220. 10
226.90
257.39
286.60
299.51
304.28
299.25
(1) capital
-
that the full initial cost ia paid off in 13 years.
SOURCE: Arthur D. Little, Inc., estimates.
-------
TABLE XII-4
TRANSLATION OF ESTIMATED POLLUTION ABATEMENT AND CONTROL CAPITAL EXPENDITURES BY THE
UNITED
STATES COPPER INDUSTRY INTO ANNUALIZED FIXED COSTS, 1970-1987
(in millions of 1974 dollars)
"REDUCED CAPACITY" SCENARIO
(Pollution Abatement and Control Capital Expenditures, by Year in which such expenditures are incurred)
Years When
Fixed Costs
Are Faced
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1970
20
3.
3.
3.
3.
3.
3.
3.
3.
3.
3.
3.
3.
3.
0.
0.
0.
0
0.
MOTES: "These
.9
55
55
55
55
55
55
55
55
55
55
55
55
55
63
63
63
63
63
1971
30
5.
5.
5.
5.
5.
5.
5.
5.
5.
5.
5.
5.
5.
0.
0.
0.
0.
.0
10
10
10
10
10
10
10
10
10
10
10
10
10
90
90
90
90
estimates,
. _ j .
1972
146
24.
24.
24.
24.
24.
24.
24.
24.
24.
24.
24.
24.
24.
4.
4.
4.
.4
89
89
89
89
89
89
89
89
89
89
89
89
89
39
39
39
1973
204.6
34.78
34.78
34.78
34.78
34.78
34.78
34.78
34.78
34.78
34.78
34.78
34.78
34.78
6.14
6.14
1974
226.0
38.42
38.42
38.42
38.42
38.42
38.42
38.42
38.42
38.42
38.42
38.42
38.42
38.42
6.78
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
240
40.
40.
40.
40.
40.
40.
40.
40.
40.
40.
40.
40.
40.
obtained outside the model
_£ mi -.___ f n\ e* _j _L___
.0 156.0 90.0 60.0 40.0 40.0 40.0 40.0 166.7 166.7 166.7 166.7 126.7
94
94 26.52
94 26.52 15.30
94 26.52 15.30 10.20
94 26.52 15.30 10.20 6.80
94 26.52 15.30 10.20 6.80 6.80
94 26.52 15.30 10.20 6.80 6.80 6.80
94 26.52 15.30 10.20 6.80 6.80 6.80 6.80
94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 28.34
94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 28.34 28.34
94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 28.34 28.34 28.34
94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 28.34 28.34 28.34 28.34
94 26.52 15.30 10.20 6.80 6.80 6.80 6.80 24.34 28.34 28.34 28.34 21.54
(where annualization is computed internally), reflect the following major assumptions:
Annual ized
Fixed Costs
By Year8
3.55
8.65
33.54
68.32
106.74
147.68
174.20
189.50
199.70
206.50
213.30
220.10
226.90
252.32
276.46
284.30
284.00
273.90
(1) capital
imal fftnf
.........
recovery period of 13 years, (2) fixed charge coefficient of 0.17 (i.e., 17 percent), (3) continued fixed cost at 3 percent of original cost
beyond the first 13 years, to reflect continued general administrative expenses and replacement investment. It ia implicit in these assumptions
that the full initial cost is paid off in 13 years.
SOURCE: Arthur D. Little, Inc., estimates.
-------
that or subsequent years. This is because the use of a machine or
equipment extends many years over which its initial cost is amortized.
Hence, the real cost of machinery or equipment is spread over a period,
typically defined as the capital recovery period in investment analysis,
and encompasses depreciation, interest payments and the like. These
are fixed costs, faced annually, over many years. It is therefore
necessary to translate initial pollution abatement and control invest-
ment levels into fixed costs spread over many years, using capital
charge coefficients. This is accomplished in Tables XII-3 and XII-4.
Tables XII-5 and XII-6 summarize the estimated annualized fixed
costs and variable (operating and maintenance) costs over the period
1974-1987 (in constant 1974 dollars) due to pollution abatement and
control under the two environmental scenarios.
The combined effects of both capacity constraints and pollution control
expenditures in terms of their economic impacts are summarized below.
1. Summary of Economic Impacts
Table XII-7 compares the baseline with the Constrained Capacity and
Reduced Capacity Scenario results. The impacts can be summarized
as follows:
a. Impact on Prices
Compared to the baseline, real prices in 1981 are 10.4 percent higher
under both Constrained Capacity and Reduced Capacity scenarios. In 1983,
real prices are 15.8 percent higher under Constrained Capacity and
26.1 percent under Reduced Capacity, the difference between the two
reflecting the assumed closing down of three smelters in that year.
During the period immediately after 1983, price impacts show a sharp
deterioration. Under Constrained Capacity, for example, prices are
23.3 percent higher in 1985 and 29.4 percent higher in 1987 than those
prevailing under baseline conditions. These reflect the combined
effects of both compliance costs and the limitation on capacity growth.
The price impacts become even higher under Reduced Capacity: real
prices are 32.8 percent above that expected to prevail under baseline
conditions in 1985 and 38.7 percent in 1987.
XII-16
Arthur D Little Inc.
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TABLE XII-5
ANNUALIZED FIXED AND VARIABLE (OPERATING AND MAINTENANCE)
COSTS
DUE TO POLLUTION ABATEMENT AND CONTROL, THE
UNITED STATES
COPPER INDUSTRY, 1974-1987
Years
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
(In millions
"CONSTRAINED
Annualized
Fixed Costsa
106.7
147.7
174.2
189.5
199.7
206.5
213.3
220.1
226.9
257.4
286.6
299.5
304.3
299.3
of 1974 dollars)
CAPACITY" SCENARIO
Variable
(Operating and
Maintenance) Costs
57.4
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.6
90.0
89.8
90.1
90.2
90.0
Total
Annualized Costs8
164.1
197.0
223.0
231.8
297.7
294.7
302.8
309.9
316.5
347.4
376.4
389.6
394.5
389.3
ROTESi ait should be noted that annualized fixed costs over the period
1974-1987 include annualized fixed costs due to pollution abatement
and control capital expenditures incurred in earlier years.
SOURCE: Based on Tables XII-2 and XII-3.
XII-17
Arthur D Little Inc
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TABLE XII-6
ANNUALIZED FIXED AND VARIABLE (OPERATING AND MAINTENANCE)
COSTS-DUE TO POLLUTION ABATEMENT AND CONTROL. THE UNITED STATES
COPPER INDUSTRY. 1974-1987
(in millions of 1974 dollars)
"REDUCED CAPACITY" SCENARIO
Annualized
Years
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Fixed Costs
106.7
147.7
174.2
189.5
199.7
206.5
213.3
220.1
226.9
252.3
276.5
284.3
284.0
273.9
Variable
(Operating and
Maintenance) Costs
57.A
49.3
48.8
42.3
98.0
88.2
89.5
89.8
89.9
78.6
78.4
78.5
78.5
78.4
Total
Annualized Cost s
161.4
197.0
223.0
231.8
297.7
294.7
302.8
309.9
316.8
330.9
354.9
362.8
362.5
352.3
a
NOTES:
It should be noted that annualized fixed costs over the period
1974-1987 include annualized fixed costs due to pollution
abatement and control capital expenditures incurred in earlier
years.
SOURCE: Based on Tables XII-2 and XII-4.
XII-18
Arthur D Little Inc
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TABLE XII-7
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATES COPPER INDUSTRY
1974-1987; SUMMARY OF SELECTED RESULTS
(all dollar figures in 1974 prices; quantities are in thousands of short tons)
IMPACT VARIABLE/SCENARIO 1974 1977 1979 1981 1983 1985 1987.
Primary Refined Copper Prices
Baseline - - 77.2 56.4 68.9 72.9 76.6 74.8 77.2
Constrained Capacity 77.3 59.4 73.5 80.5 88.7 92.2 99.9
Reduced Capacity 77.3 59.4 73.5 80.5 96.6 99.3 107.1
Z Differences from Baseline
Constrained Capacity 0.1 5.3 6.7 10.4 15.8 23.3 29.4
Reduced Capacity 0.1 5.3 6.7 10.4 26.1 32.8 38.7
Primary Refined Copper Production
Baseline - - 1792.7 2060.7 2191.6 2314.7 2477.5 2688.4 2897.3
Constrained Capacity 1790.6 1971.2 2039.6 2072.4 2095.6 2136.6 2175.5
Reduced Capacity 1790.6 1971.2 2039.6 2072.4 1867.3 1905.5 1943.0
X Difference from Baseline
Constrained Capacity -0.1 -4.3 -6.9 -10.5 -15.4 -20.5 -24.9
Reduced Capacity -0.1 -4.3 -6.9 -10.5 -24.6 -29.1 -32.9
"laseline" 167.1 239.6 274.3 361.5 356.0 513.8 571.2
Constrained Capacity 167.4 251.5 292.5 391.8 404.0 583.0 661.1
Reduced Capacity 167.4 251.5 292.5 391.8 435.2 611.2 689.6
it Differences from Baseline
Constrained Capacity 0.2 4.9 6.6 8.4 13.5 13.5 15.7
Reduced Capacity 0.2 4.9 6.6 8.4 22.2 18.9 20.7
8en 3397.8 3455.1 3792.4 4027.3 4221.8 4567.9 4864.3
Constrained Capacity 3396.9 3405.9 3708.6 3899.7 4019.3 4274.1 4474.1
3396.9 3405.9 3708.6 3899.7 3917.0 4147.2 4345.2
X Differences from Baseline
Constrained Capacity -0.02 -1.4 -2.2 -3.2 -4.8 -6.4 -8.0
Reduced Capacity -0.02 -1.4 -2.2 -3.2 -7.2 -9.2 -10.7
d
EmBaseUne 62,953 58,051 64,886 68,530 73,350 79,595 85,780
Constrained Capacity 62,879 55,530 60,366 61,357 62,044 63,258 64,410
Reduced Capacity 62,879 55,530 60.386 61,357 55,285 56.416 57,526
X Differences from Baseline
Constrained Capacity -0.1 -4.3 -6.9 -10.5 -15.4 -20.5 -24.9
Reduced Capacity -0.1 -4.3 -6.9 -10.5 -24.6 -29. 1 -32.9
NOTES: Domestic production of refined copper by primary producers, from all sources
(domestically mined copper, imported ore/concentrate/blister/scrap, domestically
generated unalloyed scrap); although it contains some secondary refined copper,
it is exclusive of secondary refined output produced by secondary refiners.
Net of exports.
clncludes primary and secondary refined copper, directly consumed scrap and imports.
dTotal full-time equivalent employment (number of persons) including mining and
milling, smelting and refining employment at all domestic primary producers
facilities; employment by secondary smelters/refiners are excluded.
SOURCE: COPMOD 1 (i.e., the acronym used for the Econometric Simulation and Impact
Analysis Model of the U.S. Copper Industry developed as part of this project;
refer to Chapter XI for a general description and to the Technical Appendix
accompanying this volume for a detailed description of this model).
XII-19
Arthur DLittklnc
-------
The forecasts of prices under the Constrained Capacity and Reduced
Capacity scenarios should be interpreted as the price levels that
would be expected to result from environmental regulations in the
absence of a massive infusion of imports into the United States.
Imports would be much higher if the rest-of-the-world (LME) copper
prices stay lower than those assumed under baseline conditions.
The baseline conditions already show a persistent increase in the
level of imports; a reversal of past trends.
b. Impacts on Production
The impact on domestic primary refined copper production closely
parallels the impact on copper prices, but in the opposite direction.
Namely, by 1981, domestic refined copper output falls 10.5 percent
below the baseline output level under both scenarios. By 1983,
domestic production is 15.4 percent below the baseline level under
Constrained Capacity and 24.6 percent under Reduced Capacity. The
full force of the negative impact is felt in 1987, when domestic
production falls 24.9 percent below the baseline forecast under
Constrained Capacity and 32.9 percent under Reduced Capacity.
c. Impact on International Trade
The overall pattern emerging from the model forecasts under baseline
conditions is that net imports show a persistent increase over time,
which represent a reversal of past trends. Under both Constrained
Capacity and Reduced Capacity, net imports become 8.4 percent higher
in 1981 than the level expected under baseline conditions. Under
Constrained Capacity, net imports in the 1980s are generally
13-15 percent above baseline levels. The reduction in domestic
capacity in 1983 leads to net imports rising 22.2 percent above
the baseline level in that year; by 1987, under Reduced Capacity,
net imports still remain 20.7 percent above the baseline level.
While these international trade impacts, especially under Reduced
Capacity, should be considered important enough for policy concern,
they nevertheless might appear less serious than would have been
expected. One explanation is that, with capacity expansion constrained
in the United States, world prices would tend to rise, which in turn
would result in a drop in demand for copper from external sources.
Another answer, more applicable to Reduced Capacity, could be that
the speed of adjustment to lower prices in the rest of the world on
the part of the domestic consumers, is perhaps not as fast or automatic
as would have been thought. This is consistent with the behavior of
the independent fabricators in the past when they continued to purchase
copper from the primary producers even when copper at lower prices
was available on the "outside" market.
XII-20
Arthur D Little Inc
-------
d. Impact on Consumption
Consistent with economic theory, total consumption (which include
primary and secondary refined copper, scrap directly consumed and
imports) falls from baseline levels, under both the Constrained
Capacity and Reduced Capacity scenarios, due to substantially higher
prices. The fall in consumption reaches 8.0 percent in 1987 under
Constrained Capacity and 10.7 percent under Reduced Capacity. The
drop in total consumption is not as serious as in domestic refined
copper production, since demand for copper remains relatively
inelastic and consumers make greater use of secondary refined copper,
scrap, and imports, while restraining their consumption somewhat
because of higher prices.
e. Impact on Employment
Under both the Constrained Capacity and the Reduced Capacity scenarios,
industry-wide employment at all stages of production—mining through
refining—is expected to be felt sharply in terms of curtailing
employment growth that would otherwise be expected to occur under
baseline conditions. Basically, Constrained Capacity would prevent
about 21,000 full-time equivalent jobs and Reduced Capacity nearly
28,000 jobs by 1987, which respectively represents 24.9 percent and
32.9 percent less employment than under baseline conditions3. It
should be noted that no significant compensating employment growth
in the secondary copper industry is expected. Likewise, employment
growth at smelters due to pollution abatement would be relatively
small.
These employment impacts do not reflect layoffs but represent lower
potential growth in a few Western states where domestic copper mining,
milling and smelting operations are largely concentrated^. As noted
in Chapter III, principal copper producing states in 1974 were
Arizona (56 percent of total United States mine production of
recoverable copper), Utah (14 percent), New Mexico (12 percent),
Montana (8 percent), Nevada (5 percent), and Michigan (4 percent).
The distribution of copper mining and milling employment by state in
1974 was as follows:
XII-21
Arthur D Little Inc
-------
(SIC 1021—Copper Ores Mining and Milling)
State Employment (June 1974)a Percent Breakdown (%)
Arizona 27,372 59.2
Utah 5,899 12.8
New Mexico 2,764 6.0
Montana 4,008 8.7
Nevada 2,094 4.5
Michigan 2,790 6.0
Other5 1,279 2.8
TOTAL 46,206 100.0
NOTES;aNumber of persons employed (both supervisory and non-
supervisory or production workers) figures refer to
June, 1974—a peak month in 1974.
blncludes the following: Missouri (502), New York (381),
and Texas (123).
SOURCE; United States Bureau of Labor Statistics, Employment and
Wages, Second Quarter 1974, Table C-8 (p. 70).
Further, of the total smelting and refining employment of 17.2 thousand
in 1972, more than half of 9.0 thousand was concentrated in the five-
state Mountain region (Montana, New Mexico, Arizona, Utah and Nevada).
Arizona alone accounted for 3.0 thousand (17.4 percent). The Northeast
Region, basically covering operations in New York (Phelps Dodge-Laurel
Hill), New Jersey (Asarco-Perth Amboy, which has since closed down),
Maryland (Kennecott-Anne Arundel County; Asarco-Baltimore, which has
since closed down), Pennsylvania (Reading Industries, Inc.-Reading),
accounted for 6.6 thousand (or 25.6 percent)5.
f. Community Impacts
If Kennecott-McGill (Nevada) and Phelps Dodge-Douglas (Arizona) smelters
actually do close down, as hypothesized under the Reduced Capacity
Scenario, the impact on these two isolated communities, which are es-
sentially one-industry towns, would be severe. If, similarly, Asarco-
Tacoma is closed down, as further hypothesized under the Reduced Capacity
Scenario, the local impact would be quite significant.
These three smelters together employ about 3,100 persons (McGill, 1,480;
Douglas, 610; Tacoma, 1,000). The McGill smelter accounts for over
half the jobs in White Pine County, which contains McGill. Similarly,
the Douglas smelter is a major employer, providing about 15 percent of
total jobs in that community. Finally, the Tacoma smelter has remained,
over many decades, a significant source of employment in Tacoma, even
though the smelter currently contributes just over one percent of all
jobs in Greater Tacoma (Pierce County).
XII-22
Arthur D Little Inc
-------
2. Related Findings
a. Impact on Capacity Growth and Utilization of Capacity
As shown in Table XI1-8 the shortfall in domestic primary smelting/
refining capacity compared to the baseline reaches 874 thousand
annual short tons of refined output under Constrained Capacity and
1,142 thousand annual short tons under Reduced Capacity by 1987.
Capacity utilization is, as expected, high throughout the period.
While both the capacity shortfall and the utilization rates projected
may be less serious under slower economic growth scenarios, the
situation could be more critical than projected here under a higher
growth macroeconomic scenario.
The capacity utilization rates shown in Table XII-8 appear consistent
both directionally and in terms of the numerical magnitudes involved,
when the baseline, Constrained Capacity and Reduced Capacity results
are cross-compared. The utilization rates become higher as we move
away from baseline conditions towards Constrained Capacity and
they become even higher under Reduced Capacity. These results are
as expected both in theory and in practice.
The following related points, in this connection, should be noted :
(i) the "optimal" capacity utilization rate for the industry, in terms
of producing at minimum average total cost is roughly around 86 percent
of installed capacity; (ii) beyond this region, the average total
cost of production rises rapidly and very steeply near the "practical"
capacity limit (at roughly 92 percent of installed capacity, due to
irreducible shutdown for repairs, etc.); (iii) consequently, prolonged
production along this segment of the industry's average total cost,
average variable cost, or marginal cost schedules would occur at
higher costs and therefore at higher prices as long as there is no sharp
fall in demand (such as in 1975); (iv) therefore, capacity constraints
imposed under Constrained Capacity and Reduced Capacity would inevitably
lead to higher prices, in a strictly microeconomic sense, all else
remaining equal (e.g., barring a sudden opening up of the domestic
market to a massive infusion of foreign imports). These effects are
quantified, in an internally consistent way, by the model.
b. Impact on Secondary Copper Prices and Production
Impact results for secondary copper prices and production are tabulated
in Table XII-9. The basic conclusion emerging from the model is that
prices of both secondary refined copper sold on the "outside" market
and scrap prices rise rapidly in response to domestic primary
smelting/refinery capacity constraints. In response to these price
increases, production of secondary refined copper (produced by
secondary smelters/refiners) rises only very slowly, given the fairly
inelastic supply function econometrically estimated for secondary
smelters/refiners. The situation is different, however, with respect
to the supply of scrap that goes directly into the consumption stream:
production rises more sharply in response to rising prices.
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CL
8
TABLE XII-8
DOMESTIC PRIMARY SMELTING/REFINING CAPACITY GROWTH ANb
CAPACITY UTILIZATION UNDER ALTERNATIVE SCENARIOS. 1974-1987
(capacity in thousands of annual short tons of refined copper equivalent production)
i
fo
Baseline
Capacity
Percent Capacity Utilization
Constrained Capacity
Capacity
Percent Capacity Utilization
Reduced Capacity
Capacity
Percent Capacity Utilization
1974
1992.0
90.0
1992.0
89.9
1992.0
89.9
1977
2380.5
86.6
2272.0
86.8
2272.0
86.8
1979
2506.0
87.5
2326.0
87.7
2326.0
87.7
1981
2615.2
88.5
2326.0
89.1
2326.0
89.1
1983
2808.1
88.2
2346.0
89.3
2078.0
89.9
1985
3056.2
88.0
2386.0
89.5
2118.0
90.0
1987
3299.9
87.8
2426.0
89.7
2158.0
90.0
SOURCE: COPMOD I.
-------
TABLE XII-9
SUMMARY OF IMPACTS ON
SECONDARY COPPER PRICES AND PRODUCTION,
(all dollar figures in 1974 prices;
Prices of Secondary Refined Copper
Baseline
Constrained Capacity
Reduced Capacity
Production of Refined Copper from Scrap
Baseline
Constrained Capacity
Reduced Capacity
Prices of Scrap
Baseline
Constrained Capacity
Reduced Capacity
Quantity of Scrap Generated
Baseline
Constrained Capacity
Reduced Capacity
1974
88.5
88.5
88.5
285.2
285.5
285.5
69.6
69.6
69.6
1229.5
1229.9
1229.9
1974-1987
quantities are in thousands of short tons)
1977
58.2
60.1
60.1
236.3
236.3
236.3
41.9
44.1
44.1
874.2
903.3
903.3
1979
75.6
78.5
78.5
243.0
248.6
248.6
57.8
61.3
61.3
1077.9
1122.8
1122.8
1981
78.2
82.9
82.9
243.9
251.9
251.9
60.9
66.7
66.7
1118.3
1193.1
1193.1
1983
80.5
88.1
93.1
249.9
260.1
266.2
63.7
72.9
78.9
1153.9
1272.7
1349.5
1985
79.3
90.3
94.8
248.5
262.9
268.4
62.3
75.6
81.0
1136.2
1307.1
1376.4
1987
80.8
95.1
99.6
252.1
269.5
274.6
64.1
81.4
86.8
1159.0
1380.9
1450.9
NOTES: aSecondary refined copper produced by secondary smelters/refiners and sold on the "outside" market.
^Refers to production by secondary smelters/refiners only.
cExcludes scrap going into the smelting/refining stream.
SOURCE: COPMOD I.
-------
It should be noted that both prices and production of secondary refined
copper and scrap are directionally correct under the various scenarios.
It should finally be noted that price differences from the baseline
become quite serious in the 1980s. By 1987, secondary refined prices
are 17.7 percent higher than the baseline under Constrained Capacity
and 23.3 percent higher under Reduced Capacity. Scrap prices display
a similar pattern; by 1987, they are 27.0 percent higher under
Constrained Capacity and 35.4 percent higher under Reduced Capacity.
3. Sensitivity Analysis
We have conducted a sensitivity analysis to see how the impact results
reported above might change under a somewhat different specification
of the environmental/industry capacity growth scenarios. Specifically,
focusing on the Constrained Capacity and the Reduced Capacity scenarios,
we have defined and tested the implications of the following new
scenarios:
• Constrained Capacity I (Sensitivity 1): which assumes that the
Constrained Capacity scenario outlined above is relaxed by
allowing for new grassroots smelter/refinery capacity to come
on-stream in 1985 (200,000 ast—annual short tons of refined
copper equivalent production—) and again in 1987 (200,000 ast).
These two additions of new smelter/refinery capacity will cost an
estimated $680 million, spread over many years; of this total,
an estimated $160 million will represent investment for pollution
control, spread over the years 1982-1986. It is further assumed
that these new additions to smelter/refinery capacity will be
accompanied by parallel new mine and mill investment of equal
productive capacity, estimated at about $1,360 million spread
over the years 1982-1986. These developments will be in addition
to the compliance cost and capacity growth assumptions already
incorporated into.the Constrained Capacity scenario.
• Reduced Capacity I (Sensitivity 2): which represents a modification
of the Reduced Capacity scenario by introducing exactly the same
new capacity growth and compliance cost assumptions as just
described under Constrained Capacity I (Sensitivity 1).
• Reduced Capacity II (Sensitivity 3): which represents a modifi-
cation of the Reduced Capacity scenario by introducing two new
assumptions. The first is that the effective domestic reverb-based
smelter capacity will be further curtailed over the period 1983-1987
by 10 percent due to SCS. Secondly, compliance cost investment
over the period 1979-1986 will be $80 million/year (compared with
$40 million/year assumed initially under the Reduced Capacity
scenario); also, pollution control-related increase in average
variable costs is assumed to be 1.8c/lb. over the period 1974-1978,
2.5c/lb. in 1979 and 4c/lb. over the period 1980-1987 (compared
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with 1.8c/lb. over the period 1974-1977 and 2.5c/lb. over the
period 1978-1987 assumed initially under Reduced Capacity).
• Reduced Capacity III (Sensitivity 4): which represents a modifi-
cation of the Reduced Capacity scenario by incorporating the
assumption that the effective domestic smelting capacity will
increase by 60,000 ast in 1981 and by another 60,000 ast in 1982
by increasing the smelting rate (NSPS expansion, as explained in
Chapter X), requiring an investment of about $24 million, of which
roughly $16 million will be for pollution control. It is further
assumed that this increase in effective smelter capacity will be
accompanied by parallel mine and mill investment of equal productive
capacity, estimated at about $408 million spread over the years
1979-1981.
• Reduced Capacity IV (Sensitivity 5): which represents a modifi-
cation of the Reduced Capacity scenario by assuming higher LME
copper prices during the 1982-1987 period (80$/lb. over the
period 1982-1984 and 85c/lb. over the period 1985-1987, in real
1974 terms), reflecting possible upward worldwide price adjustments
during this period caused in part by the hypothesized reduction
in domestic productive smelter capacity (e.g., in the form of an
international commodity agreement, etc.).
The results of the sensitivity analysis are reported in Tables XII-1QA
through XII-10E where the results for selected key impact variables
are summarized. An examination of these results generally indicates
that the severity of the adverse impacts reported earlier, would remain
broadly unchanged. As might be expected, the impacts are less severe
when new capacity is allowed to come on-stream during the period
1985-1987. Everything considered, the lowest deviations from
baseline appear to be those associated with the Constrained Capacity I
scenario, which allows for new smelters to come on-stream in 1985
and in 1987.
E. BROADER IMPLICATIONS OF ENVIRONMENTAL REGULATIONS AND RELATED
ISSUES"~~
The environmental regulations and the impact results discussed earlier
have broader implications and raise certain issues which deserve
emphasis. These pertain to the regulatory environment, growth of
the domestic copper industry and international economic implications.
1. Regulatory Environment
Environmental regulations not only lead to increased production costs
due to the cost of compliance, but also and perhaps more importantly,
cause uncertainty because of their evolving nature.
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TABLE XII-10A
I
10
00
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATES COPPER INDUSTRY 1974-1987
luMMARY OF SENSITIVITY ANALYSIS RESULTS ON PRIMARY REFINED COPPER PRODUCTIONS
(in thousands of short tons)
1974 1977 1979
Description
Environmental Scenarios
Baseline
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
Percent Difference from
Baseline (%)
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
1981
1983
1985
0
0
0
0
0
-4.3
-4.3
-4.3
-4.3
-4.3
-6.9
-6.9
-7.5
-7.1
-6.9
-10.5
-10.3
-10.6
-8.6
-10.5
1987
1,792.7
1,790.6
1,790.6
1,790.6
1,790.6
1,790.6
2,060.7
1,971.2
1,971.2
1,971.2
1,971.2
1,971.2
2,191.6
2,039.6
2,039.6
2,026.2
2,036.6
2,039.6
2,314.7
2,072.4
2,076.2
2,069.2
2,115.3
2,072.4
2,477.5
2,086.6
1,877.6
1,773.6
1,968.3
1,867.2
2,688.4
2,273.2
2,060.0
1,811.1
2,008.0
1,904.5
2,897.3
2,463.9
2,100.2
1,848.0
2,046.5
1,942.5
-15.0
-27.5
-36.2
-29.4
-33.0
MOTES;aDomestic production of refined copper by primary producers, from all sources (domestically mined copper,
imported ore/concentrate/blister/scrap, domestically generated unalloyed scrap); although it contains
some secondary refined copper, it is exclusive of secondary refined output produced by secondary refiners
SOURCE: COPMOD I.
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TABLE XII-10B
i
l>0
\o
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATE COPPER INDUSTRY 1974-1987
SUMMARY OF SENSITIVITY ANALYSIS RESULTS ON PRIMARY REFINED COPPER PRICES
Description
Environmental Scenarios
Baseline
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
Percent Differences From
Baseline (%)
Constrained Capacity
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
1974
0
0
0
0
0
(cents per pound)
1977 1979
1981
1983
1985
1987
77.2
77.3
77.3
77.3
77.3
77.3
56.4
59.4
59.4
59.4
59.4
59.4
68.9
73.5
73.5
73.9
73.6
73.5
72.9
80.5
80.4
80.6
79.0
80.5
76.6
89.0
95.9
99.6
93.3
96.5
74.8
87.4
94.1
102.3
96.2
98.6
77.2
90.4
102.2
110.0
103.9
106.7
5.3
5.3
5.3
5.3
5.3
6.7
6.7
7.3
6.8
6.7
10.4
10.2
10.6
8.4
10.4
16.2
25.2
30.0
21.8
26.0
16.8
25.8
36.8
28.6
31.8
17.1
25.0
42.5
34.6
38.3
SOURCE: COPMOD I.
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TABLE XII-10C
I
u>
o
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATES COPPER INDUSTRY 1974-1987
SUMMARY OF SENSITIVITY ANALYSIS RESULTS ON COPPER CONSUMPTION8
Description
Environmental Scenarios
Baseline
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
Percent Difference From
Baseline (%)
Constrained Capacity
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
(in thousands of short tons)
1974 1977 1979
0
0
0
0
0
1981
1983
1985
1987
3,397.8
3,396.9
3,396.9
3,396.9
3,396.9
3,396.9
3,455.1
3,405.9
3,405.9
3,405.9
3,405.9
3,405.9
3,792.4
3,708.6
3,708.6
3,703.1
3,707.4
3,708.6
4,027.3
3,899.7
3,901.3
3,897.8
3,918.6
3,899.7
4,221.8
4,015.0
3,900.4
3,863.6
3,971.8
3,919.9
4,567.9
4,333.7
4,216.5
4,094.8
4,203.8
4,158.3
4,864.3
4,617.8
4,432.0
4,292.5
4,402.6
4,351.6
-1.4
-1.4
-1.4
-1.4
-1.4
-2.2
-2.2
-2.4
-2.2
-2.2
-3.2
-3.1
-3.2
-2.7
-3.2
-4.9
-7.6
-8.5
-6.9
-7.2
-5.1
-7.7
-10.4
-8.0
-9.0
-5.1
-8.9
-11.8
-9.5
-10.5
NOTES: alncludes primary and secondary refined copper, directly consumed scrap and imports.
SOURCE: COPMOD I.
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TABLE XII-10D
D
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATES COPPER INDUSTRY 1974-1987
SUMMARY OF SENSITIVITY ANALYSIS RESULTS ON NET IMPORTS"
(in thousands of short tons)
1974
1977
1979
1981
1983
1985
1987
a
H
10
Description
Environmental Scenarios
Baseline
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
Percent Difference From
Baseline (%)
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
167.1
167.4
167.4
167.4
167.4
167.4
239.6
251.6
251.6
251.6
251.6
251.6
274.3
292.5
292.5
294.2
292.9
292.5
361.5
391.8
391.4
392.1
385.9
391.8
356.0
405.1
432.3
447.2
422.3
415.2
513.8
563.9
590.3
622.8
598.6
568.5
571.2
623.5
670.3
701.3
676.9
648.5
0
0
0
0
0
5.0
5.0
5.0
5.0
5.0
6.6
6.6
7.2
6.7
6.6
8.4
8.3
8.5
6.8
8.4
13.8
21.4
25.6
18.6
16.6
9.8
14.9
21.2
16.5
10.6
9.2
17.4
22.8
18.5
13.5
NOTES; aNet of exports.
SOURCE: COPMOD I.
-------
TABLE XII-10E
ECONOMIC IMPACTS UNDER ALTERNATIVE ENVIRONMENTAL SCENARIOS AND
CORRESPONDING COMPLIANCE COSTS ON THE UNITED STATES COPPER INDUSTRY 1974-1987
SUMMARY OF SENSITIVITY ANALYSIS RESULTS ON EMPLOYMENT^
1974
1977
1979
1981
1983
1985
19-87
NJ
Description
Environmental Scenarios
Baseline
Constrained Capacity 1
Reduced Capactiy I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
Percent Difference From
Baseline (%)
Constrained Capacity I
Reduced Capacity I
Reduced Capacity II
Reduced Capacity III
Reduced Capacity IV
62,953
62,440
62,440
62,440
62,440
62,440
58,051
55,530
55,530
55,530
55,530
55,530
64,886
60,386
60,386
59,989
60,297
60,386
68,530
61,357
61,470
61,627
62,627
61,357
73,350
61,778
55,590
52,511
58,275
55,282
79,595
67,302
60,990
53,621
59,450
56,386
85,780
72,948
62,180
64,713
60,590
57,511
0
0
0
0
0
-4.3
-4.3
-4.3
-4.3
-4.3
6.9
6.9
7.5
7.1
6.9
-10.5
-10.3
-10.6
-8.6
-10.5
-15.8
-24.2
-28.4
-20.6
-24.6
-15.4
-23.4
-32.6
-25.3
-29.2
-15.0
-27.5
-36.2
-29.4
-33.0
NOTES:^Total full-time equivalent employment (number of persons) including mining and milling, smelting and
refining employment at all domestic primary producer facilities; employment by secondary smelters/
refiners are excluded.
SOURCE: COFMOD I.
-------
For the copper industry, a major source of uncertainty in the future
relates to the fugitives problem (i.e., the magnitude of the fugitive
emissions, the degree to which they might contribute to the violation
of ambient standards even in the vicinity of smelters using modern,
"exemplary" technology and the means which might be used to alleviate
this problem).
From a planning standpoint, the problem of uncertainty is bound to
increase the degree of risk associated with a new project and increase
the required ex ante rate of return on investment. The increased
degree of perceived risk may further make the industry more cautious
and increase both the lead times and the costs required for adding
new capacity. Because of both such cost increases and compliance
costs faced by the industry, the realized rate of return may also
be negatively impacted, especially during macroeconomic downswings
("demand slack" periods) when the domestic producers would be
particularly constrained in their ability to "pass on" cost increases
owing to increased competition presented by foreign producers during
such periods. These factors, combined with the cumulative and some-
times conflicting nature of the regulations, may further be creating
a broader set of unintended consequences, for example, by effectively
curtailing expansion of domestic productive capacity in a more general
sense . Moreover, the existence of many regulatory agencies affecting
a given industry, with little or no coordination among them (in the
apparent absence of any legal requirement for them to coordinate their
activities), may well compound the unintended and unforeseen effects
of their actions falling upon the industry being regulated.
In this report, we have assumed that this fugitives problem will be
resolved in a fashion such that it does not affect existing capacity
or impede the construction of new capacity. Consistent with this and
the other regulations explicitly covered in this report, the "Constrained
Capacity" scenario appears to be the most likely.
The Reduced Capacity scenario assumes that EPA will require all smelters
to embark on a definitive program for meeting the 1988 requirements for
attaining ambient standards through the use of permanent controls alone.
This scenario becomes less likely if Congress changes the requirements
of the Act or if the EPA allows the smelters to stay open until 1988.
The expansion of NSPS smelters will be more likely if these four smelters
have attained their ultimate emissions limit. If not, these smelters
would be in nonattainment and could expand only if there was an
emissions offset. Since most smelters are the sole S02 emitting source
in their respective air quality regions, such an emissions offset would
not be achieved with NSPS caliber technology.
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Other uncertainties exist which would indicate that the actual impact
on the industry might possibly fall outside the range "bounded" by
the Constrained Capacity and Reduced Capacity scenarios:
• From a statutory viewpoint, the states can require standards that
are "tougher" than Federal standards. This and the requirement
for case-by-case review can contribute to the "moving target"
nature of the regulations. It should be noted that regional EPA
offices often provide technical help to the state environmental
agencies and can be involved in providing technical guidance on
such matters.
• Several proposed OSHA regulations will affect productivity in the
copper industry. In some instances, EPA and OSHA requirements are
in conflict (e.g., OSHA will permit control of ambient concentrations
via dilution while EPA will not). For example, if gases from a
multiple-hearth roaster are to be used in an acid plant to reduce
S02 emissions, such roasters would have to operate at a low draft
to reduce dilution of this gas. OSHA requirements might require
operation of such roasters under higher draft. In general, while
OSHA requires the use of engineering controls to reduce ambient
concentrations, such controls achieve little to meet EPA
requirements. In other words, except for fugitives, there is
little synergism between EPA and OSHA control costs and such
costs are additive. OSHA regulations which would affect the
copper industry are those for inorganic arsenic, lead, S02 etc.
The new NSO process introduced by the 1977 Clean Air Act Amendments
(explained in Chapter IX), although possibly helpful in this regard,
is not likely to substantially reduce the climate of uncertainty
facing the domestic copper industry because of environmental regulations.
2. General Issues Pertaining to the Future of the Domestic Copper
Industry
The following general conclusions are suggested from the foregoing
discussion and findings:
a. Growth of the Domestic Copper Industry
The constraint on domestic smelter capacity growth imposed by the
presently promulgated federal environmental regulations plus
continuing future uncertainty regarding new regulations and the way
they will be enforced will quite likely slow down domestic smelter
capacity expansion and new resource development generally.
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b. Technological and Energy Implications
The federal regulations affecting the copper industry are more complex
than those affecting even larger industries (e.g., iron and steel, or
steam-electric power utility industry, etc.), which is in part due
to the apparent desire to force technological change away from reverb-
based technology towards new smelting technology more amenable to
sulfur dioxide emissions control via the use of sulfuric acid plants.
Although this new smelting technology is more energy efficient than
reverb-based technology as far as smelting is concerned, the higher
degree of pollution control offsets this advantage.
c. Substitution of Aluminum for Copper
Aluminum prices could increase relative to copper prices, because of
the actions of the major bauxite producing countries (e.g., increased
taxes, cartelization, etc.) or because of higher energy costs. This
may slow down the substitution of aluminum for copper but not necessarily
stop it, especially because domestic copper prices would also rise
because of compliance costs and constraints on domestic capacity growth.
In the past, the process of substitution has been a gradual one,
limited in its pace by the fixity of the machinery and equipment
in the short-run, the need for process-design changes requiring
virtually irrevocable, heavy investments in new machinery and equip-
ment and a desire to avoid risks associated with high degree of
maintenance costs in new applications.
Compared to copper, which has been estimated to require between 86 and
112 million Btu/ton product**, aluminum ingot production is estimated
to require twice as much energy per net ton product (i.e., 244 x 10°
Btu's per ton product)9. It has often been remarked, as a result,
that the higher energy content of aluminum, together with stronger
threats of a bauxite cartel1" would tend to virtually bring to a halt
further substitution of aluminum for copper.
Further increases in aluminum prices induced by higher energy costs
could slow down but would not necessarily put a stop to substitution
from aluminum. Also, regarding the implications of bauxite
cartelization on the substitution of aluminum for copper, it should
be noted that recent activities by several important producers of
bauxite, the major ore used to produce aluminum, have led to a doubling
of price11-. However, because the cost of ore is only a small portion
of the total cost of producing aluminum (about 10 percent), larger
movements in bauxite prices would be required to significantly
influence aluminum prices.
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An important end-use market where furhter substitution could take
place is power transmission and distribution cables. Aluminum has
already claimed the majority of the market for overhead transmission
cable and for distribution cable. Further, it has made considerable
inroads into the distribution wire market. While house wiring appears
to face serious problems , telephone conductor cable and automobile
radiator applications pose perhaps the most serious threat to metallic
conductors in the telephone wire market which is currently a large end
user of copper.
3. International Economic Implications
Both the capacity constraints imposed domestically by recent EPA
regulations and costs of compliance with these regulations may have
significant international economic implications beyond those noted
above pertaining to international trade effects. A series of basic
questions arise in this context:
• What will be the effects of domestic environmental regulations
on the long-run competitive position of the United States copper
industry?
• What are likely to be the effects of domestic environmental
regulations on the domestic as well as international investment
behavior of United States primary copper producers?
• What effect, if any, would domestic environmental regulations
have on the future structure of the world copper market?
• What are the prospects for the cartelization of the world
copper market (outside the United States) and/or for the
emergence of commodity access agreements for controlling the
world price of copper? What are the potential implications of
such developments for United States dependence on external sources
of copper?
We have investigated these and similar questions in some depth as
part of this study. Summarized below are our major findings.
a. Effects of the International Competitive Positions of the United
States Copper Industry
The international competitive position of the domestic copper industry
will be negatively affected but perhaps not as significantly as would
be suggested by the foregoing findings, mostly because of mitigating
factors in the rest of the world expected to have a substantial
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influence on costs of production abroad. Among these factors can
be cited differential impacts of energy price increases, expected
high rates of inflation not offset by exchange rate adjustments,
high infrastructure investment requirements, generally lower labor
productivity, and a growing set of requirements by international
financing institutions (e.g., the World Bank) for pollution control
at new projects.
A comprehensive assessment of the potential effects of domestic
environmental regulations on the international competitive costs
of production internationally, (b) information on foreign environ-
mental regulations and estimates of compliance costs on a basis
comparable with similar information for the United States, and
(c) consideration of pollution acceptance as a resource in inter-
national trade.
First, comparable data on costs in the copper industry in various
countries of the world are very difficult to obtain and to interpret
in terms of relative competitive advantage. For new large mines,
capital costs tend to be somewhat similar because the technical
conditions of production are much the same. On the other hand,
infrastructure costs incurred by the copper producing firm may
differ substantially. Project costs may differ, depending on the
degree of pollution control at new projects that is required by
financing institutions (e.g., the World Bank).
Interest costs may differ, depending upon how the financing has
been arranged. Labor costs may account for one-third to one-half
of operating costs, depending upon whether the mine is an open-pit
or underground operations, since the latter type operation is
more labor intensive. Wages and labor productivity are important
determinants of cost. Rapid increases in wages (such as have
occurred in Peru and Central Africa) which are not offset by
exchange rate depreciation or rapid increases in energy costs
may shift a low-cost mine into a high-cost category within a
few years. Differences in the quality of the ore may be offset
by the existence of co-products, such as gold, the price of
which has increased several-fold in recent years14.
The five-fold rise in international oil prices has changed relative
costs substantially throughout the world, depending upon the source
of energy used in the production and transportation of copper. For
example, the rise in oil prices was largely responsible for shifting
the Philippine mines from relatively low-cost producers to a high-cost
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category. Capital and operating costs are also affected by environ-
mental regulations. Finally, royalties, excise taxes (which are
usually included in production costs), and corporate income taxes
introduce complexities in determining comparative costs, since these
charges have a different impact on government-owned mining enterprises
as contrasted with privately-owned mines.
We expect the relative cost positions of the various copper producing
countries will change over the next five years, with differential
rates of domestic inflation not offset by exchange rate adjustments
and by differential energy costs (e.g., the development of cheap
hydroelectric power in Zaire and exploitation of South African coal
reserves). Despite the low grade of United States copper ore, a
narrowing of the cost differential between the United States land
Canada) and other regions of the world is generally expected in the
future for a number of reasons. Some of the most important reasons
are : (1) labor costs in North America are expected to rise at a
slower rate than elsewhere; and (2) the United States and (especially)
Canada are likely to be less adversely affected by the future rise
in energy prices . Some of these reasons may require further
examination, however.
Second, comprehensive and comparable information on foreign pollution
abatement standards and compliance costs are lacking to permit quanti-
tative cost comparisons. Information on European countries with
smelters—principally Belgium, West Germany, Norway and Sweden—indicates
that their pollution abatement standards are comparable to those in the
United States, but that there is more flexibility in their administration,
particularly as related to existing local ambient conditions, so that
costs may be lower in some cases than for the United States. Japan may
have even higher standards but again with greater administrative flexi-
bility. Even before the imposition of strict S02 emission standards,
Europe and Japan found it profitable to employ smelting techniques that
captured a high proportion of S02 for production of suIfuric acidl°.
Pollution abatement standards in developing countries vary but are
generally lower than in the developed countries. This is in part
because most of the smelters in Africa and Latin America are located
far from populated areas. Despite the desire of the developing
countries to process their own ores by building smelters or encouraging
foreign investors to do so, it seems likely that most developing
countries will over time insist on pollution abatement standards but
perhaps with allowance for the ambient conditions and population.
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Some of the new mine development agreements between host government
and foreign companies provide for observance by the foreign companies
of environmental regulations, but without providing details regarding
those regulations. For example, Anaconda has been building a pyro-
metallurgical smelter in Brazil under contract with a Brazilian
government enterprise, which calls for the same type of pollution
abatement standards as in the United States. The World Bank Group
has been encouraging its members to adopt environmental standards in
the formulation of the projects for Bank financing, and in some cases
has insisted on the incorporation of pollution abatement facilities
in such projects".
Finally, we should consider the implications, for the competitive
position of the United States copper industry, of the willingness
elsewhere in the world to accept pollution (or to tolerate lower
standards of pollution abatement) as a national resource which will
affect the country's comparative advantage in international trade.
It is argued that if certain countries are willing to accept more
pollution than others, they will gain a relative advantage in
producing those commodities which involve pollution in their production
and whose costs of pollution abatement tends to be high18. This
advantage may also occur because of the profitability of locating
high-polluting production in certain countries in areas far from
populated centers (e.g., the location of copper smelters in the
deserts of northern Chile). One possible mitigating factor would be
the possibility of changing the technical conditions of production
for any particular commodity toward the use of non-polluting processes,
so that over time non-polluting technology becomes competitive with
polluting technology. However, new non-polluting alternatives to
copper smelting, such as the hydrometallurgical processes for
treating sulfide concentrates are currently not cheaper than the
pyrometallurgical processes. Over time pollution abatement standards
are likely to become more important in the developing countries,
thereby reducing their relative advantage.
b. Effects on the Investment Behavior of United States Primary
Copper Producers
There exists a virtual concensus in the industry that differences
among various countries in terms of pollution control costs alone are
likely to prove quite insignificant in their decisions regarding new
investment abroad compared with the large number of uncertain factors
associated with foreign investment in most developing countries.
Further, political risks abroad are generally assigned greater weight
than environmental risks faced at home. Nevertheless, there is a
growing climate of opinion that political risks abroad are
controllable through international financing, joint ventures, majority
ownership in the host country, and other means. Accordingly, there
appears to be emerging the view that the cycle of expropriation abroad
is at an end, whereas the end of environmental regulations in the
United States is nowhere in sight. Hence, new investment is likely
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to be exported abroad to areas which are considered less risky
politically. The recent growth in copper production capacity in
Canada takes on new significance when viewed in this light. The
Canadian copper industry, which will be a major beneficiary of the
capacity constraint in the United States, is expected to emerge as
a major exporter of copper to the United States.
In a perfectly competitive world economy with no constraints on foreign
investment, a decline in the profitability of an industry in the
United States arising from increased total unit costs alone would
tend to shift investment in that industry to other industries or
countries where costs have not risen. In other words, lower rates of
return in the domestic industry would reduce the amount of domestic
capital available for reinvestment in that industry, while higher rates
of profitability abroad would increase foreign capital available for
investment in other countries. Further, higher costs in the United
States, accompanied by a constraint on domestic capacity growth,
would in the long-run tend to bring about upward pressure on world
prices; as a result, expected profitability in foreign areas would
tend to rise, leading to an acceleration in the outflow of investment
abroad. The pace of such an investment outflow would be offset by
the degree to which domestic producer prices remain high enough in
view of rising prices in the rest of the world, to enable domestic
producers not only to cover their increased costs of production but
also to attain a return on their invested capital sufficient to induce
further investment domestically.
c. Implications for the Future Structure of the Copper Industry
Domestically, the presently promulgated federal environmental
regulations would quite likely slow down or delay the entry of new
firms (e.g., oil companies) into the industry, thus possibly
reversing an evolving trend during the postwar period when the
industry has become increasingly more diverse and perhaps less
concentrated. Worldwide, the effects might be just the opposite,
in the sense that the constraint domestically on capacity growth
may spur investment abroad especially as LME copper prices rise
over the next five-to-seven years in response to not only a secular
upward shift in worldwide demand but also, and in particular, as a
result of the constraint on capacity growth in the United States.
In this respect, it should be noted that the long-run supply factors,
rather than demand factors, are likely to be the more crucial, in
terms of the future structure of the world copper industry, given
the relative inelasticity of demand for copper and even after allowing
for continued long-run substitution from aluminum.
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On the supply side, we should dwell briefly on known world reserves,
already discussed in Chapter V. Reserves are not static but change
with the amount of exploration activity, technology and the price
of copper; the lower the grade of the ore and the higher the cost
of extraction (all else being equal), the higher must be the price
for its recovery to be profitable. Based on available data (see
Chapter V) identified and potential copper world reserves are in
excess of a billion tons of copper content, more than three times
the estimated cumulative world consumption of copper between now and
the year 2000. Hence, it is most unlikely that aggregate world reserves
will constitute a constraint on output in the foreseeable future.
On the other hand, reserves could constitute a constraint on output
in particular producing areas over the next several decades and
this is more likely to be the case in the absence of adequate
exploration activity for identifying additional reserves.
Next, nearly two-thirds of known world reserves are located outside
the United States, mostly in the less developed countries (LDCs).
In virtually all foreign copper exporting countries, except Canada,
the copper content of the ores is substantially higher than in this
country, and it is likely that the differential in metal content
will increase over time. There are, of course, a large number of
other factors which have a bearing on cost and, perhaps more
important, the rate at which copper resources can be developed. The
shift in ownership and control patterns in the mining industries of
the developing countries and the declining role of the international
mining companies in exploration and development in these countries
have made it difficult to assess the reasons for relative rates of
increase in copper producing capacity abroad.
The LDCs are anxious to develop their mineral resources in order to
expand their export earnings, and they recognize the need for the
technical knowledge, venture and debt capital, and managerial ability
of the international mining firms. A case can be made for some
countries that exploration and new investment have been curtailed
by the nationalization movement. However, it would be rash to predict
that the growth of copper mining activity will be substantially
retarded in the developing countries as a consequence of the
nationalization movement and of the emergence of new relationships
between the host countries and the foreign investor. In fact, most of
the governments of the copper exporting countries have ambitious plans
for expanding their copper producing capacity and these plans may be
pushed without regard for the outlook for profitability as ordinarily
perceived by private enterprise, provided the capital can be obtained.
As noted in Chapter VIII, the LDCs have a high foreign exchange
requirement to finance their development and for reasons already
explained in Chapter VIII, these countries could continue to expand
copper production even in face of low LME prices. Moreover,
governments are not subject to the kinds of constraints on investment
in new capacity imposed by high taxes, government regulations, and
political instability that deter private investors.
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However, there are serious difficulties facing many foreign countries
in obtaining the necessary technology, management and capital from
abroad for realizing their national plans for resource development.
Some important questions still remain basically unresolved. First,
will there be an adequate expansion of exploration in the developing
countries? Will host governments be able to raise the billions of
dollars required to develop their mineral reserves as majority or
100 percent owners and managers? Will the host governments be able
to maintain or attract the technical and managerial personnel needed
for the efficient operation '.of existing mines and the expansion of
their productive capacity?
The answers to these and other questions, such as those relating to
the effects of nationalization on world markets, will have an
important bearing on the long-run supply of copper. However, in
this context, it seems quite likely that for the present and for
some years to come, the development of new mining capacity, particularly
in the developing areas, will depend upon management and technology
provided by the large international mining companies and upon the
ability of these companies to raise large amounts of capital, running
into many billions of dollars, from outside sources.
d. Prospects for Cartelization and International Commodity Agreements
In recent years there has been a great deal of discussion and theorizing
regarding the international control of copper prices. The purpose of
control arrangements might be simply to avoid sharp fluctuations in
world copper prices that prove uneconomic and harmful to producers
and consumers alike. The objective of such an effort would be to
maintain the price of copper close to its long-term equilibrium level
as determined by long-run cost and demand factors. Alternatively,
the purpose might be to maximize the copper earnings of the developing
countries, since the developing countries account for the vast bulk
of the primary copper produced outside the United States and nearly all
of this copper is exported.
Recentlyi serious concern has been expressed that the present members
of CIPEC, an organization involving all of the major copper exporting
countries, might act in concert to double or triple the world price
of copper, much in the same way that OPEC has tripled the price of
petroleum over the past three to four years. However, CIPEC, while
patterned after OPEC—the oil cartel—, has not yet evolved a
mechanism to control prices or, far short of that, to stabilize prices
through an international buffer stock arrangement.
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The gains and losses to the producing and consuming countries arising
from an international price stabilization program through, for
example, a copper buffer-stock arrangement is not entirely clear.
At any rate, the subject is sufficiently complex to warrant separate
examination, especially in view of the current deliberations inter-
nationally in connection with the Integrated Program for Commodities
proposed by UNCTAD19.
As far as the threat of cartelization is concerned, it should be noted
that, in principle, collusive control of copper prices would help to
maintain or raise prices over relatively short periods. However,
the higher disequilibrium price? would soon invite increased primary
copper production, some increase in the supply of secondary copper,
and the substitution of other metals for copper in important uses.
This means that, in the future, any rational undertaking by
CIPEC to control copper prices must take into account the inter-
mediate and long-term effects on the foreign exchange earnings of
its member countries and not simply its ability to influence prices
in the short-run.
In the normal course of events in the future, the likelihood of the
emergence of a CIPEC cartel would not appear to be high. This can
be seen by briefly examining the similarities and differences between
CIPEC and OPEC. Most fundamentally, CIPEC's world market power in
copper differs from that of OPEC1s in petroleum in several important
respects. First, world petroleum reserves are heavily concentrated
in the Middle East, and at the rate of growth of world petroleum demand
in 1970-1972, nearly half of the required annual increase in output
over the next decade would have to come from one country, namely
Saudi Arabia. Copper resources on the other hand are more widely
distributed throughout the world, and the CIPEC countries account
for a much smaller share of world copper exports than do the OPEC
countries of the world petroleum exports. Second, substitutes for
primary copper, including scrap and other metals, are more readily
available in the short- and intermediate-run than are substitutes for
petroleum for meeting the world's energy requirements. Withholding
the oil output of two or three Arab states could substantially impair
the economies of Western Europe and Japan. Withholding all of CIPEC1s
copper output would inconvenience the world economy but not seriously
reduce the world's industrial and agricultural production. Third,
several of the Arab oil states have producing capacity that
substantially exceeds their need for foreign exchange over the next
few years, and at current levels of production they are accumulating
reserves on a massive scale. This is not true for any of the CIPEC
countries, all of which desire to expand output and develop their
copper reserves for meeting their foreign exchange requirements.
This factor is important for attempts to control output and productive
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capacity of copper over the longer-run. Some of these factors would
operate to limit CIFEC's market power even if the organization were
expanded to include all of the major copper countries in the developing
world and if they were able to unite on a common program for market
control.
Nevertheless, the likelihood that an expanded CIPEC will be able to
exercise some control over the world price of copper in the medium-
term future cannot be ruled out. Such a development could occur
especially if worldwide macroeconomic recovery becomes strong.
In this event, the CIPEC member countries would experience an
improvement in their payments deficits resulting from higher prices.
This would ease the pressure on them for competitive pricing among
themselves to obtain badly needed foreign exchange.
In the longer-run, all copper producing countries would probably want
to obtain a larger share of the world market; hence, it is most
unlikely that there will be any agreement on sharing the growth in
copper producing capacity over the long-run. At any rate, even if
CIPEC were able to achieve somewhat greater price stability in the
medium-term through the operation of a buffer stock, or otherwise,
the long-run average price of copper might not be greatly affected.
Moreover, if the average price of copper were raised, revenues might
not rise because of competition from substitutes for primary copper,
including scrap copper, aluminum and plastics.
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CHAPTER XII
MOTES
For a review of how the cost schedules are affected by compliance
costs, refer to Technical Appendix to this report, Econometric
Simulation and Impact Analysis Model of the U.S. Copper Industry,
Supporting Paper 5: "Effects of Pollution Abatement and Control
Costs on Industry-wide Cost Functions".
Refer to Technical Appendix to this report, Econometric Simulation
and Impact Analysis Model of the U.S. Copper Industry. The model
is econometrically estimated (including demand functions,
investment/capacity expansion behavior, supply functions for the
competitive secondary copper sectors, inventory equations, etc.)
by using a combination of 2SLS with a correction for auto-
correlation (iterative Cochrane-Orcutt technique, augmented by
the use of the Hildreth-Lu scanning technique when the former
led to a local, rather than a global, minimum of the sum of
squared residuals).
The model is mathematically solved by developing and using a
modified version of the Newton-Raphson technique where the
solution is made essentially independent of the initial guess
for the root.
The financial analysis module is block-recursive with respect
to the econometric model. Overall cash-flow and flow-of-funds
(sources versus uses) analyses are performed, by analyzing
financial data computed directly from the model's results, as
well as on the basis of detailed historical industry-wide
and specific company-by-company financial data. Various types
of standard financial checks are exercised, by examining
debt-to-equity ratios, amount of external borrowing required,
profits on sales, rate of return on assets, and so forth.
The employment forecasts discussed here reflect average labor
productivity (refined copper output by the primary producers
per full-time equivalent employee) 'conditions prevailing over
the period 1967-1973 (actual, estimated productivity levels
were used for years 1974-1977). Overall labor productivity
in the domestic copper industry has at best remained fairly
constant in recent years. Employment forecasts reflect no
significant improvement in labor productivity over the
1978-1987 period. To the extent that the industry's productivity
problem further deteriorates, the employment impacts given here
would understate potential impacts.
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NOTES
(Continued)
4. Possible layoffs would be associated, under this analysis, only
in the eventuality that the McGill, Douglas, and Tacoma smelters
would be closed down as assumed under the Reduced Capacity scenario.
5. The employment data given here are obtained from United States
Bureau of the Census, Census of Manufactures, 1972, Industry
Series; Smelting and Refining of Nonferrous Metals and Alloys.
Vol. II, 33C (Washington, D.C.: United States Government Print-
ing Office, 1975) Table 2. It should be noted that employment
data at the state level (except for Arizona) are withheld to
avoid disclosing figures for individual companies.
6. For a detailed discussion of the points made here, pertaining
to the cost functions of the primary producers, refer to
Technical Appendix to this report, Econometric Simulation and
Impact Analysis Model of the United States Copper Industry.
7. We have discussed in Chapter X in considerable technical detail
how the present environmental regulations effectively constrain
domestic capacity growth. In retrospect, this result appears to
have been unintended.
8. Cement copper (86); refined copper (112), with the following
breakdown: mining (21.6), at 0.2 percent grade with 157 tons
of ore per ton metal; concentration (42.3); smelting (38.2);
refining (10.2). This high energy consumption stems from
problems associated with the relatively low grade of the ore.
See Earl T. Hayes, "Energy Implications of Materials
Processing", Science (Materials) Vol. 191, No. 4228
(20 February 1976), pp. 661-665.
9. Ibid.
10. The reference here is to the International Bauxite Association
(IBA), established in a meeting in Conakry, Guinea, March 5-8,
1974; seven founding members include Australia, Guinea, Guyana,
Jamaica, Sierra Leone, Surinam and Yugoslavia; headquartered in
Kingston, Jamaica. In a Council of Ministers Meeting of the
organization held in Georgetown, Jamaica (November, 1974), three
new members (Dominican Republic, Ghana and Haiti) were admitted;
three other countries (Greece, India, and Trinidad and Tobago)
were accepted as official observers. It was also decided that
Indonesia and Malaysia would qualify as observers if they should
apply. IBA controls about 80 percent of world bauxite production.
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NOTES
(Continued)
11. Jamaica unilaterally proceeded to institute a new levy of 7.5
percent of the realized price on sale of primary aluminum and
increase royalties to 50 cents per ton of bauxite mined. The
Government also purchased a 51 percent equity in Kaiser Bauxite
Company and has presumably the same ownership in Revere Jamaica
Aluminum, Ltd. Surinam has signed a letter of intent with
Alcoa, according to which levies on one ton of bauxite (estimated
at $2.50) would be increased to $9. In Haiti, Reynolds agreed
to pay increased levies similar to those in Jamaica. See
L. Nachai (United States Bureau of Mines), "Investment for
Mineral Exploration and Development in Foreign Countries—Problems
and Positive Factors", paper presented at the AIME Annual Meeting,
Las Vegas, Nevada (February 22-26, 1976), pp. 6, 7.
12. Certain practical difficulties stand in the way of significant
substitution of aluminum for copper. For example, with copper
wire it is very easy to make connections, while with aluminum
considerable care is needed. Also, since aluminum "creeps"
more than copper, slack can develop in connections, which can
lead to a build-up in resistance in the circuit. This poses a
subsequent fire risk by promoting oxidization of the metal and
causing a rise in the temperature. Difficulties with installation
and with fire risks have led to outright bans of aluminum wire in
several areas, notably in California and Washington, D. C.
13. The discussion presented here draws upon working papers and unpub-
lished material provided by Raymond F. Mikesell, Professor of
Economics, University of Oregon (Eugene, Oregon); he remains, however,
blameless of the interpretation of his inputs and the conclusions
drawn by Arthur D. Little, Inc.
14. When the Bougainville mine in Papua, New Guinea went into
operation in 1972, the high gold content of the ore helped
in making that mine a relatively low-cost producer.
15. See, for example, Commodities Research Unit (CRA), The Current
Costs of Producing Primary Copper and Future Trends (1976).
16. This was in contrast to smelters in the Western United States
which until recently at least, did not have any outlet for
the acid.
17. See Environment and Development, World Bank, Washington, D. C.,
June 1975.
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NOTES
(Continued)
18. See Ingo Walter, "Environmental Control and Patterns of
International Trade and Investment: An Emerging Policy Issue",
Banca Nazionale del Lavoro Quarterly Review (March, 1972);
Anthony Y. C. Koo, "Environmental Repercussions and Trade
Theory", The Review of Economics and Statistics (May 1974);
and Wassily Leontief, "Environmental Repercussions and the
Economic Structure: An Input-Output Approach", The Review of
Economics and Statistics (August 1970).
19. The resolution of UNCTAD IV held in Nairobi, May 1976 for the
"Integrated Program" (IP) called for both the stabilization of
commodity prices and the improvement of the real incomes the
LDCa derived from commodity exports. The IP proposal recommends
focus on 17 commodities which cover about three-fourths of the
nonfuel commodity trade of the developing countries. These
include ten "core" commodities (cocoa, coffee, copper, sugar,
cotton, jute, rubber, sisal, tea and tin) and seven others
(bananas, bauxite, beef and veal, iron ore, rice, wheat and
wool). The ten core commodities are storable and are
recommended for initial individual international stockpiling
agreements. The UNCTAD IV resolution provides for (1) a negoti-
ating conference on a "common fund" for financing the
stabilization arrangements (beginning by March 1977);
(2) preparatory meetings on individual commodities not
later than February 1978; and (3) commodity negotiating
conferences with negotiations to be concluded at the latest
by the end of 1978.
For a summary of some of the analytical issues associated with
international commodity price stabilization programs, see
Raymond F. Mikesell, "The Ford Foundation Sponsored Conference
on Stabilizing World Commodity Markets", an unpublished paper
which provides a summary of the papers and discussion given at
a conference on Stabilizing World Commodity Markets held at
Airlie, Virginia, March 17-20, 1977. (Note; the conference
was financed by the Ford Foundation and directed and organized
by Professor F. Gerard Adams of the University of Pennsylvania).
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APPENDIX A
DESCRIPTION OF THE BUSINESS
OF THE MAJOR UNITED STATES COPPER PRODUCERS
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1. Amax, Inc.
Amax is one of the largest diversified, multinational, nonferrous metals
and mineral resources companies. Principal products are molybdenum,
aluminum, iron ore, coal, copper, lead, zinc and potash. It also
produces nickel, zirconium and other specialty metals.
In July, 1972, Amax acquired Banner Mining Company, which owned the Twin
Buttes/Pima County, Arizona property then leased to and mined by
Anaconda; and then entered into a partnership arrangement with Anaconda
to develop and expand operations at Twin Buttes, with an expected
expenditure exceeding $200 million over the period 1973-1976. Banner
Mining was acquired in 1973, by merger into Amax Copper Mines, Inc., a
wholly-owned Amax subsidiary, in accordance with the plan of merger and
partnership.
The Twin Buttes Mine is now owned and operated by Anamax Mining Company,
the 50-50 partnership between Amax and Anaconda. The $275 million
expansion program is expected to raise capacity from about 75,000 tons/
year to 90,000 tons/year (from sulfide ores) plus 36,000 tons/year from
a hydrometallurgical process for producing cathodes from oxide ores.
Amax's subsidiary, United States Metal Refining Company, has operated
for many years a copper smelter and refinery at Carteret, New Jersey,
capable of producing refined copper from domestic and foreign ores,
concentrates, blister copper, and copper scrap. The Carteret smelter
treats blister copper originating largely from foreign sources, purchased
from Amax's own account and on toll for others. It also processes a large
volume of scrap, and also treats precious metal-bearing secondary
material and precious metal from primary sources both for its own account
and for others; large quantities of silver and gold are typically
handled. The total annual refining capacity of 275,000 short tons
consists of 150,000 tons of electrolytic capacity and 125,000 tons of
fire-refined capacity.
An environmental control program for the Carteret plant has been under
review by the New Jersey Department of Environmental Protection and EPA,
involving the design and construction of additional control facilities.
This program is likely to involve cumulative expenditures of $12 to $15
million, most of which has occurred.
Amax had held approximately 20 percent of Copper Range's common stock,
and reached agreement in 1975 for Copper Range to merge with a wholly-
owned Amax subsidiary. The merger was opposed by the Justice Department
and Copper Range was subsequently merged with Louisiana Land and
Exploration.
Amax has substantial United States lead and zinc operations, carried out
through wholly-owned subsidiaries. It has a participation in a joint
venture for the operation of a lead, zinc, and copper mine and mill in
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New Brunswick, Canada, through Heath Steele Mines, Ltd., of Canada, also
a subsidiary.
Amax and Homestake Mining Company are equal partners in the mine-mill-
smelter complex associated with mining of their lead deposits with zinc
content, in Southeastern Missouri. The mine participants sell a portion
of their lead concentrates under long-term and spot contracts. In
October 1969, Amax became a coal producer through the acquisition of
Ayrshire Collieries Corporation. In 1974, Amax ranked as the fourth
largest coal producer in the United States, up from eleventh position at
the time of its entry into the business.
Amax Inc. holds a 50 percent interest in Alumax Inc., formerly Amax
Aluminum Company, Inc. Since January 30, 1974, Alumax's outstanding
capital stock has been owned equally by Amax Inc. and Mitsui & Co., Ltd.,
Tokyo. Mitsui paid $135 million cash for its 50 percent interest. In
January, 1975, the corporate name was changed to Alumax Inc.
Alumax produces primary aluminum, semifabricated and fabricated aluminum
products, architectural products, secondary aluminum and zinc alloys.
It operates 49 domestic plants and warehouses located in 24 states, and
14 foreign plants and warehouses located in Canada, Mexico, England,
Holland, Germany, France and Sweden.
Table A-l presents details on the breakdown of Amax's sales revenues and
consolidated income, by lines of business, for the past ten years, as
reported by the company. Base metals per se, including tolling services
and trading revenues, were $607 million in 1974; they typically have
accounted for somewhat over 50 percent of total sales, but less than 25
percent of operating earnings ($76 million in 1974, out of $146 million
total). Copper sales have accounted for about 17 percent of total sales
in recent years, and roughly 75 percent of this is derived from scrap
and/or foreign blister. Amax additionally derives revenues from its
International Group, including fees and commission through RST Inter-
national, Inc. ($32 million) and dividends from investments principally
in African copper mining companies ($18 million).
2. The Anaconda Company (Atlantic Richfield)
The Anaconda Company was incorporated in the State of Montana in 1985.
Anaconda is the third largest producer of primary copper, the largest
producer of brass mill products in the United States, and is a signifi-
cant producer of wire mill products."* in addition to mining and
processing copper, it has a significant position in the production of
aluminum and the mining and milling of uranium.
Anaconda conducts its mining, processing and manufacturing operations at
over 50 locations throughout 22 states of the United States, and has
120 sales offices throughout the country. It also has investment in
mining, processing and manufacturing operations in Australia, Brazil,
Canada, Jamaica, Mexico, Puerto Rico and the Netherlands.
A-2
Arthur D Little Inc
-------
TABLE A-l
For the Year
(dollars in millions except per
share amounts)
Sales
Earnings from operations
Equity in earnings of Alunax Inc.
Interest expense
Interest and other income, net
Dividend income
Federal and foreign Income taxes
Earnings before extraordinary
items
Extraordinary Items
Net earnings
Dividends declared on:
Preferred stock
Common stock
Total
Per share of common stock
Primary earnings'*
Fully diluted earnings
Dividends declared
Dividends as a percent of
primary earnings
Book value
Price range
Price earnings ratio
Return on January 1,
shareholders' equity
At Year-End3
(in millions)
Working capital
Investments (at book
amounts) in:
A Umax Inc.
Africa
Other
Property, plant and
equipment (net)
Long-term debt
Deferred income taxes
Other
Shareholders' equity
high
low
AMAX TEN-YEAR FINANCIAL SUMMARY
1974
$1.163
$145.5
18.9
(22.0)
41.2
19.4
(54.6)
$148.4
_
$148.4
$ 9.3
39.0
$ 48.3
1973
$ 964
$115.8
17.3
(26.9)
16.8
14.2
(32.1)
105.1
_
$105.1
$ 10.1
35.0
$ 45.1
1972
$ 566
$ 71.3
10.5
(21.0)
15.9
8.0
(18.5)
66.2
_
$ 66.2
$ 4.1
33.2
$ 37.3
1971
S 480
$ 48.9
7.2
(25.8)
26.1
11.2
(12.5)
55.1
(3.8)
$ 3.4
33.1
$ 36.5
1970
$ 582
$ 69.3
8.9
(19.7)
22.0
14.2
(22.1)
72.6
_
$ 72.6
$ 3.2
33.1
$ 36.3
1969
$ 474
$ 48.0
12.0
(10.8)
12.8
32.8
(12.8)
82.0
_
$ 82.0
$ 1.2
31.3
$ 32.5
1968
$ 342
$ 38.8
11.0
(8.5)
10.1
28.0
(10.7)
68.7
7.6
$ 76.3
$ .4
29.4
$ 29.8
1967
$ 273
$ 27.4
9.3
(6.8)
9.2
21.9
(4.4)
56.6
3.5
$ 60.1
$ .9
28.6
$ 29.5
1966
$ 356
$ 50.5
8.0
(6.1)
8.0
23.9
(15.2)
69.1
-
$ 69.1
$ 1.4
28.1
$ 29.5
1965
$ 305
$ 46.7
2.1
(4.3)
12.1
22.3
(16.4)
62.5
-
$ 62.5
$ 1.8
24.3
$ 26.1
$ 5.82 $ 4.03 $ 2.62 $ 2.03 $ 2.93 $ 3.47 $ 3.28 $ 2.62 $ 3.06 $ 2.78
5.26 3.74 2.59 2.00 2.83 3.40 3.20 2.55 2.94 2.67
1.64 1.4B 1.40 1.40 1.40 1.33 1.27 1.27 1.27 1.12
28Z 37Z 53Z 69Z 48Z 38Z 39Z 48Z 42Z 40Z
$31.72 $27.50 $25.75 S24.54 $23.91 $21.14 $19.97 $17.85 $16.13 $14.13
$52-7/8 $51-1/4 $33-7/8 $37-3/8 $40 $37 $35-5/8 $38-3/4 $43-5/8 $36-1/8
$30-1/4 $29 $27 $25-1/4 $28-3/4 $29-1/8 $28
9-5 13-7 13-10 18-12 14-10 11-8 11-9
$28-1/8 $22-3/4 $26-7/8
15-11 14-7 13-10
17.7Z 15.2Z 10.OZ 7.9Z 12.5Z 17.3Z 17.9Z 15.OZ 19.6Z 19.8Z
$ 197 $ 327 $ 339 $ 299 $ 217 $ 191 $ 197 $ 194 $ 172 $ 167
130
90
52
1,069
(401)
(109)
(86)
* ^
$ 942
206
61
42
771
(441)
(77)
(49)
$ 840
203
85
50
574
(457)
(64)
(37)
$ 693
218
79
38
485
(391)
(42)
(22)
$ 664
207
83
38
397
(260)
(30)
HI
$ 649
201
62
35
332
(201)
(27)
(10)
$ 583
185
52
26
213
(190)
(15)
7
S 475
145
42
28
182
(157)
(14)
7
$ 427
128
40
21
173
(126)
(14)
0
$ 394
98
38
20
147
(108)
(11)
1
$ 352
NOTES;
"Previously reported amounts have been restated to include Alumax, Inc. on an equity basis.
Effective October 1, 1971, the capitalization of interest applicable to major construction projects was
extended to Include Interest on general corporate borrowings, as well as specific project borrowings.
Interest capitalized totaled: 1974, $17.0 million; 1973, $14.0 million; 1972, $11.6 million and 1971,
$3.8 million. No interest was capitalized in 1970 and Interest capitalized in prior years was not material.
••Includes extraordinary gains and charges: 1971, charge of 16c per share; 1968, net gain of 33? per share;
1967, gain of 15c per share.
SOURCE: Araax Annual Report.
A-3
Arthur DLittklnc
-------
TABLE A-l
(Continued)
AMAX TEN-YEAR FINANCIAL SUMMARY—BY LINES OF BUSINESS
For the Year
(dollars In millions)
Sales:
Molybdenum and Specialty
Metals
Base metals
Fuels and Chemicals
Jron Ore
RSTb
Total sales0
Earnings from operations before
income taxes, exploration and
unallocated corporate expenses:
Molybdenum and specialty
metals
Base metals
Fuels and Chemicals
Iron Ore
RST
Exploration expenses
Unallocated corporate expenses
Earnings from operations
Capital expenditures and
investments:
Molybdenum and specialty
metals
Base metals
Fuels and Chemicals
Iron ore
RST
Corporate
Total capital expenditures
and investments
Depreciation and depletion
1974 1973 1972
$ 240 $ 179 $
1971 1970 1969 1968
1967
1966
1965
$ 108 $ 145 $ 155 $ 123 $ 106 $ 123 $ 111
607
206
78
32
$1.163
534
154
60
37
$ 964
256
137
45
14
$ 566
205
118
39
10
$ 480
276
118
25
18
S 582
275
36
8
-
$ 474
197
22
-
_
$ 342
141
26
-
-
$ 273
200
33
-
-
$ 356
161
33
-
-
$ 305
41 $46 $ 28 $ 28 $ 51 $ 55 $ 37 $ 32 $ 40 $ 39
76
45
37
20
219
(37)
(36)
$_JU6
47
22
32
26
173
(33)
_i24)
$ 116
16
23
25
5
97
(12)
(14)
$ 71
8
15
23
1
75
(16)
(10)
$ 49
11
13
13
8
96
(14)
_J13)
$ 69
9
0
4
_
68
(9)
_Jii>
$ 48
14
1
-
_
52
(7)
ti> .
$ 39 !
9
0
-
-
41
(7)
£!>
U£
20
4
-
_
64
(5)
ii>
$^51
15
8
-
-
62
(7)
18)
LM
$ 140
76
89
33
68
$ 51
110
64
10
1
17
$ 39
10
52
8
8
28
49 $ 29 $ 11 $ 17 $ 25 $ 24 $ 25
8
36
30
8
19
24
84
4
15
83
18
10
15
4
29
11
13
5
14
9
12
1
26 $ 57 $ 48 $ 45
18 S 13 $ 16 $ 14
NOTES: alncludes the sale of metals processed from concentrates and scrap materials, tolling services, sales of
copper from AMAX's 50Z share of the operations of the Twin Buttes Mine from January 1, 1973 and sales of
copper and silver arising out of purchase and sales transactions of these metals on commodity exchanges.
Consists of fees, commissions and net trading revenue.
cSales of molybdenum, copper and coal to total Company sales for the last five years were as follows:
Molybdenum
Copper*
Coal
*Exclusive of charges for toll refining of copper and transactions on commodity exchanges.
1974
20Z
17
12
1973
17Z
17
10
1972
182
19
16
1971
20Z
16
13
1970
23Z
21
10
A-4
Arthur D Little Inc
-------
Anaconda employed approximately 21,934 persons at July 30, 1975, compared
to 27,840 persons employed by it at June 30, 1974. (This substantial
reduction in employees resulted from layoffs which were compelled by
reduced demand for Anaconda's products during the recession, together
with company-wide efforts to reduce costs and increase productivity.
a. Copper Production
Anaconda's domestic production of primary copper was 190,059 tons in
1974. Over the five year period 1970-75, production ranges from a low
of 149,600 tons in 1975 to a high of over 200,000 tons in 1970.
Approximately 60 percent of such production comes from the Butte Mines
in Montana; certain of these operations are being phased out. The
Twin Buttes Mine in Arizona, on the other hand, has been the subject of
a new development investments, through Anamax Mining Company, a 50-50
partnership between Anaconda and Amax (see also Amax).
Substantially all copper concentrates from Anaconda's mines and pre-
cipitates from leaching operations are shipped to its smelter in
Anaconda, Montana for smelting. All anode copper produced at the smelter
in Anaconda, Montana is shipped to Anaconda's electrolytic refinery at
Great Falls, Montana for refining and casting into commercially market-
able forms of refined copper, and slimes are set apart for recovery of
precious metals.
In October, 1974, production commenced at Anaconda's new Arbiter plant
near Anaconda, Montana. The Arbiter plant represents the first
commercial application of a hydrometallurgical refining process in the
copper industry instead of the traditional combination of pyrometallur-
gical and electrolytic refining processes. A principal advantage of the
new Arbiter process is the elimination of sulfur oxide and other air
pollutants produced by the conventional pyrometallurgical smelting of
sulfur ores. The Arbiter process was developed by Anaconda's metallur-
gical research department as a part of a major research effort to
reduce pollution.
Anaconda has stated that the Arbiter plant is capable of treating a wide
range of concentrate types and grades with a recovery capability
approximately equal to the most efficient smelters. Capital costs of a
plant using the Arbiter process are estimated to be lower than those of
a conventional smelter and refinery, and it is anticipated that the
operating costs of the Arbiter plant will be competitive with costs
incurred in the conventional method. Anaconda has invested approximately
$47 million in the construction and development of the Arbiter plant as
of June 30, 1975.
In July, 1975, the Arbiter plant was temporarily shut down, and was re-
opened in mid-1976, after required adjustments relating primarily to
materials handling and mechanical problems. Anaconda spend an additional
investment of approximately $8 million for these adjustments. The
Arbiter plant is expected to have a capacity of approximately 36,000
tons os cathode copper production per year.
A-5
Arthur DLittklnc
-------
Significant by products are produced in the course of Anaconda's copper
processing operations. Molydenite is recovered at the Twin Buttes Mine.
Silver, gold, selenium and tellurium are recovered by the refinery from
the slimes left in the refining plant after the production of electro-
lytic copper. Anaconda received approximately $30.3 million from the
sale of precious metals in 1974, compared with $15.2 million in 1973.
Approximately 49 percent of Anaconda's mined copper was sold to its
manufacturing divisions in 1973, compared to 58 percent in 1974 and 72
percent for the six months ended June 30, 1975, and the balance was sold
to others. Approximately 37 percent, 41 percent and 63 percent of the
copper required for Anaconda's domestic manufacturing operations was
purchased from Anaconda during 1973, 1974 and the six months ended June
30, 1975, respectively, and the balance was purchased from other
primary copper producers, scrap dealers, customers and other sources.
b_. Sales and Operating Income by Division
Table A-2 sets forth the approximate relative contributions to consoli-
date sales and operating income by Anaconda's organizational profit
centers for the four years 1972-1975. Comparable information for prior
periods is not available, primarily because of the Chilean expropriation
and subsequent corporate reorganization in 1971. A five-year summary
is presented in Table A-3.
c. Foreign Operations
Among Anaconda's foreign manufacturing interests are a wholly-owned
subsidiary, Anaconda Canada Limited, which operates a large brass mill
in Toronto, Ontario.
Anaconda owns 49 percent of Compania Minera de Cananea, S.A., which has
an open-pit mine at Cananea in the State of Sonora, Mexico. The
Cananea Mine produced 44,373 metric tons of blister copper during 1974,
compared with 41,999 metric tons during 1973. In 1973, an expansion
program commenced which is expected to increase production to
approximately 70,000 metric tons of copper per year by the end of 1976.
Cananea Mine production is concentrated and smelted at Cananea facilities,
and the resulting blister copper is shipped for refining to Cobre de
Mexico S.A. in Mexico City, in which Compania Minera de Cananea has a
small ownership interest.
Anaconda also owns a 40 percent in National De Cobre, S.A., which
operates casting and brass mill manufacturing facilities in Mexico City,
a 40 percent interest in S.A. Marvin, which operates a brass mill in
Brazil.
A-6
Arthur D Little Inc
-------
TABLE A-2
ANACONDA'S SALES AND OPERATING INCOME BY DIVISION
(millions of dollars)
The following table sets forth the contributions to consolidated sales
and operating income by Anaconda's organizational profit centers for
the four years 1972-1975. Comparable information for 1971 is not avail-
able, primarily because of the Chilean expropriation and subsequent
corporate reorganization in 1971.
1975 1974 1973 1972
Sales and other operating revenue:
Montana Mining and General Mining
Divisions $ 278.1 378.5 341.3 341.8
Uranium Division 24.0 28.6 29.5 18.2
Natural Resource Divisions 302.1 407.1 370.8 360.0
Aluminum Division 311.2 384.0 276.2 198.4
Brass Division 347.2 616.4 497.3 346.5
Wire and Cable Division 294.1 502.0 390.5 286.1
Walworth Division (Acquired
October 1975) 11.6
Forest Products Division
(Sold June 1972) 9.7 24.6
Less sales between divisions (178.4) (236.8) (201.4) (204.0)
Net Sales and other operating
revenue $1,087.8 1.672.7 1.343.1 1.011.6
Operating income (loss):
Montana Mining and General Mining
Divisions (40.7) 41.1 49.9 27.2
Uranium Division .5. 4.5 10.1 5.8
Natural Resources Divisions $ (40.2) 45.6 60.1 33.0
Aluminum Division 17.4 48.9 (2.9) 3.9
Brass Division (1.8) 30.1 24.9 10.3
Wire and Cable Division 9.2 61.3 23.9 13.8
Walworth Division (Acquired
October 1975) .8
Forest Products Division
(Sold June 1972) 3.6
Unallocated Corporate Expenses (13.2) (11.0) (9.1) (8.4)
Consolidating adjustments (.9) (1.3)
Operating income (loss) $ (28.7) 173.6 96.8 56.2
SOURCE: Anaconda Annual Report.
A-7
Arthur D Little Inc
-------
TABLE A-2
(Continued)
FIVE-YEAR SALES BY CLASS OF PRODUCTS
(millions of dollars)
Copper and copper products
Aluminum and aluminum products
Uranium oxide
Other metals, forest products, etc.
Total
Primary Production
Copper (short tons)
Aluminum (short tons)
Uranium (short tons)
Silver (thousands of ounces)
1975 1974 1973 1972 1971
$ 625.1 $1,163.1 $ 960.9 $ 701.3 $ 662.5
335.8 403.8 299.7 220.2 177.0
24.0 28.6 29.5 18.2 20.4
102.9 77.2 53.0 71.9 86.6
$1.087.8 $1.672.7 $1.343.1 $1.011.6
149,622 197,543 208,110 242,955 227,415
243,591 298,737 217,950 177,618 171,677
1,736 2,025 2,069 2,022 1,763
2,352 3,571 4,256 3,979 3,869
SOURCE; Anaconda Annual Report.
A-8
Arthur D Lit tie I nc
-------
TABLE A-3
ANACONDA FIVE-YEAR SUMMARY OF OPERATIONS
(millions of dollars, except per share figures)
Sales and Other Operating Revenue
Operating Costs and Expenses
Cost of sales and expenses
Provision for depreciation and
depletion
Operating Income (loss)
Equity in net income of affiliated
companies
Income from Chilean investments
Interest and miscellaneous income
Interest expense
Gains (losses) on foreign exchange
Income (loss) before Taxes and
Extraordinary Income
Provision for income taxes
Income (loss) before Extraordinary
Income (loss)
Extraordinary income (loss)
Net Income (loss)
Per share of common stock:
Income (loss) before extraordinary
income (loss)
Extraordinary income (loss)
Net income (loss)
Dividends paid:
Amount
Per share of common stock
1975
1974
1973
1972
(38.6) 161.2
1.2 54.5
93.7
24.6
48.8
5.4
(39.8)
106.7
140.4
247.1
69.1
17.7
43.4
88.3
86.8
131.7
1971
$1.087.8 1.672.7 1.343.1 1.011.6 946.5
1,065.2 1,448.4 1,200.6 911.3 882.3
51.3 50.7 45.7 44.1 46.9
1.116.5 1.499.1 1.246.3 955.4 929.2
(28.7) 173.6 96.8 56.2 17.3
5.8
9.4
6.1
(32.0)
.8
16.7
5.4
5.6
(29.7)
(10.4)
15.3
4.8
(23.2)
10.0
4.3
(21.7)
4.2
1.6
(25.2)
(2.1)
3.9
(6.0)
(347.9)
$
L
(1.80)
(1.80)
16.6
.75
4.83
6.36
11.19
22.1
1.00
3.13
.80
3.93
11.0
.50
1.97
4.00
5.97
2.7
.125
(.28)
(15.89)
(16.17)
10.9
.50
NOTES;
aReference should be made to the company's previous annual reports to shareholders
for more complete explanations of the extraordinary income (loss) shown above. The
extraordinary items included: 1971—losses due to the expropriation of Chilean
investments and corporate reorganization costs; 1972—gain on sale of Forest
Products Division's principal assets and income tax benefits from utilization of
loss carryforwards; 1973—utilization of tax loss carryforwards; and 1974—settlement
of 1971 expropriation loss with the Government of Chile and utilization of tax loss
carryforwards.
Certain changes in accounting practice were adopted during the five-year period. The
only changes significantly affecting reported annual earnings occurred in 1972 in the
method of translating foreign currency debt, which resulted in an extraordinary
charge of $5.2 million (24 cents per share), and in 1974 in the extension of the use
of the Lifo method, which had the effect of reducing income before extraordinary
income and net income for that year by $8.9 million (40 cents per share) and $17.2
million (78 cents per share), respectively.
A_9 Arthur DLittklnc
-------
d. Aluminum Division
Anaconda produces aluminum in primary forms from alumina at its reduction
plant located at Columbia Falls, Montana, which has an annual capacity of
180,000 tons of aluminum, and its reduction plant in Sebree, Kentucky,
which has an annual capacity of 120,000 tons of aluminum. The Sebree
facility was phased into operation in mid-1973. Approximately 13 percent
of Anaconda's aluminum production was sold to others in 1974.
Anaconda normally receives 59 percent of its alumina (the raw material
for producing primary aluminum) from Alumina Partners of Jamaica
("Alpart"), a joint manufacturing venture in which Anaconda has a 27
percent interest. Alpart owns and operates bauxite mines and an alumina
production plant in Jamaica, West Indies.
e. Uranium Division
Anaconda has one of the larger uranium mining and milling complexes
existing in the United States.
Uranium ore produced from the Jackpile and Paquate mines is processed
into uranium oxide at Anaconda's Bluewater plant near Grants, New
Mexico. The plant's current milling capacity is approximately 2,500
tons of ore per day. Production of uranium oxide during the five years
ended December 31, 1974 and the six months ended June 30, 1975 was
about 23 million pounds U_0g. Delivery commitments 1976-1980 were
expected to approximately equal this amount.
f. Chilean Expropriation
Anaconda suffered the expropriation of its Chilean properties in July,
1971. The Chilean copper mines provided, it is believed, over 40
percent of Anaconda's 1970 earnings and an even greater proportion in
prior years. In connection with the expropriation, which has been well
publicized, Anaconda's financial statements showed large write-offs,
(accounted for as an extraordinary loss) tax credits, and tax-loss
carry forward efforts, offset in subsequent years by insurance and
Chilean settlement adjustments and their corresponding tax effects.
3. Asarco. Inc.
Asarco's business has, for many years, been in the mining, smelting,
and refining of nonferrous ores and concentrates, producing there from
principally copper, lead, zinc, silver, and gold, and recovering
related by-products from such operations. The business also includes
buying and processing nonferrous scrap, and selling the alloys produced;
producing and selling coal and asbestos; and producing chemical materials
and manufacturing machinery for the metalplating and finishing industry.
Asarco's operations are carried on principally in the United States with
additional operations in Canada, Mexico, and Peru. Asarco has sub-
stantial investment in other mining companies, principally in Australia
A-10
Arthur D Little Inc
-------
(Mount Isa Mines holdings—49 percent), Peru (Southern Peru Copper
Corporation—51.5 percent), Mexico (Industrial Minera Mexico—34 percent),
and holds a substantial interest in Revere Copper and Brass Incorporated
(33.4 percent stock plus convertible debentures).
Table A-4 reproduced from Asarco's Annual report succinctly illustrates
Asarco's participation in the nonferrous metals.
In the United States, Asarco plays a special role as the largest custom
smelter as well as one handling considerable "dirty" concentrates and
recovering by-products such as arsenic. Asarco has incurred substantial
expenditures for environmental controls associated with its smelters and
refineries.
Asarco has phased out production at its Baltimore and Perth Amboy copper
refineries after 1975. Asarco has constructed a new copper refinery,
with a designed capacity of 420,000 tons of refined copper per year, in
Amarillo, Texas.
The associated companies—principally those in Australia, Peru and
Mexico—also have major capital expansion programs underway. Capital
expenditures by the three companies in 1972 aggregated $127 million and
exploration expenditures exceeded $5 million.
Sales in 1974 totalled $1,344 million, an all-time high. Earnings
before taxes and extraordinary items were a record $165.8 million, in-
cluding $109 million ($43 million in dividends) in equity earnings of
nonconsolidated associated companies. A five-year financial summary is
presented in Table A-5.
In 1974, Asarco had approximately 15,300 employees. Employment dropped
to 13,500 in 1975.
4_. Cities Service Company
Cities Service is engaged in finding, producing, manufacturing and
distributing oil, gas, and chemical products. The company's annual
revenues are in the $3 billion category. Employment totals 17,000 -
18,000.
A-ll
Arthur D Little Inc
-------
TABLE A-4
ASARCO AND ASSOCIATED COMPANIES' METALS PRODUCTION
1975
1974
1973
Copper
Lead
Zinc
(tons)
Sliver
(ounces)
Mines
Refineries
Associated
Companies
Mines
Refineries
Associated
Companies
Mines
Zinc Fuming
Plants"
Zinc Oxide1
Refineries
Associated
Companies
Mines
Refineries
Associated
Companies
Mission
Sacaton
Silver Bell
San Xavler
Granduc*
Quiruvilca
Others
Total
Tacoma
Perth Amboy
Baltimore
Amarillo
Total
Mount Isac
Southern Peru
Industrial
Miners Mexico"
Buc nans
Leadville
Others
Total
Omaha
Glover
Total
Mount Isac
Industrial
Mlnera Mexico6
Neptune
Tennessee
Buc nans
Leadville
Ground Hog
Quiruvilca
Park CityS
Total
Columbus
Hlllsboro
Total
Corpus Christl
Amarillo
Total
Industrial
Minera Mexico*
Mount Isac
Neptune*
Galena
Quiruvilca
Buc bans
Mission
Leadville
Others
Total
Perth Amboy
Baltimore
Total
Industrial
Minera Mexico6
Mount Isac
Neptune^
26,900
21,900
18,300
9,700
9,300
6,200
3.600
95,900
119,700
117,100
41,800
30,600
309.200
175,800
119,600
35,100
11,900
7,500
6.000
25.400
118,200
81.900
200,100
146,700
85,600
1,400
47,900
19.500
14,100
10.900
4,400
2.700
99.500
41,800
14,000
7.200
21.200
81,900
20.400
102.300
132.700
126,600
11,700
3,350,000
1.134.000
611.000
292,000
352,000
711.000
6.450.000
44,576.000
10.679.000
55.255.000
17.303.000
11,045,000
98,000
40,300
9,500
23,500
5,900
15,900
7,400
4.000
106.500
117,400
127,600
111.000
356.000
167,000
134,400
37,900
13,900
6,400
4.400
24.700
125,800
72.900
198.700
139,200
108,200
3,500
56,400
23,400
12,800
12.400
4.700
109.700
39.600
20,700
15.400
36.100
81,100
46.700
127.800
135.700
113,400
15,700
3,486,000
1.388,000
741,000
511,000
330,000
644.000
7.100.000
37,835.000
16.947.000
54,782.000
20,770,000
9,690,000
72.000
46,600
23,800
2,700
16,800
8,400
3.100
101.400
120,100
154,800
138,100
412.800
129,300
133,500
37,100
6,800
7,200
4.500
18.500
136,300
82.300
218,600
125,100
96,600
3,000
29,600
11,500
15,100
13,500
4,900
74.600
46,700
19,200
13.800
33,000
88,600
46,800
135.400
136,400
112,200
20,600
4,192,000
1.262,000
376,000
571,000
457,000
589.000
7.447.000
45,255,000
16.130,000
61.385,000
17.225,000
8,803,000
59,000
A-12
Arthur D Little Inc
-------
NOTES; ACCOMPANYING TABLE A-4
aAsarco's 50 percent share of copper in concentrates.
Blister output plus copper exported in concentrates.
netal content of products for fiscal year ended June 30.
Blister output.
Refined output.
Metal content of products.
AAsarco's 40 percent share of zinc in concentrates.
Metal content of zinc fume recovered from lead smelter slag at
El Paso and East Helena.
Metal content of zinc oxide.
Refined output plus metal conent of concentrates and fume sold.
SOURCE: Asarco.
A-13
Arthur DLittklnc
-------
TABLE A-5
ASARCO: FIVE-YEAR FINANCIAL SUMMARY
The following tables set forth, for the five years ended December 31. 1975. the approximate nmounts of Asarco's consolidated sales and earnings, before
taxe^ on income and extraordinary Items, attributable to its principal linos of business and11 consolidated sales of principal products and services.
Sales figures do not include sales by nonconsolidaced associated companies.
Lines of Business
1975
1974
1972
1971
(dolldrs In thousands)
Primary metals
Secondary metals
Other products
Equity in earnings
of nonconsoli-
dated associated
companies0.
Non-operating
Unusual Items
Total
*Restated, see note 2
Sales
(dollars in thousands)
Silver
Lead
Secondary metals .
Other products
Total
1
Sales
$ 697.000
121.698
185,940
-
~
$1. 004. 638
of notes to
1975
$ 167,676
252,634
81,712
85.893
121.698
295,025
$1.004.638
Earnings
(Loss)
$27.493
3,340
(4,489
27,829
(18.309)
(20.500)
$15.364
financial
17Z
25
8
9
12
29
100Z
Sales
SI, 067, 658
192,395
83.997
-
~
$1.344.050
statements.
1974
$ 290,316
285,176
143,125
120,866
192,395
312.172
$1.344.050
Earnings
(Loss)*
$ 78,927
10.706
824
109,123
(3.921)
(29,838)
$165.821
22Z
21
11
0
14
23
100Z
Sales
$ 820,692
137,162
110,585
-
$1.068.439
Earnings
(Loss)*
$ 60.911
1.467
(5.257)
81,184
(7.108)
2.237
$133.434
Sales
$653,706
107,754
52.885
-
$814.345
Earnings
(Loss)*
$27.754
1,032
(157)
31,382
(3.277)
$56.734
Sales
$512.184
103,587
40.986
-
$656.757
Earnings
(Loss)*
$ 8,677
818
800
36,826
2,268
8*9.389
1973
1972
1971
$ 324.671
174.083
110.547
75,697
137.162
246,279
$1.068.439
31Z
16
10
7
13
23
100Z
$263.942
110.534
67.438
56.232
107.754
208.445
$814.345
32Z
14
8
7
13
26
100Z
$211.290
96,798
60.619
57,623
103,587
126.840
$656.757
32Z
IS
9
9
16
19
100Z
"includes mining, smelting and refining of copper, sliver, lead, zinc and by-produrts as well as toll treatment charges for smelting and refining.
Primary cost, asbestos and llmenlte.
jSee note 4 of notes to financial statements.
Primarily dividends and Interest on Investments (other than those accounted for by the equity method). patent royalties and Interest expense.
*See note II of notes to financial statements.
Includes by-products, coal, asbestos, llmenite, etc., and toll treatment charges.
-------
Its North American Chemicals and Metals group produced the following
tonnages for sale In the last three years:
1975 1974 1973
(thousand tons)
Sulfurlc Acid 865 850 910
Copper 47 31 40
Iron Products 284 124 217
Zinc Concentrates 9 6 206
Other Industrial Chemicals 156 161 206
Total sales from North American Chemicals and Metals operations are now
in the range of $140-150 million per year, but representing only about
5 percent of the company total, and a somewhat higher percentage
contribution to profits. Table A-6 shows financial data for Cities
Service.
a. Copper
The Company conducts extensive operations in the "Copper Basin" region
of Copperhill, Tennessee. Cities Service commenced its activity there
with the purchase of Tennessee Copper Company in 1963. The ore is
mined from five underground mines, and contains 35 percent iron, 24
percent sulfur, 1 percent copper and 1 percent zinc. Operations are
integrated for production of industrial chemicals and iron products.
The values of iron and sulfur recovered at Copperhill are considerably
greater than the copper values per se. In 1970, a very large expansion
and modernization program was begun, including a new copper smelter,
iron oxide pellet plant and an additional sulfuric acid plant.
Construction of yet another acid plant was completed in 1975, and
completion of two water treatment plants to remove both chemicals and
suspended solids from process water is scheduled for 1976.
In addition to operations at Copperhill, much more extensive copper
mining operations are conducted at several locations in Arizona as
discussed below.
After many years of production, the in-place reserves of the Copper
Cities and Diamond H open-pit mines at Miami, Arizona, were exhausted
early in 1975, but leaching operations will continue at declining rates
for several years.
The mine and mill facilities of the Pinto Valley open-pit mine near
Miami, Arizona, were completed in 1974 ahead of schedule and at capital
costs slightly below estimates. This represented the largest construc-
tion project in the Company's history. The first division began pro-
duction in June of 1974 and the second division in October of 1974.
A-15
Arthur D Little Inc.
-------
TABLE A-6
CITIES SERVICE COMPANY
SUMMARY OF CONSOLIDATED FINANCIAL DATA
(Stated in millions of dollars except per share data)
1975 1974 1973
CAPITAL EXPENDITURES
North American petroleum
Production
Natural gas liquids
Refined products
Alternate fuels
Natural gas transmission
North American petrochemicals
North American chemicals and metals
International
Other operations
Total plant additions
Investments
Total
PROPERTY, PLANT AND EQUIPMENT
North American petroleum
Production
Natural gas liquids
Refined products
Alternate fuels
Natural gas transmission
North American petrochemicals
North American chemicals and metals
International
Other operations
Total gross investment
Accumulated depreciation and depletion
Total net investment
CAPITALIZATION
Long-term debt
Stockholders' equity
Total capitalization
Ratio of long-term debt to capitalization
Stockholders' equity at year end, per share3
Return on stockholders' average equity —
income before extraordinary credits
151.0
10.5
38.4
92.5
292.4
19.2
21.3
50.0
47.8
5.2
435.9
3.5
439.4
1,354.2
229.5
697.7
120.9
2,402.3
394.6
325.4
408.2
68.0
85.6
3,684.1
1,597.4
2,086.7
780.1
1,631.8
2,411.9
32.3%
60.46
8.6%
NOTES : aAd justed for 3 percent stock dividend paid
SOURCE: 1975 Annual Report.
182.4
6.9
49.7
46.4
285.4
16.6
19.0
90.5
28.0
5.4
444.9
2.0
446.9
1,253.1
220.7
696.5
52.6
2,222.9
379.5
309.2
365.2
50.8
84.2
3,411.8
1,481.0
1,930.8
581.2
1,673.7
2,254.9
25.8%
42.25
12.7%
in 1974.
178.5
4.1
33.2
4.9
220.7
13.6
12.5
75.1
19.6
54.9
396.4
5.8
402.2
1,124.6
215.2
691.2
5.5
2,036.5
365.4
313.3
281.7
39.0
255.5
3,291.4
1,437.6
1,853.8
613.8
1,530.1
2,143.9
28.6%
56.95
9.2%
A-16
Arthur DLittklnc
-------
The design capacity of 40,000 tons of ore per day was reached early in
1974. This production rate will recover in excess of 60,000 tons of
copper annually.
Copper produced in concentrate form will be smelted at a smelter of
another company (Inspiration Consolidated).
Start-up of the Miami East underground mine was expected to begin in the
early part of 1976, but was postponed due to escalation costs and
depressed market conditions. It is believed the production could amount
to 2,000 tons of high grade ore per day in 1978.
A solvent extraction-electrowinning plant to produce cathode copper at
the Miami leaching operation is under construction and should be
completed by mid-1976.
An active mineral exploration program is being conducted in the Rocky
Mountain area, in Alaska, and in Canada. The objective is to find
deposits of copper and copper-associated minerals.
Cities Service is also engaged in production of fabricated copper
products in the form of sheet, strip, and insulated wire. Sales were
at record levels in 1974 but volumes have declined in the early months
of 1975, reflecting the downward trend of economic conditions. In
1974, a 50 percent expansion was completed at the Chester, New York,
plant which manufacturers insulated wire and cable for the electric and
electronic industries.
b. Financing
Cities Service has used various sources of funds to supply its capital
needs. Earnings and other funds from operations were the major source
providing approximately 60 percent of the funds expended on its diverse
operations recently. Additional funds were obtained from the sale of
$150 million 9-3/4 percent sinking fund debentures and the receipt of
$37 million in interest-free advances from natural gas pipeline
companies to be repaid from future natural gas production. The Company
also raised $48 million by guaranteeing environmental control and
industrial development revenue bonds issued by municipal agencies at
favorable interest rates for construction of facilities leased to the
Company. (The obligations under these leases are recorded as long-term
debt in conformity with accepted accounting practices.)
In 1975, Cities Service substantially completed negotiations for an
agreement to borrow $100 million from the Province of Alberta, Canada,
to help finance development of the Syncrude Canada Ltd. project. The
company renegotiated an expanded $200 million line of credit from a
consortium of banks. The company issued commercial paper during the
year; none was outstanding at year end.
A-17
Arthur D Link Inc
-------
There is a production payment liability on the Pinto Valley orebody
which totaled $107.9 million at December 31, 1975. This was a net
reduction of $300,000 during 1975 as repayment began from a percentage
of the revenues on sale of related copper production.
5. Copper Range Company
Since its organization in 1899, Copper Range Company, a Michigan
corporation, and its subsidiaries, have been engaged in the business of
mining and refining primary copper in Northern Michigan and, since 1939,
in fabricating and distributing copper and brass products. The company
is the seventh largest producer of domestic primary refined copper in
the United States.
The company's mine, mill and smelter for producing refined copper are
located in White Pine, Michigan. Its principal fabricating plant is
located in Leetsdale, Pennsylvania, with two smaller plants in Eminence,
Kentucky, and Anderson, Indiana. The mine and mill have a capacity of
25,000 tons of ore per day. The company is a relatively high-cost
producer. The smelter has a capacity of 180 million pounds of copper per
year. The company had approximately 3,600 employees in 1974, but
subsequently reduced its work force substantially due to the recession
in 1975.
Copper Range has under development a portion of the White Pine mine
knows as the Southwest Orebody, in which ore grades are believed to be
higher than those in the area currently being mined. In addition to
continued development of the Southwest Orebody, Copper Range plans to
expand its mining operations in future years by mining, both in the
area currently being mined and in other areas, to depths greater than
the 2,200-foot level to which mining is now carried out.
The copper produced at White Pine is Lake Copper whose principal distinc-
tive charasteristics is a natural silver content. It is fire-refined
and cast at White Pine into standard commercial shapes for sale. The
natural silver content of the copper derived from the White Pine mine
constitutes a competitive advantage to Copper Range in several markets.
In addition, because of its silver content, such copper is sold at
prices which include a premium of 1/8 cent of 1/4 cent per pound, depend-
ing upon the market on which it is sold. However, the same silver
content effectively precludes the use of such copper in wire mills, the
largest single market for refined copper, because its heat-resistant
qualities require the application of higher temperatures in order to
permit such copper to be drawn.
Sales in 1974 were $97.6 million. Refined copper typically has accounted
for about 61 percent, fabricated copper products 37 percent, and other
revenues 2 percent of sales over the last five years. Sales of copper
and prices received for the five years ended December 31, 1974 are
shown in Table A-7.
A-18
Arthur DLittklnc
-------
TABLE A-7
COPPER RANGE COMPANY: METAL STATISTICS
Finished Copper Production—tons
Average Grade of Ore Milled—
% Copper
Sales of Copper—tons
Average Price Received per Pound
of Copper (Net of Freight)3
Cost per Pound of Refined
Copper Sold"
Sales of Silver—Ounces0
Average Price Received per
Ounce of Silver Sold0
1973
78,506
1.002
82.k03
1974
66,896
1.006
65,947
1970 1971 1972
67,798 58,634 70,427
1.077 1.000 1.011
64,255 61,395 68,218
$ .5908 $ .5114 $ .5050 $ .6106 $ .8183
$ .4458 $ .5107 $ .5075 $ .5247 $ .7000
771,123 590,058 699,160 662,837 737,387
$1.7698 $1.5660 $1.5927 $2.3408 $4.6937
NOTES; alncludes any premium for silver content.
Does not include Interest expense and certain unallocated corporate costs
not considered material. Includes amounts for overhead and other indirect
costs for the periods indicated as follows: 1970—$.0515; 1971—$.0616;
1972—$.0495; 1973—$.0437; 1974—$.0791.
CAverage price received is net of tolling and outside processing charges.
Since this silver is recovered as a by-product, only negligible costs
are allocated to it.
SOURCE; Copper Range Company Annual Report.
A-19
Arthur DLittklnc
-------
During 1974, approximately 21 percent of Copper Range's total sales of
refined copper were to Revere Copper & Brass Incorporated and
approximately 16.5 percent to Anaconda Brass Company ("Anaconda").
During the past ten years these purchasers have accounted for from 21
percent to 27 percent and from 4 percent to 16.5 percent, respectively,
of Copper Range's total sales of refined copper. During 1974, 8.7
percent of Copper Range's total sales of refined copper were to the
Company's Hussey Metals Division ("Hussey") for use in Hussey's own
fabrication activities. During the past ten years, between 8.7 percent
and 22.5 percent of Copper Range's total sales of refined copper were
to Hussey.
Copper Range's copper is sold primarily on a current basis, with orders
generally being accepted only during the month preceding the month
of shipment. A contract with Anaconda American Brass Company called
for the shipment of 2 million and 2.5 million pounds of copper during
each month in 1975, prices to vary with New York Commodity Exchange
prices. This contract was subject to cancellation or renegotiation by
Anaconda if Copper Range changes its general pricing policy. A second
contract called for the monthly shipment to a foreign customer of
between 175,000 and 225,000 pounds of copper through April, 1975, at
prices based upon copper prices on the London Metal Exchange.
a. Copper Fabrication—Hussey Metals Division
Copper Range has fabricating facilities with an annual capacity of 51.5
million pounds of copper-brass products.
Hussey fabricates a variety of copper and copper-based alloy products
including copper bar and strip sold primarily to the electrical industry,
standard copper sheet for the construction and metal-working industries
and industrial copper strip, plate and sheet sold principally to the
electrical, industrial equipment, graphic arts and casket manufacturing
industries. It also distributes metal products made by others, in-
cluding copper, brass and bronze rods and aluminum sheet and strip.
Hussey purchases refined copper in meltable forms (which must be cast
before being fabricated) and in rolling shapes from copper producers
and from merchants. During the past five years from 1970 through 1974
Hussey purchased from White Pine Copper Company approximately 86 percent,
60 percent, 62 percent, 59 percent, and 26 percent, respectively, of
its total copper requirements (excluding copper toll-refined for others).
The decline in the percentage of Hussey's requirements purchased from
White Pine during 1974 was due, in part, to Hussey's withdrawal from
buying, following awards to Hussey of national stockpile copper from
February to May.
During the past five years Hussey's sales to Square D Company, a
producer of electrical equipment, have constituted from 6.8 percent to
11.2 percent of Hussey's sales of its fabricated products; during the
A-20
Arthur DLittklnc
-------
past three years Hussey's sales to General Electric Company have
constituted from 5.5 percent to 11.9 percent of sales of Its fabricated
products. A portion of Hussey's production represents material toll-
refined for others. During the period from 1970 through 1974 toll-
refined materials represented approximately 3.1 percent, 10 percent,
11.0 percent, 19.6 percent and 19.4 percent, respectively, of Hussey's
sales of its fabricated products.
In May 1974, Copper Range adopted a new pricing policy for domestic sales
of primary refined copper, which policy is based on New York Commodity
Exchange prices. Copper Range believed that this departure from the
pricing system used by most other domestic producers offered long-term
advantages to it. For a period of approximately four months after the
adoption by Copper Range of its new pricing policy, that policy resulted
in Copper Range's obtaining significantly higher prices for its copper
than would have been obtained under the system previously used; however,
during the latter part of 1974, the operation of Copper Range's pricing
system resulted in its obtaining prices for its copper significantly
below those which it would have obtained under the "producer price"
method used by most other domestic producers. During February, 1976,
the Company returned to the "producer price" method for the pricing of
its refined copper under which prices will be determined and published
from time to time based on the Company's evaluation of the market.
With three major fabricators of copper products in the United States,
seven medium-size fabricators (including Copper Range) and approximately
70 smaller fabricators, Copper Range's view of the market place is that
competition in this area is principally on the basis of price and time of
delivery; and that Copper Range's facilities are better suited to the
specialized order market for fabricated copper products, which involve
somewhat higher production costs and prices, than to the market for
larger, standard orders. Copper Range believes that Hussey's network
of warehouses provides it with a competitive advantage of terms of
delivery at industrial centers.
A 20-year summary of Copper Range's perfromance is shown in Table A-8.
6. Cyprus Mines Corporation
Cyprus Mines Corporation is engaged directly and through its subsid-
iaries and affiliated companies in the production and marketing of a
diverse group of metallic minerals including copper, lead, zinc, iron
ore, silver, and molybdenum; ocean transportation or iron ore and other
basic commodities; the production, processing and marketing on non-
metallic minerals, including premium grade talc, kaolin clays, and
cement; and in the manufacture and marketing of wire cable, tubing and
related products for the electrical industry.
Cyprus, through Fima Mining and Bagdad Copper, is a source of over 200
million pounds per year of domestically mined copper.
A-21
Arthur D Little Inc
-------
TABLE A-8
K>
COPPER RANGE COMPANY AND SUBSIDIARIES
HISTORICAL TABLE— 1955-1975
Net warding Capital
VEAR
1975
1974
1973
1972
1971
1970
1969
1963
1967
1966
1965
1964
1963
1962
1961
1960
1959
1958
1957
1956
1955
Nil
Income
$(13,692.218)
17.947037
10.568.656
(6.934.706)
(5.595.703)
9.566.1 19
15.866.075
9.706.016
614.665
6.467 627
8.532.708
3.302.035
3545717
3 299 904
2.657.639
(1.291 022)
2.405.095
2,585.309
2.164.979
9.155.972
9.040.059
Human of
Common
Shirai
2,343.795
2.343.795
2 343.795
2.343.795
2.343.795
2.343.435
2.228.065
2.117.804
2.054.668
2 046,775
1.982.169
1. 886.625
1.877.773
1.877.573
1.877.473
1.877.473
1.877.473
1,877.473
1.877.473
1.375.420
1.778.534
Incoflia
Peisnere—
Adjusted
01
$<584)
766
451
(296)
(239)
409
660
416
26
365
369
145
157
146
1 18
( 57)
106
1 14
96
405
402
Fund!
Generated
From
Operation*
$(10,927.930)
33427160
25 828 218
6.041.517
4.895.632
19.412680
24.797.459
17.554.001
7971.347
14.503682
13932.806
8.784.885
7.229.864
7350579
6.089.557
2.329.722
6.501,502
6.848.971
6.442,664
13.137,932
' 13.221,191
Capua!
Expenditure*
S10.4S2.933
7.519.845
5.487.854
4116.122
11.929.109
13.953.454
12,137.694
14,416.405
18.074.371
24.61 1 993
5.076.296
3.227 790
8721.331
4,446,070
3.139.191
2.932.954
1.732.632
683,624
1.968.492
1.885.351
3.673.328
Cain
Paul
$ 878.949
3.515.729
-
-
585.870
1.116.426
1.060.283
1.028.295
1.025.393
994.231
236.446
-
-
-
-
938.761
938.761
938.749
1.676.546
1.787.984
621.419
Per snare-
Adiusted
(i)
* .38
1 50
-
-
25
46
45
44
44
43
10
-
-
-
-
42
42
42
83
79
28
Total
$42,965.100
70.439 438
48.919.059
30.280.555
30.267.187
25.680.246
25.062.978
18.018.645
18.664.070
18,111.475
29.778.017
21.525.868
21.245272
25.138.775
26.470.520
26.151.143
31.499.707
32.852.309
29.081.421
29.110.347
26.486.265
Per Shara-
Adiintad
(1)
$18.33
3005
2087
1292
1292
1097
1074
773
803
780
1287
948
940
11 12
11 71 •
1157
1393
1453
1286
1289
11 79
Book Value
Total
$105.184.232
119.755.399
105.324.091
94 755 435
101.690.141
108140,577
99.528,978
84.641.250
75,962.056
76,178,193
69.351,438
60.372.823
57.611.308
54.906.985
51,605.514
48.947.675
51.177,658
49,711,324
48.064.764
47.723.992
40.361.203
Per Share—
Admiled
(1)
$44.88
5109
4494
4043
4339
4618
4264
3632
3264
3262
2996
2658
2548
2428
2283
2165
2264
2199
21 26
21 13
1796
Non-Current
Long-Term
DeW
$31.269.551
32.666.703
33.567.779
35.019.677
36.321.457
24.300.000
27.600.000
33.400.000
35.412.500
22.400.000
23.600.000
24.800.000
29.642.263
33,095.731
36.495.731
39.080.731
42.480.731
46.861.333
51.448.048
51.596.274
57.850.876
Helmed
Copper
Produclion
(Pound!)
141,551.410
133.795.919
157.011.226
140.853.407
117.268.854
135.596.115
156.709.694
147.604.119
101.568.460
131.069.202
138.064.322
1 18.107.726
121.998.453
117.484.025
112.881.034
79.583.493
74.776.464
66.431,989
74.938.664
80.426.212
68.137.483
(l) Adiusud to reflect 5% stock dividend 12/15/56.
3% stock dividend 12/9/65.
3*t suck dividend 12/9/66.
3% Slock dnrldend 12/6/68.
5* stock dividend 12/5/69.
5* stock dividend 12/4/70
-------
The company operates principally through wholly-owned divisions and
corporations in which it has a majority interest and management control.
(The two major exceptions are: (1) Marcona Corporation, which is engaged
in iron ore mining—principally associated with Peru—and shipping, is
owned 50 percent by Cyprus and 50 percent by Utah International as to
voting stock and 46 percent each as to equity; (2) Mount Goldsworthy
Mining Associates, in which the company owns an undivided one-third
interest in the iron ore reserves in Western Australia and participates
equally with Consolidated Gold Fields Australia and Utah Development
Company in the ownership and management of Goldsworthy Mining Limited,
the contract mining company).
The consolidated financial statements include all of the wholly owned
and majority-owned subsidiaries of Cyprus Mines Corporation (Cyprus).
The majority-owned subsidiaries are the following: Cyprus Anvil Mining
Corporation (Cyprus Anvil, 63 percent-owned), Cyprus Fima Mining
Company (Cyprus Pima, 50.01 percent-owned), Cyprus Hawaiian Cement
Corporation (Cyprus Hawaiian, 92.98 percent-owned), and Cyprus metallur-
gical Process Corporation (Cymet, 90 percent-owned).
Affiliated corporations which are owned from 25 percent to 50 percent
are accounted for by the equity method (wherein Cyprus includes in its
investment account for each affiliate the cost of the capital stock
acquired, its equity in their retained earnings, and advances made).
The revenue, and profits of Cyprus for the last five years are listed
in Table A-9.
a. Nonferrous Minerals Group
The company's nonferrous minerals group includes the Pima, Bagdad, and
Bruce mines in Arizona; and the Anvil mine in the Yukon Territory of
Canada.
Pima Mining Company, which has been managed by Cyprus Mines Corporation
since its initial development in the mid-1950's, is a California
corporation 50.01 percent owned by Cyprus. It has accounted for most of
Cyprus' copper production in recent years. The balance of Pima stock
is owned by Union Oil and Utah International, Inc. While essentially a
producer of copper in the form of copper concentrates, Pima also recovers
minor amounts of molybdenum sulfide concentrates and silver. In 1974,
the open-pit copper mine and the concentrator near Tucson, Arizona,
produced in concentrates approximately 160 million marketable pounds of
copper, approximately one million ounces of silver, plus molybdenite
concentrates.
Ore reserves are estimated at approximately one million tons of
contained copper.
Copper concentrates are shipped to two Arizona smelters for smelting and
refining under long-term contracts. About half of the refined copper
and the silver are returned to Pima for sale through normal channels
A-23
Arthur D Little Inc
-------
TABLE A-9
CYPRUS MINES CORPORATION
1971-1975 REVENUES AND PROFITS BY LINES OF BUSINESS
T
$114.1
38.5
112.9
15.7
114.6
8.9
404.7
74.8
$479.5
28%
9
28
4
29
2
100%
$132.8
34.6
137.2
18.3
148.7
6.6
478.2
86.8
$565.0
28%
7
29
4
31
1
100%
$126.5
25.4
108.3
20.3
105.3
5.0
390.8
69.7
$460.5
32%
7
28
5
27
1
100%
$ 96.9
20.0
89.6
15.3
77.6
3.3
302.7
48.8
$351.5
32%
6
30
5
26
1
100Z
$ 82.9
18.0
89.3
28.3
70.5
4.2
293.2
42.0
$335.2
28%
6
31
10
24
1
100%
(Dollars in Millions) 1975 1974 1973 1972 1971
Revenues
Nonferrous Minerals
Inudstrial Minerals
Iron Ore
Shipping
Manu faccur ing
Other
Subtotal3
Add minority interests
Totalb
Cross Profit0
and Other Income
Nonferrous Minerals
Industrial Minerals
Iron Ore
Shipping
Manufacturing
Other
Subtotal8
Add minority interests
Totalb
NOTES;^"Revenues" and "Gross profit and other income" are primarily the aggregate of Cyprus' ownership percentage of the
revenues or gross profit of each of the various operations or companies in which Cyprus has an Interest of 20Z or more.
b"Total revenues" and "Total gross profit and other income" are the amounts shown in Cyprus' Consolidated Statement of
Income, and represent the amounts defined in a above, plus the minority shareholders' interests in the revenues or
gross profit of Cyprus' consolidated subsidiaries (owned 50% or more by Cyprus) consisting of Cyprus Anvil, Cyprus Pima,
Cyprus Hawaiian Cement, and Cymet.
C"Gross profit" represents sales less all costs of production, including depreciation and depletion but before charges
for general and administrative costs, interest expenses, and income taxes.
$ 30.0
4.6
2.1
1.6
13.2
1.9
53.4
14.6
$ 68.0
56%
9
4
3
25
3
100%
$ 54.
5.
(1.
11.
29.
(4.
93.
41.
$135.
7
0
6)
0
1
4)
8
6
4
59%
5
(2)
12
31
(5)
100%
$ 44.
3.
6.
8.
12.
(4.
70.
29.
$100.
5
8
6
1
0
7)
3
7
0
64%
5
9
12
17
(7)
100%
$ 27.3
3.5
9.8
5.4
4.9
(4.0)
46.9
15.7
$ 62.6
58%
7
21
12
11
(9)
100%
$ 27.
2.
9.
10.
4.
(2.
51.
16.
$ 68.
4 54%
4 5
2 18
4 20
4 8
5) (5)
3 100%
9
2
-------
while the balance of the copper and silver is sold to the smelters.
Molybdenite concentrates are sold in the open market.
The old Cyprus Island Division and the Bruce Mine Division is not
considered a material asset of the company or a foreseeable material
contributor to the total revenues of the company, and has essentially
been written off.
Cyprus Mines Corporation acquired Bagdad Copper Corporation in June of
1973 in an exchange of stock. Bagdad has sales revenues of about $33
million and earnings of $3.7 million in 1972. Cyprus' financial results
are restated to account for Bagdad on a pooling-of-interests basis.
Bagdad had production of 18,000 tons of copper in 1974, and about
14,000 tons in 1975. A major expansion of Bagdad is underway, and
Cyprus states that its proven ore reserves with nearly 1.5 million tons
of contained copper will assure operation at the accelerated rate
beginning in 1977, for about 20 years.
b. Financing Operations
Cyprus' principal expansion effort is the major program of the Cyprus
Bagdad copper operation in Arizona, budgeted at an estimated cost of
$240 million. Completion of the program is scheduled for the end of
1977. At the close of 1975, $55 million had been spent. To finance the
first stages of the expansion and other smaller projects, in January
1975, Cyprus sold $100 million of ten-year notes to the public through
a group of underwriters. This was the first public borrowing in the
Company's history. In May, 1975, a $100 million bank credit agreement
was made with a group of seven banks to assure availability of funds in
1976 and 1977 while the Cyprus Bagdad expansion is being completed. No
borrowings under the agreement have yet been made. The company is
considering alternative financing which would reduce or eliminate the
need for bank borrowings.
c. Foreign Investment
On July 25, 1975, the Peruvian Government expropriated the iron ore
mining properties and facilities of Marcona Mining Company in Peru.
Cyprus' underlying share of the book value of Marcona's investment
in the Peruvian properties was approximately $12.9 million which is net
of approximately $10.2 million of income taxes previously provided by
Cyprus on the undistributed earnings of Marcona. Subsequent to the
expropriation, Marcona sustained additional losses which are deemed to
be directly associated with the takeover by the Peruvian Government.
These losses relate to Marcona-owned and chartered vessels which were
involved in transporting ore from the Peruvian mine. Such losses,
totaling $5.8 million (Cyprus' share), have been combined with Cyprus'
share of the book value of Marcona1s investment in the Peruvian proper-
ties as losses resulting from the expropriations. Accordingly, Cyprus
has written off such losses, totaling approximately $18.7 million as an
extraordinary item during 1975.
A-25
Arthur D Littk Inc
-------
We understand that United States Government officials working together
with Marcona management have held discussions with the Peruvian
Government in an attempt to receive just compensation for the expropria-
ted Peruvian assets and to resolve proposed additional tax assessments
which have been asserted for prior years. While it is still premature
to predict the outcome of these negotiations, any recovery will be
recorded as an extraordinary gain when received.
During 1974 hostilities arose on the Island of Cyprus, resulting in the
Company's operations being forcibly halted. The Board of Directors on
December 11, 1974, therefore directed the write-off of the Cyprus Island
Division by the taking of an extraordinary loss in 1974 of the amount
of $4.0 million, consisting of net assets of $10.1 million less income
tax of $6.1 million.
7. Inspiration Consolidated Copper Company
Inspiration is a domestic company and accounts for about 4 percent of
United States refined output. A continuous cast and rolled copper
rod-making facility converts about 65 percent of Inspiration's copper
production into a fabricated form sold to wire and cable manufacturers.
The bulk of Inspiration's mine production comes from relatively low-
cost open-pit operations in Arizona. Total mine production in 1974 was
122 million pounds of copper, of which some 75 percent was obtained
from open-pit mining. The Inspiration area mines Including heap and
dump leaching operations, contributed about 81 percent, Christmas Mine
11 percent, and the Ox Hide Mine's open-pit and heap-leaching operations,
8 percent. At the Christmas Mine, underground mining was plagued by
water inflow and unstable rock conditions and operations were suspended
in 1966; the open-pit operations have been expanded. The underground
operations are being maintained on a standby basis.
Reserves at the Inspiration area are estimated to contain nearly 2
billion pounds of recoverable copper; they have been expanded period-
ically by inclusion of lower-grade ores as the company becomes able to
treat such ores economically.
Approximately 8 percent of Inspiration's output is in the form of
electrowon cathode, another 14 percent from waste dump leaching, and
another 18 percent from precipitation of cement copper from low-grade
solutions. These operations require substantial amounts of sulfuric
acid and will be able to utilize that from the new acid plant which
came cmstrearn in 1974, in conjunction with the new smelter (discussed
below).
In 1972, Inspiration's plan for meeting Arizona smelter emission control
standards by 1974 called for a new smelter installation with a capacity
of about 300 million pounds of copper per year and costing about $45
million. Some $13.2 million was advanced by a toll customer (Cities
Service) to be repaid over the term of a ten-year contract for treating
A-26
Arthur D Little Inc
-------
the customer's concentrates. The balance was borrowed on bank
revolving credit, to be replaced by long-term debt financing. This
smelter complex, involving a new technology, was a substantial under-
taking, relative to the size of the company: total net plant and
equipment was $66 million at the beginning of 1973 with net working
capital of $24 million.
The new smelter came onstream in 1974, at a higher cost than originally
estimated, but having the benefit of favorable external financing.
Revenues were $98 million in 1974, and included $83 million in deliveries
of copper and $15 million in smelting and refining tolls and fabricated
product sales. The average price received for the 112 million pounds of
refined copper delivered in 1974 was 74.5 cents per pound. This was 50
percent higher than that received in 1972. Costs before depreciation,
depletion, and taxes were about 44 cents a pound in 1974. The company
began depreciating its new smelter pollution control facilities in 1974,
which increased its average cost by 3 cents/lb. in that year and 4 cents/
Ib. on the somewhat lower production for 1975; it showed a pre-tax loss
in 1975 on deliveries at 63.3 cents/lb., and lower fabricated product
sales.
Anaconda has held a significant stock interest in Inspiration, and
supported sale of larger block to the Anglo American Group in 1975,
the result being that these two groups collectively hold the majority
of Inspiration's stock.
Table A-10 presents a 4-year review of Inspiration's operations.
8. Kennecott Copper Corporation
Kennecott together with its subsidiaries is an integrated producer of
metals, minerals and metal products, principally copper and copper
products. It is the largest domestic producer of copper and an impor-
tant source of molybdenum, gold, silver, lead, zinc, titanium slag,
high purity iron and iron powders. Peabody Coal Company ("Peabody"),
which was acquired in 1968, is the largest domestic producer of coal
and also the largest supplier of steam coal to the electric utility
industry in the United States. Kennecott was required by an order of
the Federal Trade Commission to divest itself of its interest in Peabody.
This divestiture was completed in 1977.
a. Copper Operations
Kennecott operations four copper properties in the United States. The
production statistics are shown in Table A-11. Kennecott's Utah Copper
Division mine in Bingham, Utah, is the second largest copper producer
in the world, ranking next to Chile's Chuquicamata mine. Most of the
blister copper from the Utah smelter is revined at the company's
electrolytic refinery at Garfield. (Kennecott's other electrolytic
refinery is in Maryland.) Construction continued during 1975 on smelting
A-27
Arthur D Little; Inc
-------
TABLE A-10
INSPIRATION CONSOLIDATED; FOUR-YEAR REVIEW
(amounts expressed in thousands, except price and
per share figures)
1975
a,f
Deliveries of copper:
Pounds
Price per pound"
Proceeds
Other operating revenue
Interest and other income
Costs, other than those shown
separately below
Taxes, other than income taxes
Exploration and metallurgical research
Selling and general administrative
expense
Interest expense
Depreciation
Depletion
Income (loss) before income taxes
Income tax expense (credit)
Net Income (loss)
Net income (loss) per share
Average number of shares outstanding
Dividends
Dividends per share
Capital expenditures
Stockholders' equity at year end
Stockholders' equity per share
87,425
63.34C
$55,374
22,893
872
79.139
60,685
6,738
1,941
1,920
2,077
10,706
182
82.249
(5,110)
(1.200)
$(3.910)
$(1.37)
2,859
$4,053
$1.50
$2,789
$114,687
$35.07
1974
b,f
111,568
74.50
83,123
14,190
1.134
98.447
62,330
6,768
3,697
1,521
3,083
9,836
167
87.402
11,045
1.576
9.469
3.92
2,416
6,283
2.60
18,751
91,208
37.74
1973
c,f
129,732
59.18
76,774
12,605
820
90.199
58,878
5,793
2,770
1,492
5,800
221
74.954
15,245
644
14.601
6.05
2,414
4,829
2.00
40,781
87,948€
36.42€
1972
145,519
50.80
73,922
11,239
388
85.549
54,564
5,399
2,241
1,227
5,096
250
68.777
16,772
4.592
12.180
5.06
2,407
4,815
2.00
27,746
77,882e
32.35€
NOTES:
aDemand continues to decline; price drops to 63e in January; stockholders approve sale of
850,000 shares of common stock at $37 per share.
bPrice controls end April 30; price rises to 85c by June 5. 40-day strike in 3rd quarter;
market weakens with downturn in United States and foreign economies. Price drops to 72c
by year end.
CIncreasing worldwide demand. United States prices rise to 60c ceiling in 1st quarter.
United States government allows increase to 68c in December. Pollution control facilities
ready for startup at year end.
dCopper supply ample; demand modest until year-end upturn. Smelter pollution control
facilities and acid plant under construction.
CRestated to reflect adjustment related to settlement of excavator-collapse litigation.
fSee Management's Discussion and Analysis of Summary of Earnings on page 20 of Annual
Report 1975.
81972 and subsequent deliveries are shown at cathode price, whereas 1971 and prior
deliveries are on a wirebar basis.
A-28
Arthur DLittklnc
-------
TABLE A-ll
KENNECOTT COPPER CORPORATION COPPER STATISTICS
METAL MINING DIVISION PRODUCTION—1966-1975 (UNITED STATES AND CANADA)
Year
1975
1974
1973
1972
1971
1970
1969
1968
1967
1964
Ore Mlnea,
Milled and
Treated
(000 Net
Tons)
44,158
62.093
66,542
58,493
59.332
68,555
66,698
47,249
33,829
57,921
Material
Removed
to Dumps
(000 Nee
Tons)
170.280
194.676
179,590
163,978
157,689
179,759
164,648
120.154
69,923
132,606
Copper
Produced
(Net Tons)
288.104
402.213
471,721
460.576
456.142
518,888
495.968
378.215
289.016
454.044
Grade of
Ore Mined
(Percent
Copper)
.716
.714
.766
.787
.796
.773
.749
.747
.778
.792
Molybdenum
Produced
(000
Pounds)
8.833
10,316
14.288
15,041
18.460
23,123
21.471
17.023
9.853
15.577
Gold
(Ounces)
256.049°
280.561
J42.284
350,080
340,636
404,141
442,339
290,495
214,689
387,727
Silver
(Ounces)
4.852.4183
3.619,922
4.246,543
4,335,074
3,711.141
4.338.730
3.863.239
3.229,258
2,769.292
4.763.348
10
VO
COPPER PRODUCTION (BY OPERATING DIVISION) 1975-1974
Total Copper Produced from All Sources
(Net Tons)
Ore Mined. Hilled and Treated
(Net Tons)
Grade of Ore Mined
(Percent Copper)
Chlno Mines
Nevada Mines
Ray Mines
1975
53.193
21.393
42,036
288.104
1974
60,557
37.562
74.764
402.213
1975
5.297,820
4,849.672
6.692.267
44.157.759
19/4
7.638,638
7,455,476
11.721,547
35.277.300
62.092.961
.855
.721
1.023
.613
.716
.861
.775
1.043
.652
NOTES: "The method of reporting production for gold and silver was changed in 1975 from a smelter to a refinery basis in co?n"^0^™ ™J
implementation of a LIFO method of accounting. In the above table refined output of gold and silver is shown for 1975 in contrast to
previous years where smelter production of gold and silver is shown. Because of this change in reporting and the lag between the
smelting and refining processes. 1975 production of gold and silver was 28.163 ounces and 1.002.912 ounces, respectively.
-------
facilities required to meet sulfur dioxide emission standards. The new
facilities are expected to be operational in 1977, and when completed the
Magna smelter complex, together with Kennecott's other capacity, is
thought to provide the company sufficient smelter capacity for at least
the next several years.
The Chino Mines Division comprises the Chino mine at Santa Rita, New
Mexico, and a concentrator and smelter at Hurley, New Mexico, nine
miles away. The Chino mine is an open-pit operation. The Ray Mines
Division operates an open-pit mine at Ray, Arizona, The ore is
concentrated and smelted in company facilities at Hayden, Arizona.
The Nevada Mines Division has the smallest copper production. It was
shutdown in the third quarter of 1975. Then, the mining and milling
operations were curtailed indefinitely in early 1976, because of market
conditions.
Development work on a potential copper ore deposit beneath the perimeter
of the Utah Copper Division's Bingham Canyon open-pit mine continued
during 1975, and development work in this area is scheduled for comp-
letion by 1981.
Design engineering continued in connection with future operations of a
small copper mine near Ladysmith, Wisconsin. The mine could be in
operation by 1978 with estimated annual production of copper in concen-
trates of 11,000 tons.
Kennecott's subsidiaries include Chase Brass Copper Co. Chase is a
leading fabricator of copper and brass mill products; it buys a large
portion of its copper from Kennecott, accounting for about 10 percent
of Kennecott's copper sales. Profit margins are typically low in this
part of the industry; in fact, Chase showed a loss in 1971 and 1972,
and 1975.
b. Capital Expenditures and Financing
Capital expenditures for property, plant and equipment by Kennecott
(excluding Peabody) increased 39 percent in 1975 to $133.4 million from
$95.7 million in 1974. More than half of this amount related to
pollution control facilities. Sharply lower internal funds generation
resulted in the need for substantial outside financing during the last
year. (In a "normal" year, Kennecott could look forward to a cash flow
from its copper business equal to roughly its record capital spending
in 1975.)
Kennecott's financial capability in the short-run to have funds available
for expansion and improvement of its basic copper business, including
necessary pollution control expenditures, or for diversification can be
very significantly altered by the disposition of its ownership and
equity in Peabody Coal operations.
A-30
Arthur D Little Inc
-------
Kennecott increased its long-term debt by $220 million in 1975 by enter-
ing into a $200 million term loan agreement with banks, and incurring a
$20 million liability for pollution control revenue bonds issued (at
7-3/8 percent interest rate) by the Town of Hurley, New Mexico, for
facilities at Chino Mines. It ended the year with $406 million in
debt, out of total capitalization of $1,857 million; it reported $262
million in net working capital, up about 10 percent from the previous
year. Debt repayment 1976-1980 averages about $41 million per year.
c. Chilean Expropriation Effects
As in the case of Anaconda, analysis of Kennecott's financial picture
is complicated (further) by its Chilean holdings and claims: Kennecott's
49 percent interest in Sociedad Minera El Teniente, S.A., a Chilean
corporation which owned and operates the El Teniente copper mine in
Chile, was expropriated by the Chilean Constitutional Reform Bill,
which became effective in July, 1971. In prior years, Kennecott
received over $20 million per year in dividends from El Teniente.
Kennecott's investment in Chile was carried at $143.3 million at
December 31, 1971. $84.6 million of El Teniente Mining Company notes
was the subject of a Contract of Guaranty with the United States Over-
seas Private Investment Corporation. In 1972, Kennecott received a
$64.9 million settlement of its expropriation insurance claim, and
wrote off (as extraordinary loss) its $50 million ($26 million after tax
effects) equity in El Teniente stock.
In 1974, Kennecott and the Chilean Government reached an agreement
pertaining to the 1971 expropriation. The aggregate compensation agreed
upon, consisting of equity, dividends and interest was $81.4 million
less Chilean taxes of $13.4 million. The net amount of $68.0 million
consisted of $61.5 million in Chilean notes and the balance, cash.
United States taxes, net of foreign tax credits, amounted to $25.7
million, leaving a net recovery of $42.3 million reported as "extra-
ordinary credit" in 1974. All principal and interest payments due in
1975 were received. Cash flow (amortization) should equal about $6.2
million per year for 10 years, plus interest at 6 percent.
Subordination agreements existing between Kennecott and other lenders,
if enforceable, may affect retention by Kennecott of amounts previously
received on other notes issued by El Tiente. At December 31, 1975, the
amount subject to subordination was approximately $20 million.
d. Sales
Kennecott's sales of metals and metal products were $1,160 million in
1974 and, primarily as a result of a depressed copper market, declined
to $769 million in 1975. The average price received in 1975 was 61.2
cents/lb., compared to 76.6 cents/lb. on much larger tonnage in 1974.
A-31
Arthur D Little Inc
-------
Tables A-12 and A-13 show a breakdown of Kennecott's sales and income by
principal category, Income is before income taxes, minority interests
and extraordinary items. Kennecott's pre-tax operating income from its
metals mining and metals product sales (excluding dividends and Interest
items) was about $233 million in 1974; such operations produced only a
few million dollars operating profit (before write-off of a Chase Brass
and Copper fabrication plant) in 1975, when Kennecott's copper mining
and fabrication businesses were at:essentially a break-even level
(Kennecott's copper mine production was at about 70 percent of economic
capacity).
Kennecott's net earnings before taxes and before equity in net income of
Peabody Coal Company, and before minority interests and extraordinary
items, was $229 million in 1974 (and a loss of $52 million in 1975);
Kennecott made provision for $17 million current and $1 million deferred
foreign income taxes, for a total of $56 million before extraordinary
items.
9. Newmont Mining
Newmpnt, a diversified mining investment and operating company, is the
parent of Magma Copper Compnay. Newmont also owns, importantly,
Carlin Gold Mining Compnay, and 91 percent of Foote Mineral Company, and
interests in petroleum and cement companies. Internationally, it has
diverse mineral interests, notably in Canadian and African mining
companies.
In Canada, the Granduc copper mine in Northern British Columbia is
jointly leased with Asarco. The wholly-owned Similkameen project near
Princeton, B.C., began producing copper concentrates in mid-1972.
Newmont has sold its share of concentrates production at both Canadian
properties for several years to Japanese interests.
O'okiep Copper Company, 57.5 percent owned, operates several South
African copper mines (Amax has a 17 percent interest). Dawn Mining
Company, 51 percent owned, is a medium-size supplier of natural uranium
concentrates, from the Midnite Mine. Resurrection Mining Company, a
small wholly-owned subsidiary, has a joint venture with Asarco, which is
producing lead and zinc concentrates from a mine near Leadville,
Colorado; production began early in 1971. Newmont is also engaged in
petroleum and natural gas exploration and production in the United
States and Canada.
Magma Copper Company is the fourth largest United States copper producer
and presently among the more profitable of the major companies (with
estimated average total costs of between 50c and 60c/lb.). Its
principal copper properties, smelter, and refinery are located at San
Manuel, Arizona. Another mine-mill complex is at Superior, Arizona.
Magma normally employs about 4,400 persons in copper mining, smelting,
and refining operations.
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Arthur D Little Inc
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TABLE A-12
KENNECOTT REVENUE ANALYSIS
Kennecott Revenues
Copper and Copper Products
Molybdenum
Gold
Silver
Lead and Zinc Concentrates
Titanium Slag
Sorelmetal
Iron Powders
Other Products
Dividends, Interest and Miscellaneous
Revenue 15.2 15.5
Sale of 925,000 shares of Kaiser Aluminum
& Chemical Corporation common stock 19.4
Total $803.1 $1.175.7
Peabody Coal Company Revenues
Coal $705.9 $ 504.1
Dividends, Interest and Miscellaneous
Revenue 17.5 10.8
Total $723.4 $ 514.9
(in millions of dollars)
1975
ts $506.9
20.0
40.4
14.3
es 30.7
54.5
78.3
10.1
13.4
1974
$ 876.3
30.1
45.8
10.0
41.2
50.1
68.8
11.4
26.2
SOURCE; Kennecott*s 1975 Annual Report.
A-33
Arthur D Link Inc.
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TABLE A-13
SALES AND INCOME BY LINE OF BUSINESS. 1972-1974
(In millions of dollars)
Twelve Months Ended December 31
1974 1973 1972
Kennecott Copper Corporation Business Category Sales Income Sales Income Sales Income
Metals and metal products $1,160.1 $ 248.7 $1,013.8 $ 236.2 $ 800.9 $ 117.7
Non-operating income3 7.3 5.6 9.6
Non-operating deductions (1.4) (1.6) (1.6)
Coalb 504.1 23.5 381.3 (3.6) 344.4 10.2
Non-operating income 12.3 18.2 8.3
T Non-operating deductions (6.5} (7.5) (2.8)
u
*•
Shutdown expenses during strikes (12.8) (.4) (4.0)
Other non-operating income 7.9 6.6 2.3
Other non-operating deductions (28.7) (29.1) (32.6)
TOTALS
NOTES; aln 1970 a substantial portion of non-operating income resulted from dividends and interest received
from Sociedad Minera El Teniente S. A. in which the Company held a 49% equity interest. The
Company's interest in El Teniente was expropriated by the Government of Chile during 1971
(see "El Teniente" infra).
Sales and income exclude revenues applied against a reserved production payment.
D
£T SOURCE; Form 10-K Annual Report to SEC, 1974
75"
3"
-------
Newmont now has most of its consolidation assets attributable to
companies in North America. These companies accounted for 97 percent
and 77 percent of consolidated net income in 1975 and 1974, respectively.
Total assets are approximately $1.1 billion, of which its investments in
companies owned 50 percent of less represent nearly $200 million at
cost or equity.
Newmont's total revenues in 1975 were $516.5 million, and net income of
$52.9 million, compared to $547.7 million and $113.6 million, respectively,
in 1974. Magma Copper Company is the single largest source of Newmont's
income: $189.6 million in sales and $20 million in net income for 1975,
compared to $251 million and $57 million respectively in 1974.
With respect to financing, Newmont took steps to restructure its
corporate debt in 1972. A loan of $50 million from a leading insurance
company was closed in November 1972, in the form of 12-year notes, with
repayment beginning in December 1978. Simultaneously, the $130 million
revolving credit, placed in 1972 with a group of New York banks, was
restructured. Magma obtained financing for its air pollution control
program in the form of a $30 million pollution control program in the
form of a $30 million pollution control revenue bond issue.
Newmont's consolidated long-term debt was 27 percent of total capital-
ization at December 31, 1975, down from a figure near 30 percent at
year-end of 1972.
Table A-14 shows a 3 year financial summary for Newmont.
10. Pennzoil Company (Duval)
Pennzoil engages in oil and gas exploration and production, in processing,
refining and marketing of oil and gas and refined petroleum products and
in mining and processing copper, molybdenum, potash and sulfur. A five-
year financial summary for Pennzoil is presented in Table A-15.
a. Mining
Duval Corporation (Duval), a wholly owned subsidiary of Pennzoil, is
engaged in the mining and processing of ores and minerals, principally
copper, molydbenum, potash and sulfur. It is the fifth largest copper
producer.
Duval owns and operates three open-pit copper-molybdenum mines in
Arizona and two open-pit copper mines in Nevada, and four concentrating
mills located near its mines. Silver'is recovered as a by-product from
all the ore bodies, and gold is recovered as a by-product from the
Nevada ore bodies. Duval's largest mine, the Sierrita Property located
near Tucson, Arizona, is owned by Duval Sierrita Corporation (Duval
Sierrita), a wholly owned subsidiary of Duval.
A-35
Arthur D Little Inc
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TABLE A-14
NEWMONT MINING CORPORATION AND SUBSIDIARIES
THREE-YEAR SUMMARY
Gross Income
Sales and other operating revenue
Dividends, interest and other income
Equity in income of affiliated
companies
Net gain on security transactions
(on an identified cost basis)
Costs and Expenses
Operating costs and expenses
Depreciation and depletion
Granduc write-off
Exploration and research
Interest expense
Income taxes (current and
deferred)
Minority interest
Income before extraordinary items
Extraordinary items
Net Income
Preferred stock dividends
Net Income
Applicable to common stock
Cash Dividends Paid on
Common Stock
Average Share of Common
Stock Outstanding
Per Share of Common Stock Based
on the average number of shares
outstanding and after preferred
stock dividend requirements
Income before extraordinary items
Extraordinary items
Net income
After full conversion of
convertible preferred stock
(amount before extraordinary
item in 1972 is $1.84)
Cash dividends
Stock dividends
Expenditures for Property. Plant
and Mine Development
Stockholders' Equity
1975
$516,524,000
14,367,000
12,210,000
13,547,000
556,646,000
414,995,000
32,342,000
11,237,000
20,237,000
22,197,000
2,752,000
503,760,000
52,888,000
52,888,000
2,578,000
$ 50,310,000
$ 39,356,000
24,580,000
$2.05
$2.05
$2.00
$1.60
$ 53,231,000
$648,331,000
1974
$547,738,000
16,043,000
40,304,000
740,000
604,825,000
366,473,000
26,098,000
12,278,000
15,007,000
17,619,000
45,227,000
8,517,000
491,219,000
113,606,000
113,606,000
2,833,000
$110,773,000
$ 37,858,000
24,332,000
$4.55
$4.55
$4.33
$1.55
$ 55,769,000
$637,370,000
1973
$427,780,000
11,894,000
38,949,000
3,400,000
482,023,000
276,774,000
20,056,000
15,910,000
18,825,000
40,072,000
7,010,000
-378,647,000
103,376,000
103,376,000
3,181,000
$100.195,000
$ 2,7,289,000
24,135,000
$4.15
$4.15
$3.92
$1.13
$ 47,636,000
$564,361,000
A-36
Arthur D Little Inc
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TABLE A-15
STATISTICS FOR PENNZOIL COMPANY AND SUBSIDIARIES
1975
1974
1973
1972
1971
Gross Revenues—In
Thousands3 .
Oil and Gas Production
Refining and Marketing
Mining
Gross Operating Income—
In Thousands3>C .
Oil and Gas Production
Refining and Marketing
Mining
Net Crude Oil and Plant
Products Produced
(Bbls.)
Daily Average
Net Natural Gas Produced
(Mcf.)B
Daily Average
Crude Oil and Liquids
Processed (Bbls.)
Daily Average
Refined Products
Produced (Bbls.)
Lubricating Oils, Waxes
and Other
Gasoline and Naphtha
Mined Product Sales—
In Thousands
Sulphur—Long Tons
Potash—Short Tons
Copper—Pounds
Molybdenum—Pounds
Silver—Ounces
Gold—Ounces
Number of Employees
Payroll and Payments for
Account of Employees--
In Millions
313,168
518,097
284,308
164,947
24,310
36,890
243,890
441,796
281,425
121,904
27,202
70,240
135,463
282,765
201,723
45,833
31,617
33,989
103,073
196,603
166,356
38,417
23,358
15,987
94,821
146,931
130,504
33,999
20,272
15,896
21,143,908 19,821,548 16,983,435 15,548,091 14,937,768
57,929 54,305 46,530 42,481 40,925
270,315,000 273,360,000 246,435,000 221,396,000 214,800,000
741,000 748,000 675,000 605,000 588,000
18,529,083 17,388,496 13,283,971 12,114,159 11,640,078
50,765 47,640 36,394 33,099 31,891
10,993,976 10,492,515 6,356,766 5,307,107 5,135,694
6,885,384 6,361,269 6,257,666 5,981,568 5,884,236
1,787
1,043
313,217
16,371
1,805
19
1,993
1,527
244,889
20,924
1,287
10
1,762
1,357
251,032
21,965
1,570
8
1,400
1,109
282,229
16,596
1,621
13
1,026
1,270
193,216
10,405
1,348
16
9,433
146.1
9,487
122.8
8,872
102.9
7,726
84.2
7,689
77.2
MOTES:"Without adjustment for certain intercompany transactions.
blncludes POGO's entire interest but does not include any amounts attributable
to PLATO.
clncome before interest charges, Federal income tax and outside shareholders' interest.
SOURCE; Pennzoil Annual Report.
A-37
Arthur D Little. Inc
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Duval's copper concentrates and precipitates are currently sold as such
or are toll smelted and refined by others for redelivery to and
marketing by Duval. Duval has recently completed the physical construc-
tion of and is now in the process of starting up the operating of a
CLEAR-process hydrometallurgical plant near the Sierrita Property for
the electrolytic production of copper crystals (equivalent to a high-
grade blister copper) from concentrates produced at the Esperanza and
Sierrita Properties and precipitates produced at the Esperanza and
Mineral Park Properties. The patented CLEAR process is designed to
create no solid, liquid or gaseous pollution. The plant is intended to
produce 40,000 tons of copper crystals per year. It was estimated that
the plant will cost a total of $43 million, including capitalized
interest and start-up and test costs. The copper crystals will be
marketed as such to refiners and others or will be toll-refined by others
for marketing by Duval.
Most of Duval's molybdenum concentrates are currently treated by Duval
for marketing as molybdenum sulfide or for roasting in Duval's roasters.
The roasted product, molybdenum trioxide, is packaged and marketed by
Duval as technical molybdic oxide. The balance of the molybdenum
concentrates is converted into ferro-molybdenum, one of a broad line of
products offered to the steel and foundry industries. In the last sev-
eral years, Duval has accounted for about 18 percent of domestic
molybdenum production (Amax accounts for about 60 percent, Kennecott and
Molycorp most of the balance).
b. Duval Sierrita—GSA Contract
In November, 1967, the United States General Service Administration (GSA)
and Duval Sierrita Corporation entered into a domestic copper production
expansion contract pursuant to the provisions of the Defense Production
Act of 1950 for the development of the low-grade copper-molybdenum
Sierrita orebody adjacent to Duval's Esperanza Property. Construction
of facilities were substantially completed in March, 1970. Approximately
$181 million was required to develop the original project (not including
the cost of the expansion project referred to below) of which $83
million was obtained from the GSA in the form of advances against
future deliveries of copper produced from the property; $48.75 million
from commercial bank loans guaranteed in part by the GSA; $10 million
from Pennzoil; and the remainder from Duval in equity or loans. Duval
provided management and technical guidance to Duval Sierrita at cost.
The contract with the GSA provided that repayment of advances would be
made by delivery of about 218.4 million pounds of copper to the GSA
prior to June 30, 1975. The advances were credited at the rate of 38$
for each pound of refined copper delivered. While the contract provided
that certain minimum deliveries must be made at stated intervals Duval
Sierrita was entitled to sell in the open market its molybdenum and by-
product silver production and such amount of its copper production as
may be necessary to cover all cast operating expenses and maintain
working capital.
A-38
Arthur D Little Inc
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In May, 1970, these contracts were amended to provide for an increase in
the mine and mill capacity at the Sierrita Property. Duval Sierrita
agreed to spend not less than $8 million on additional facilities and
guaranteed the GSA an average rate of ore throughput on an annual basis
of not less than 72,000 tons per day. In turn, the GSA and the
commercial banks agreed to permit Duval Sierrita to sell on the open
market for its own account 90 percent of production attributable to
any ore throughput exceeding 72,000 tons per day. The remaining 10
percent of such production (net of sales required to meet cash operating
expenses attributable thereto) was to be delivered to the GSA at a
fixed price of 38c per pound.
The facilities for integrated copper-molybdenum milling operations were
completed in the latter part of 1970 and normal production commenced
subsequently.
Generally, prices and costs for copper in the United States subsequently
rose substantially in the inflationary period of 1970-1974. In 1975,
Duval Sierrita arranged a substantial acceleration of deliveries to the
GSA, after obtaining a new $55 million bank credit, and by December
1975, the total amount of copper required to be delivered to the GSA had
been made available for delivery to the GSA at refineries. Duval
Sierrita1s cash flow in excess of that needed to cover cash operating
expenses and capital additions and replacements and to maintain working
capital is now dedicated to accelerate the repayment of the bank loans,
and Duval Sierrita's operations will not contribute to Duval's cash
flow until the bank loans have been repaid.
Duval estimates the proven ore reserves of the Sierrita Property to be
523 million tons with an average copper content of 0.33 percent and an
average molybdenum content of 0.032 percent.
c. Marketing
Duval produced 132,148, 132,594 and 137,956 tons of copper in 1973, 1974,
and 1975, respectively. This production accounted for approximately
8 percent of domestic mine copper production in 1973 and 1974 and
approximately 10 percent of such production in 1975. In 1975 Duval sold
156,604 tons of copper by the acceleration of deliveries (65,000 tons)
to discharge Duval Sierrita1s obligations under the GSA contract.
Substantially all copper sales during this period were made in the
United States.
Asarco currently smelts and refines substantially all Duval's copper
concentrates and precipitates. Under existing arrangements Asarco
Purchases a portion of the copper production (in the form of copper
concentrates and precipitates) and smelts and refines the balance on a
toll basis for redelivery to and marketing by Duval. Duval's current
sales are made to a number of wire and brass mills.
A-39
Arthur DLittklnc
-------
Through 1975, Duval's sales of refined copper on the open market were
priced on the basis of the Metals Week wirebar average for United States
producers, delivered. Effective January 1, 1976, Duval declared its own
pricing basis.
d. Revenues
Metals sales constitute the bulk of Duval's revenues and typically the
major part of gross operating income. Mining revenues were approximately
$280 million in both 1974 and 1975; mining operations Income was
approximately $47 million in 1975, compared to $70 million in 1974, when
it represented about one-third of Fennzoil operating income.
During the past eight years (since the acquisition of Duval by Pennzoil
through merger with the United Gas Corporation), Duval has spend more
than $419 million for the acquisition and development of new properties
and the installation of new facilities, including more than $49 million
in 1975. The new facilities require Duval to market substantially
increased amounts of its products and to participate in markets, both
domestic and foreign, in which it did not previously participate to
a significant extent.
11. Phelps Dodge Corporation
Phelps Dodge (PD) is the second largest domestic copper producer. It
sells part of its copper production as refinery shapes or as rods, and
fabricates the remainder of its copper (as well as copper purchases from
others) for sale as wire, cable, and tubular products. PD also does
smelting and refining of copper and rolling of copper rod on tool for
others. Approximately one half of its refinery production in 1974
and 1975 was material under contract for other companies.
PD participates in the uranium market through Western Nuclear, full
ownership of which was acquired in 1971, and is expanding this subsidiary's
uranium mining and milling production capacity.
PD investments include, a 40 percent equity in Conalco, Inc., a large
domestic aluminum producer and fabricator; a 16 percent interest in
Southern Peru Copper; plus various interests in 25 companies in 19
countries abroad manufacturing wire and cable and related products.
Table A-16 is a ten year summary of Phelps Dodge operations.
a. Mining
Phelps Dodge produces copper from open-pit copper mines at Morenci, Ajo,
Metcalf, Arizona; and Tyrone, New Mexico. All the ore at Phelps
Dodge's mines is now sulfide ore. As of early 1973, Phelps Dodge
estimated the copper ore reserves at its properties at approximately
1,580 billion tons of ore, containing 9.4 million tons (18.8 billion
pounds) of recoverable copper. The Morenci property, the largest of
A-40
Arthur DLittklnc
-------
TABLE A-16
PHELPS DODGE; TEN-YEAR SUMMARY OF OPEBATIONS (1966-1975)
(dollar amounts are in millions except per share figures and copper price)
1975
1974
1973
1972
1971°
1970
1969
1968
1967
1966
o
Phelps Dodge-mined Metals:
Copper—thousand tons
Silver—thousand ounces
Gold—thousand ounces
Copper sales—thousand tons .
Copper price—cents per pound
Revenues and Expenses'
Operation revenues
Non-operating revenues
Costs and expenses exclusive of
items shown below
Exploration and research
Selling and general
administrative expenses
Depreciation, depletion and
amortization
Interest expense
Income taxes
Equity earnings (losses) less
income tax
Extraordinary itens less Income
tax
Net Income
Dividends
Capital Outlays:
Capital expenditures
Pre-operatlng mine development
Investments
Per Share
Net Income"
Dividends
Stock prices (NYSE) — high
—low
Average number of shares outstanding
(in thousands)
At December 31
Net current assets
Total assets
Long-term debt
Shareholders' equity per share
$
$
$
$
$
$
249.7
1.806
41
276.6
64.2
780.B
27.4
636.5
23.0
31.9
35.1
37.4
(13.2)
(11.1)
-
46.4
4S.2
203.2
19.6
2.8
2.26
2.20
40.25
29.00
20,563
146.5
1,652.1
522.5
43.44
281.3
2.212
52
231.7
77.3
1,026.1
K.3
789.0
18.0
34.1
36.6
24.4
36.7
10.9
9.2
121.7
45.2
274.7
14.4
7.3
5.92
2.20
49.88
25.50
20,567
92.7
1,492.9
327.1
43.38
319. A
2,564
68
324.7
59.5
962.0
21.2
705.3
14.9
32.6
35.9
15.8
66.7
(J.O)
-
109.0
44.6
178.0
10.3
5.9
5.31
2.175
50.25
38.75
20.526
217.0
1,268.9
281.9
39.67
305.4
2,385
70
327.7
51.2
765.8
14.7
554.1
11.9
31.0
34.2
14.1
44.8
(8.2)
-
82.2
43.1
94.2
11.4
1.6
4.01
2.10
44.50
34.38
20.514
213.7
1,043.1
181.3
36.53
281.2
2,425
70
288.8
52.0
703.6
15.3
524.1
11.2
27.8
29.1
8.7
39.9
(4.3)
2.0
75.8
42.9
75.5
8.1
6.6
3.72
2.10
48.00
28.00
20,379
208.5
988.7
166.0
34.62
313.5
2.647
82
270.9
58.2
716.2
17.9
495.7
8.2
27.7
21.9
6.6
65.1
(0.9)
4.8
112.8
42.3
89.2
4.6
0.3
5.60
2.10
56.50
34.00
20,153
141.8
878.5
86.1
32.90
284.2
2,425
84
283.5
47.9
628.9
21.1
464.3
5.5
24.3
19.5
4.6
43.3
1.0
-
89.5
39.3
84.7
9.4
7.7
4.43
1.95
52.50
39.13
20,179
137.3
792.3
77.2
29.43
213.2
1.780
71
212.4
42.3
531.7
16.7
412.5
4.3
19.1
15.0
2.5
31.3
0.9
-
64.6
35.3
73.9
8.3
5.7
3.20
1.75
55.75
29.75
20,178
126.6
652.8
28.5
26.95
156.7
1,203
48
157.2
38.6
509.8
17.5
415.3
3.6
19.4
11.9
0.6
25.6
-
-
50.9
34.4
55.0
3.2
5.1
2.52
1.70
40.00
31.25
20,222
173.6
610.1
2.7
25.25
271.7
2,126
87
272.3
36.6
554.0
15.5
395.9
3.1
18.3
13.5
56.5
-
-
82.2
43. lc
30.9
0.4
4.05
2.125C
41.50
27.13
20,285
215.2
581.7
24.65
NOTES!"Primary metal production curtailed by strikes.
°Metals Week average domestic delivered price—virebars.
.Includes extia of 42-1/2C per share.
Based on average number of shares outstanding for year.
SOURCE: Phelps Dodge Annual Report.
-------
PD's mines, also holds about 60 percent of FD's reserves. Additional
properties are undergoing exploration and development.
PD produced a record 319.6 thousand tons mine output of copper in 1973;
production was lower in 1974 due to strikes and in 1975, due to reduced
demand. Additional capacity has recently been brought in at the Metcalf
mine, at a cost of $194 million to replace the Bisbee operations and
to raise overall capacity to 330,000 tons per year. The Tyrone mine was
expanded In 1972-1973 to 100,000 tons annual production capacity.
In general, Phelps Dodge is thought to be one of the lowest cost copper
producers. The company has reported that production costs per pound of
copper are lowest at Morenci, which mines the largest quantity of ore.
b. Copper Smelting
Phelps Dodge's copper smelters are located at Morenci, Ajo, and Douglas,
Arizona; and the new Hidalgo smelter in New Mexico. In 1975, production
of the Morenci mine and most of that from Tyrone was treated at the
Morenci smelter, which has the capacity to treat nearly 1 million tons
annually of copper-bearing materials such as concentrates, ore and
scrap. Production of the Ajo mint, and a portion of the Tyrone produc-
tion, was treated at the Ajo smelter, which has the capacity to treat
approximately 300,000 tons of new metal-bearing material annually.
Production from a portion of Tyrone, as well as custom material and
scrap, was treated at the Douglas smelter, which has capacity to treat
approximately 860,000 tons of new metal-bearing material annually. The
smelters produce anode copper—copper which is then shipped to Phelps
Dodge refineries for refining. The new Hidalgo smelter, was expected
to begin treating concentrates from Tyrone in the second quarter of 1976.
The smelter is the first in the United States to use the flash process
developed in Finland.
c. Other Facilities
Refinery capacity is located at El Paso (electrolytic and fire-refined)
and Laurel Hill, New York (80,000 tons electrolytic and 20,000 tons
fire-refined). Wire mills are located in New York (4), New Jersey (2),
Indiana (2), Kentucky and Arkansas. Tube mills are in California and
New Jersey. A brass foundry is operated in Alabama and Interests are
held in 13 foreign fabricating operations.
The company has approximately 14,000 total employees, some 50 percent of
whom are associated with primary copper production.
Sales and operating revenues in 1974 exceeded $1 billion, of which
approximately 35 percent was attributable to deliveries from PD's own
mine production. Net income after taxes was $112.5 million. Both
sales and net Income were down substantially in 1975, due to decline in
nonferrous metals demand and prices.
A-42
Arthur D Little Inc
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In 1975 capital expenditures and pre-operating developments at mines,
concentrators, and smelters totaled about $200 million, compared with
about $260 million in 1974. Of the 1975 expenditures, $39.0 million
was spent at Morenci (56.3 million in 1974), $13.0 million at Metcalf
($64.0 in 1974), $3.4 million at Ajo ($5.9 million in 1974), $2.4
million at Tyrone ($2.6 million in 1974), $6.1 million at the Douglas
smelter ($13.7 million in 1974), and $93 million at the Hidalgo smelter.
This accounts for the bulk of all Phelps Dodge expenditures, the balance
of the order of $20 million per year or so going into the manufacturing
(fabricating) plants and affiliates.
In 1975, a total of $15.3 million was expanded for air quality control
facilities at the Morenci, Ajo, and Douglas smelters ($45.2 million in
1974), and $21.5 million for the related tailings leach programs at
Morenci ($21.6 million in 1974).
Capital investment in the Hidalgo smelter project was $226.6 million by
the end of 1975, of which $92.9 million was spent during the year.
Total investment, including the new town of Playas and the 36-mile
industrial railroad linking the smelter with the Southern Pacific
system, is expected to amount to about $240 million.
Phelps Dodge has agreed with Cyprus Mines Corporation to treat at
Hidalgo, beginning in 1978, concentrates from Cyprus' expanded Bagdad,
Arizona mine. Additional facilities to make this possible, including
a second sulfuric acid plant, are being designed and construction is
expected to begin in the second quarter of 1976. Under this agreement,
Cyprus will lend PD $35 million toward the cost, estimated at $40
million, of the additional facilities.
Phelps Dodge had $166 million in long-term debt outstanding at
December 31, 1971. Reports to the Securities and Exchange Commission
showed that, as of September 30, 1973, long-term debt had increased to
$288 million primarily as a result of the issuance of nearly $100
million primarily as a result of the issuance of nearly $100 million in
Pollution Control obligations. Additional long-term debt and pollution
control financing were obtained subsequently; by year-end of 1975,
long-term debt was 31 percent of total capitalization, the highest
among the traditional copper companies (i.e., excluding the oil
companies from the comparison).
A-43
Arthur D Little Inc
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APPENDIX A
NOTES
1. Anaconda Is now a part of Atlantic Richfield.
2. In 1975, Anaconda acquired the Walworth Company, one of the
leading valve manufacturers.
A-44
Arthur DLittklnc
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APPENDIX B
LONG-RUN SUBSTITUTION FOR COPPER
Arthur DLittleJnc
-------
This appendix presents detailed information on trends in long-run substi-
tution for copper in markets.
A. CONDUCTOR APPLICATIONS
Aluminum has made significant Inroads into copper markets in certain elec-
trical conductor applications, specifically in busbar and switchgear,
building wire, communication cable, and power cable. To a lesser degree,
aluminum has been substitute, on occasion, for copper in motor and motor
control parts and in automotive electrical apparatus and consumer elec-
tronics goods.
In the building wire industry, substitution of aluminum for copper has
been increasing rapidly since 1964. The amount of substitution is
directly related to the conductor size: the larger the conductor, the
greater the percentage of aluminum building wire.
Substitution of aluminum for copper in the small building wire sizes is
minor because little monetary savings per unit length can be realized in
these sizes. In addition, mechanical connectors of aluminum to aluminum
or aluminum to copper are a problem, particularly in the smaller wire
sizes. Training of electricians on how to make proper connections when
installing aluminum building wires has not always been done, and the
resultant troubles have caused many building contractors to abstain from
the use of aluminum conductor building wire in small sizes.
The use of aluminum conductors in the communications industry is minimal
at present. However, there is much research activity in this field by.
both manufacturers and end users because large savings in communication
conductor costs are indicated if a number of technical problems can be
solved.
\
The substitution of aluminum for copper in the power-cable field has pro-
gressed expeditiously and, in recent years, approximately 40 percent of
the insulated power cables and almost 100 percent of the bare conductors
have been aluminum. Aluminum has such a weight advantage over copper that
aluminum-conductor, steel-reinforced cable has been used for most long-
transmission lines for more than a decade. Recently introduced aluminum
alloys are being used as conductors on overhead transmission lines.
Copper remains the first choice for automotive wiring at current prices.
In areas where space in an existing design is not a problem, the use of
the larger sizes of aluminum wire will increase. Examples of such appli-
cations are battery cables, air conditioners, clutch coils, alternators,
anti-skid devices, horn coils, and some accessory motors.
B-l
Arthur D Little Inc
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Copper and aluminum are used widely as electronic consumer Items (TV re-
ceiver, radios, record players, tape recorders, etc.)* For many years the
normal electrical conductor In consumer Items was an Insulated copper
wire. However, with the advent of solid-state electronics, a large In-
crease In aluminum usage occurred because of Its excellent heat-sink capa-
bilities. With the Increasing usage of printed circuits or wiring boarfds
of epoxy glass and epoxy coated steel, and of thin and thick film ceramic
units, nickel, gold, silver, tantalum, and rhodium, as well as aluminum
have begun competing with copper for this application.
B. HEAT-EXCHANGER APPLICATIONS
Substitution of aluminum for copper In radiators Is possible given the
fabrication techniques and the available supply of metal In the required
sheet and strip forms. Automotive radiators have been built of aluminum
in limited quantities and are similar in appearance and heat-transfer
characteristics to copper radiators.
All but a small proportion of the motor vehicles currently in service
use radiators constructed of copper and copper alloys. Copper has been
traditional for this application because of its heat transfer properties,
corrosion-resistance, ease of fabrication, and ease of joining the various
components by conventional "soft" soldering techniques.
Experience has shown that copper radiators are quickly and economically
repairable with the use of minimal additional copper. Present repair
techniques for aluminum radiators are either unreliable or available only
at great expense at a limited number of shops. Most aluminum radiators
today are replaced when leaks occur.
The major deterrent to volume production of aluminum radiators seems
to be high capital equipment costs plus the unamortized cost of equipment
presently used for production of copper radiators. Total cost of Industry
conversion has been estimated to be more than $200 million.
Currently, more than 90 percent of the primary surfaces In automotive
air-conditioner evaporators and condensers are aluminum, and domestic
refrigerators and freezers have used all-aluminum evaporators and steel
condensers for years. Copper and aluminum are completely substitutable
in this area.
Copper tubing is still the predominant primary surface in heat exchangers
for commercial refrigerators and freezers, and room, central residential,
and commercial air conditioners. Aluminum tubing is used in less than 10
percent of these products. Extensive manufacturing development is neces-
sary before aluminum could be considered completely substitutable for
copper in these applications.
B-2
Arthur D Little Inc
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Aluminum-alloy tubing in air conditioners has up to twice the wall thick-
ness of copper, but still maintains a weight and cost advantage.
Production processes for most aluminum tube commercial and residential
air conditioners and commercial refrigerator and freezer heat exchangers
are similar to those for copper tube heat exchangers with the exception
of joining or assembly methods. The cost of converting an assembly line
for copper-tube heat exchangers to aluminum is relatively low because
most of the production equipment could be used with either metal, but
not simultaneously.
Additional field experience is required before aluminum will be substituted
widely for copper in room-air-conditioner condensers and commercial heat
exchangers using water as a secondary refrigerant or as a heating medium.
These products account for approximately 25 percent of the total tubing
requirements and pose specific corrosion problems to aluminum. Codes
now limit the use of aluminum-tube heat exchangers mounted in ducts.
However, these codes are being re-evaluated and soldered aluminum-tube
heat exchangers may be accepted in the near future.
Aluminum has been tried in five different U. S. power plants. In two
cases, failure occurred in about a year; in another instance, failure
occurred in five years; and in the other two, condenser tubes lasted
ten years. Fresh water was used for cooling in all cases.
There are problems, seemingly insurmountable, that must be overcome to
use aluminum in the main condenser of power generating stations. The
necessary volume of circulating or cooling water is very great and its
quality is extremely variable. To insure against attack of aluminum
tubing by water, controls and conditioning equipment not customarily used
in electrical generating stations would be required.
Applications Requiring Corrosion Resistance
Copper and aluminum compete directly in many conductivity and heat-
exchanger applications, and in some structural applications, but rarely
in applications in which corrosion resistance is the prime requisite.
In many applications, copper and aluminum are not mutually substitutable.
Even where an overlap exists (valves and fittings, for example), a
serious decline in copper usage has not occurred.
C. ELECTROPLATING AND COATINGS
Copper has been, arid will continue to be, widely used in coatings applied
by electroplating and in forms made by electrodeposition. Aluminum
coatings by electroplating are not easily applied and currently are in
negligible use. In coating applications, copper and aluminum are not
interchangeable because the electro-deposition of aluminum requires highly
special procedures. In recent years, electrodeposited coatings of
B-3
Arthur D Littk Inc
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aluminum would have cost 6 to 10 times those of copper, technical diffi-
culties would require major changes In equipment.
Recent developments In the thermal decomposition of liquid and vapor
phase aluminum organometalllc compounds may, however, permit the use of
aluminum In coatings for steel and In protective paints In the future.
P. ALLOYING APPLICATIONS AND COATINGS
Copper Is essential In all U. S. coins because of the requirements of the
large automatic vending machine Industry. These machines are designed to
accept coins with the properties of coin silver. To match these properties,
silver-free coins must contain a high percentage of copper.
Aluminum Is not used In any U. S. coins. It Is too light In weight to
operate coin-operated machines and has less wear resistance than currently
used metals In coins. Thus, aluminum Is an unlikely candidate for use in
this field in the foreseeable future.
E. ORDNANCE AND ACCESSORIES
Although other materials have been employed for certain fuse components,
copper alloys continue to be the major ingredient. Periods of critical
shortage in copper supplies have prompted efforts to substitute other
materials In fuses for several years. Efforts to replace copper with
aluminum also have been related to reducing weight.
In recent years, more than 30 different fuses have been used by the U. S.
Army. Among standard models, the number of copper and/or aluminum com-
ponents varies from practically none to a significant proportion. In
some, the original functioning requirements were such that other materials
(such as steel) were satisfactory for almost all components. In others,
aluminum alloys have replaced copper alloys to a certain extent as the
result of a gradual substitution program. In still others, especially
the recent models developed for entirely new projectiles, aluminum alloys
comprise a comparatively large proportion of the materials used. Thus,
a part-by-part analysis of the degree to which copper alloys have been or
may be replaced by aluminum alloys becomes impractical.
For the manufacture of cartridge cases, no commercially available
aluminum alloy has proven Ideal enough to seriously threaten the use of
copper.
B-4
Arthur D Little Inc
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APPENDIX C
INTERINDUSTRY RELATIONSHIPS OF PRIMARY COPPER.
COPPER ROLLING AND DRAWING. UNITED STATES. 1967
Arthur D Little Inc
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INTERINDUSTRY RELATIONSHIPS OF PRIMARY COPPER. UNITED STATES. 1967
From To Description ($ millions)
38.01 27.01 Industrial Inorganic and Organic
Chemicals 12-3
38.01 37.01 Blast Furnaces and Basic Steel
Furnaces 25.8
38.01 37.02 Iron and Steel Foundries 6.7
38.01 37.04 Primary Metal Products, n.e.c. 22.8
38.01 38.01 Primary Copper 823.8
38.01 38.02 Primary Lead •*
38.01 38.03 Primary Zinc 3.8
38.01 38.04 Primary Aluminum 8.5
38.01 38.05 Primary Nonferrous Metals, n.e.c. 67.6
38.01 38.06 Secondary Nonferrous Metals 23.6
38.01 38.07 Copper Rolling and Drawing 871.7
38.01 38.08 Aluminum Rolling and Drawing 23.8
38.01 38.09 Nonferrous Rolling and Drawing, n.e.c. 13.8
38.01 38.10 Nonferrous, Wire Drawing and Insulating 426.5
38.01 38.11 Aluminum Castings 9.8
38.01 38.12 Brass, Bronze, and Copper Castings 89.2
38.01 38.13 Nonferrous Castings, n.e.c. 2.5
38.01 40.02 Plumbing Fittings and Brass Goods 17.9
38.01 42.03 Heating Equipment, except Electric 8.5
38.01 42.08 Architectural Metal Work 40.7
38.01 48.05 Printing Trades Machinery 4.4
38.01 48.06 Special Industry Machinery, n.e.c. 4.7
38.01 49.01 Pumps and Compressors 5.9
38.01 49.05 Power Transmission Equipment 6.8
38.01 53.04 Motors and Generators 8.8
C-l
Arthur DLttklnc
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INTERINDUSTRY RELATIONSHIPS OF PRIMARY COPPER.
UNITED STATES, 1967
(Continued)
From To Description ($ millions)
38.01 53.05 Industrial Controls 6.1
38.01 68.01 Electric Utilities 1.2
38.01 71.02 Real Estate 1.5
38.01 83.00 Scrap, Used and Secondhand Goods 1.5
38.01 88.00 Total Intermediate Output 2,547.8
38.01 93.00 Net Inventory Change 14.1
38.01 94.00 Net Exports 171.8
38.01 97.10 Federal Government Purchases, Defense -106.3
38.01 97.20 Federal Government Purchases, Others 18.8
38.01 99.02 Total Final Demand 98.3
38.01 99.03 Total Output 2,646.1
38.01 99.04 Transfers-Out 83.9
C-2
Arthur D Little Inc
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INTERINDUSTRY RELATIONSHIPS OF COPPER ROLLING AND DRAWING.
From
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
To
9.00
11.01
11.02
11.03
11.05
12.01
12.02
13.01
13.02
13.03
13.05
13.06
13.07
17.06
20.01
27.01
27.04
32.04
36.02
37.01
38.01
38.04
38.07
38.08
38.09
38.10
38.12
UNITED STATES, 1967
Description ($
Stone and Clay Mining and Quarrying
New Construction, Residential Buildings
(Nonfarm)
New Construction, Nonresidential
Buildings
New Construction, Public Utilities
New Construction, All Other
Maintenance and Repair Construction,
Residential Buildings (Nonfarm)
Maintenance arid Repair Construction,
All Other
Complete Guided Missiles
Ammunition, Except for Small Arms, n.e.c.
Tanks and Tank Components
Small Arms
Small Arms Ammunition
Other Ordnance and Accessories
Coated Fabrics, Not Rubberized
Logging Camps and Logging Contractors
millions)
.8
138.4
87.8
17.7
7.6
34.2
23.9
.2
6.2
.3
.5
100.4
.6
.3
.5
Industrial Inorganic and Organic Chemicals .2
Miscellaneous Chemical Products
Miscellaneous Plastics Products
Brick and Structural Clay Tile
Blast Furnaces and Basic Steel Products
Primary Copper
Primary Aluminum
Copper Rolling and Drawing
Aluminum Rolling and Drawing
Nonferrous Rolling and Drawing, n.e.c.
Nonferrous Wire Drawing and Insulating
Brass, Bronze, and Copper Castings
2.7
.3
.1
6.0
45.3
.7
77.1
82.5
13.3
579.9
11.5
C-3
Arthur D Little Inc
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TNTERTNTJUSTRY RELATIONSHIPS OP COPPER ROLLING AND DRAWING.
From
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
38.
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
07
38.07
38.07
To
38.
40.
40.
40.
40.
40.
40.
40.
40.
40.
41.
41.
42.
42.
42.
42.
42.
42.
43.
43.
44.
45.
14
01
02
03
04
05
06
07
08
09
01
02
01
02
03
05
08
11
01
02
00
01
45.02
45.03
46.01
46.02
46.03
46.04
UNITED STATES. 1967
(Continued)
Description ($ 1
Nonferrous Forglngs
Metal Sanitary Ware
Plumbing Fittings and Brass Goods
Heating Equipment, Except Electric
Fabricated Structural Steel
Metal Doors Sash and Trim
Fabricated Plate Work (Boiler Shops)
Sheet Metal Work
Architectural Metal Work
Miscellaneous Metal Work
Screw Machine Products and Bolts, Nuts,
Rivets, and Washers
Metal Stampings
Cutlery
Hand and Edge Tools Including Saws
Hardware, n.e.c.
Miscellaneous Fabricated Wire Products
Pipe, Valves, and Pipe Fittings
Fabricated Metal Products, n.e.c.
Steam Engines and Turbines .
Internal Combustion Engines, n.e.c.
Farm Machinery
Construction Machinery
Mining Machinery
Oil Field Machinery
Elevators and Moving Stairways
Conveyors and Conveying Equipment
Hoists, Cranes, and Monorails
Industrial Trucks and Tractors
mill
24.
1.
50.
24.
2.
1.
26.
8.
4.
2.
93.
68.
1.
3.
35.
14.
98.
7.
17.
8.
12.
4.
1.
1.
1.
4.
2.
•
ic
9
8
2
1
3
5
7
1
8
7
9
4
3
5
9
1
1
1
2
7
1
1
0
6
6
3
5
7
C-4
Arthur D Little Inc.
-------
INTERINDUSTRY RELATIONSHIPS OF COPPER ROLLING AND DRAWING,
From
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
To
47.01
47.02
47.03
47.04
48.01
48.02
48.04
48.05
48.06
49.01
49.02
49.03
49.04
49.05
49.06
49.07
50.00
51.01
51.02
51.03
51.04
52.01
52.02
52.03
52.04
52.05
53.01
53.02
53.03
UNITED STATES, 1967
(Continued;
Description
Machine Tools, Metal Cutting Types
Machine Tools, Metal Forming Types
Special Dies and Tools and Machine
Tool Accessories
Metalworking Machinery, n.e.c.
Food Products Machinery
Textile Machinery
Paper Industries Machinery
Printing Trades Machinery
Special Industry Machinery, n.e.c.
Pumps and Compressors
Ball and Roller Bearings
Blowers and Fans
Industrial Patterns
Power Transmission Equipment
Industrial Furnaces and Ovens
General Industrial Machinery, n.e.c.
Machine Shop Products
Computing and Related Machines
Typewriters
Scales and Balances
Office Machines, n.e.c.
Automatic Merchandising Machines
Commercial Laundry Equipment
Refrigeration Machinery
Measuring and Dispensing Pumps
Service Industry Machines, n.e.c.
Electric Measuring Instruments
Transformers
Switchgear and Switchboard Apparatus
($ millic
2.3
1.0
7.3
6.4
1.3
3.0
10.0
2.4
10.2
11.7
3.0
4.5
.2
6.0
5.6
4.2
30.6
2.9
.2
.2
.9
.2
.3
135.2
1.2
1.6
4.3
17.6
46.2
C-5
Arthur D Little Inc
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INTERINDUSTRY RELATIONSHIPS OF COPPER ROLLING AND DRAWING.
From
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
To
53.04
53.05
53.06
53.07
53.08
54.01
54.02
54.03
54.04
54.05
54.06
54.07
55.01
55.02
55.03
56.01
56.03
56.04
57.01
57.02
57.03
58.03
58.04
58.05
59.01
59.02
59.03
60.01
UNITED STATES, 1967
(Continued) '
Description ($
Motors and Generators
Industrial Controls
Welding Apparatus
Carbon and Graphite products
Electrical Industrial Apparatus, n.e.c.
Household Cooking Equipment
Household Refrigerators and -Freezers
Household Laundry Equipment
Electric Housewares and Fans
Household Vacuum Cleaners
Sewing Machines
Household Appliances, n.e.c.
Electric Lamps
Lighting Fixtures
Wiring Devices
Radio and Television Receiving Sets
Telephone and Telegraph Apparatus
Radio and Television Communication
Equipment
Electron Tubes
Semiconductors
Electronic Components, n.e.c.
X-Ray Apparatus and Tubes
Engine Electrical Equipment
Electrical Equipment, n.e.c.
Truck and Bus Bodies
Truck Trailers
Motor Vehicles and Farts
Aircraft
millic
27.7
6.8
9.5
.6
4.4
1.4
1.4
1.3
3.2
.9
.3
3.6
.9
9.0
35.7
.8
28.1
6.1
2.5
1.8
27.4
.9
9.9
4.9
3.8
.6
119.9
1.6
C-6
Arthur D Little Inc
-------
INTERINDUSTRY RELATIONSHIPS OF COPPER ROLLING AND DRAWING,
From
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
38.07
To
60.02
60.04
61.01
61.02
61.03
61.04
61.05
61.06
61.07
62.01
62.02
62.03
63.03
64.01
64.02
64.03
64.04
64.07
64.12
65.01
68.01
69.01
71.02
83.00
88.00
93.00
94.00
97.10
UNITED STATES. 1967
(Continued)
Description (§
Aircraft Engines and Parts
Aircraft Equipment, n.e.c.
Shipbuilding and Repairing
Boatbuilding and Repairing
Locomotives and Parts
Railroad and Street Cars
Motorcycles, Bicycles and Parts
Trailer Coaches
Transportation Equipment, n.e.c.
Engineering and Scientific Instruments
Mechanical Measuring Devices
Automatic Temperature Controls
Photographic Equipment and Supplies
Jewelry, Including Costume, and Silver-
ware
Musical Instruments and Parts
Games, Toys, Etc.
Sporting and Athletic Goods, n.e.c.
Buttons, Needles, Pins and Fasteners
Miscellaneous Manufactures, n.e.c.
Railroads and Related Services
Electric Utilities
Wholesale Trade
Real Estate
Scrap, Used and Secondhand Goods
Total Intermediate Output 2
Net Inventory Change
Net Exports
Federal Government Purchases, Defense
millic
2.1
8.8
14.4
.7
9.1
2.3
.2
4.4
1.0
1.2
12.7
16.6
1.0
19.8
2.0
.7
3.2
22.6
15.0
6.0
.7
2.4
4.1
33.2
,582.0
.3
18.5
4.5
C-7
Arthur D Little Inc
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INTERINDUSTRY RELATIONSHIPS OF COPPER ROLLING AND DRAWING,
UNITED STATES, 1967
(Continued)
From To Description ($ millions)
38.07 97.20 Federal Government Purchases, Other 3.9
38.07 99.02 Total Final Demand 26.6
38.07 99.03 Total Output 2,608.6
38.07 99.04 Transfers-Out 258.9
SOURCE: U. S. Department of Commerce, Input-Output Structure of the
U. S. Economy; 1967, Volume I, Transactions Data for Detailed
Industries, A Supplement to the Survey of Current Business,
1974.
C-8
Arthur DUttklnc
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APPENDIX D
MODEL FORECASTS (1974-1987)
APPENDIX D-l: BASELINE
APPENDIX D-2: CONSTRAINED CAPACITY
APPENDIX D-3: REDUCED CAPACITY
APPENDIX D-4: DEFINITION OF VARIABLES
Arthur D Link Inc
-------
APPENDIX D-l
BASELINE
D-l
Arthur D Little Inc
-------
EKOGBHOUS AMD BHDOGBBOUS VABXABLBS LISTED BBLOB
TEAB COHST
1954
1955
1956
1957
19 SB
1959""
1960
1961
1962
1963
1961*
1965'
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992"
1993
.0000
.0000
.0000"
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000
.0000"
.0000
RPAL
24.SS5
32.411
" 28.855
23.002
20.745
22.763
21.320
18.924
~ 17.562
18.372
19.306
22.770
19.369
15.589
14.472
17.991
14.515
10.593
9.2281
13.018
16.180 "
9.2830
13.797
"15.000
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-------
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1954
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-4.0000
-6.0000
15.000
11.000
-17.000
-5.0000
-4.0000
1.0000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
1220. 1
1320.7
1467.2
1422.1
1373.1
1071.6
1559.6
1609.2
1677.6
1639.7
1740.7
1864.0
1896.5
1251.4
1546.3
1937.0
1975.1
1733.3
2011.4
2027.2
1838.8
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
64.645
77.043
68.903
54.095
48.912
53.035
50.790
52.040
52.575
53.544
56.519
73.662
87.523
68.584
67.136
78.477
70.917"
60.422
72.426
84.241
79.880
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
198.30
242.10
220.60
254.00
206.40
259.90
235.00
.204.70
206.90
244.70
249.70
276.80
286.80
275.20
292.70
277.90
267.60
229.10
247.10
285.40
297.70
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
45.929
60.774
53.617
32.843
28.119
35.646
33.417
34.577
34.297
35.267
40.810
53.498
67.790
49.264
47.035
59.161
52.342
35.018
47.883
58.579
54.880
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000 ,
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
742.00
938.80
855.40
808.70
735.30
883.10
831.60
776.40
804.10
849.00
989.70
1025.6
1013.1
932.10
982.60
1082.9
978.50
971.90
1062.2
1119.5
1025.1
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
46.753
57.375
76.868
52.575
38.420
45.210
49.021
43.943
48.061
45.343
48.272
55.669
82.559
77.441
73.855
67.260
69.935
60.485
60.486
60.329
81.640
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
-..00000
-.00000
-.00000
-.00000
-.00000
-.00000
-.00000
I"
D
-------
SUNHART FOB YEARS: 1974 - 1987
HOST PROBABLE
_PARANETRIC SOLUTIONS FOB THE ENDOGENOUS VARIABLES _.
QD - TOTAL CONSUMPTION IN US
RPEHJ - DEPL. AVE REP. PRICE
NE - NET EXPORTS SC3AP * REF
QR - TOTAL PRODUCTION REFINED
DELIF - STOCK CHAKGE FABRICAT.
UiiLIRR - STOCK CHANGE REFINER
DELIRS - STOCK CHANGE SCRAP
QPR - TOTAL PltOD. PRIMARY
RPSR - PBICE SECONDARY REUSED
USR - PROD REFINED FROM SCRAP
RPS - REAL PRICE OF SCRAP
QSNR - SCRAP RECEIPTS NOT BEF
RPFUT1 - UEFL FJT PRICE (JAN)
QUANTITY ESTIMATES IN 1000'S
PRICE ESTIMATES IN CENTS PER PODND
1
>
t.
1.
!D
?
?.
1
OP
1974
3397.846
77.196
-167.099
2077.928
-.380
194. 184
" "" "65.326
1792.744
BU.507
285.185
1229.450
'71.238
SHOBT TONS
1975
2503.437
54.364
61.963
1433.310
36.979 __
-223.964
-5.031
1216.281
70.828
217.029
940.074
" " 68.086 "
1976
3317.901
55.968 . . .
-222. 154
2099.293
25.656
-163.414
6.770
1876.421
57.808
222.872
41.198
865.466
48.636
1977
3455.103
. 56.3"7.
-2J9. 59J
2297.015
10.793
-59.607
4.480
2060.721
58.232
236.294
41.876
874.162
48.534
1978
3502.930
4H.448
-2U1.682
2463.919
9.965
5.841
-4.474
2359.380
56.487
223.984
36.771
808.660
48.534
r^
•^
-------
SOHHABI FOB IBABS: 1974 - 1987
HOST PBOOABLB
PABANBTBIC SOLUTIONS FOB THE ENDOGENOUS VARIABLES
QD - TOTAL CONSUMPTION IN US
BPERJ - DBFL. AVE BEF. PBICE
HE - NET EZPOETS 5CBAP * BEF.
QB - TOTAL PRODUCTION BBFINED
OELIF - STOCK CHANGE FABBICAT.
DBLIBB - STOCK CHANGE BEFIHEB.
OELIBS - STOCK CH&NSE SCBAP
QPB - TOTAL PBOO. PBIKABX BEF.
BPSB - PaiCE SECONDARY BEPIHEO
V QSB - PBOD BEFINED FBOH SCBAP
00
BPS - BEAL PBICE OF SCBAP
QSHB - SCBAP BECEIPTS NOT BEF.
BPFUT1 - DEFL FDT PBICE (JAN)
QUANTITY ESTI BATES IN 1000'S OF
1979
3792.373
68.893
-274.285
2434.578
11.909
-23.265
5.806
2191.563
75.611
243.015
57.759
1077.961
59.902
SHOBT TONS
1980
3901.041
72.230
-313.768
2499.613
6.379
14.142
3.745
2256.021
77.771
243.592
60.406
1111.926
59.902
1981
4027.337
72.863
-361.530
2558.605
7.233
2.085
1.746
2314.668
70.176
243.936
60.900
1118.267
59.902
1982
4142.673
74.757
•406.295
2625.414
15.626
6.244
2.247
2375.430
79.289
249.994
62.211
1135.081
59.902
1983
4221.751
76.596
-355.960
2727.444
5.021
8.908
1.657
2477.489
80.485
249.955
63.680
1153.932
59.902
PBICE ESTIHATES IN CENTS PEB POUND
|
-i
D
r-
r+
n
8
-------
o
QD - TOTAL CONSUMPTION IN US
RPBHJ - DEFL. AVE DEF. PBICE
RE - NET EXPORTS SCRAP «• BEF.
QB - TOTAL PRODUCTION REPINED
DELIF - STOCK CHANGE FABRICAT.
DELIBB - STOCK CHANGE BEFINEB.
DELIBS - STOCK CUANGE SCBAP
QPB - TOTAL PBOD. PRIHABY BEF.
RP5R - PRICE SECONDARY REFINED
\JSH - PROD REFINED PROM SCBAP
BPS - BEAL PBICE OF SCBAP
QSNB - SCBAP RECEIPTS NOT BEF.
SUB MART FOB
HOST P
PARAMETRIC SOLUTIO
1984 1985
4405.506 4567.948
73.912 74.796
-474.260 -513.830
2814.747 2936.870
6.874 8.084
4.016 10.790
-.630 .049
2565.485 2688.398
78.755 79.346
249.262 248.472
61.562 62.296
1126.760 1136.171
BPFUT1 - DEFL FUT PRICE (JAN) 59.902 59.902
QUANTITY' ESTIMATES IN looo's OP SHORT TONS
PRICE ESTIMATES IN CENTS PER POUND
YEARS: 1974 - 1987
BOBABLE
NS_FJ»H . T HE_E&QOGENQI
1986
4689.812
78.346
-485.773
3054.374
a. 932
9.847
2.099
2801.672
81.563
252.702
64.974
1170.543
59.902
IS VARIABLES
1987
4864.335
77.194
-571.204
3149.329
9.579
5.450
.216
2897.264
80.828
252.065
64.079
1159.048
59.902
.
Arthur DUttl
n>
-------
APPENDIX D-2
CONSTRAINED CAPACITY
D-10
Arthur D Little Int
-------
QD - TJTAL CONSUMPTION III US "
BPE.1J - DEFL. AVE REF. PEJCE_
HE - NET EXPORTS SCRAP * BEF.
QR - TOTAL PRODUCTION REFINED"
OELIF - STOCK CHANGE FABRICAT.
DLLIRR - STOCK CHANGE HliFINEH.
DELIS3 - STOCK CHANGE SCRAP '
•JET. - TOTU PROD. PUIHABY BEF.
EP5R - PRICE SECJHOABY REFINED
QSR - PROD REFINED FROM SCBAP "
RPS - REAL PRICE OF SCRAP
OSKU - SCRAP RECEIPTS NOT BEF.
BPFUT1 - D2FL FU7 PBICE (JAN) '
QUiNTIT* ESTIMATES IN 1000*5 OF SHOBT TONS
PRICE ESTIMATES IN CENTS PEB POUND
SUMMARY FOB SEARS: 1974 - 1987
HOST PBODAB1B
PABAHETBIC SOLUTIONS FOB THE ENDOGENOUS VARIABLES
1974
3396.866"
77.270
-167.396
'" " 2076.045 "
-.380
194.035
65.393'
mo.jse
I 88.545
~ 285.457""
69.606
1229.973
71.238"
1975
2466.669
57.174
SO. 824
1362.271
36.979
-228.596
' -3.906 '"
1146.086
72.235
" 216: 185" "
48.542
959.699
" 68.066
1976
3261.998
58.712
-2)3.031
2024.275
25.656
-168.511
" 7.944
1801.627
59.419
~ 222.649
43.093
389.780
48.636
1977
3405.940
59.412
-251.546
" 2207.524
10.793
-59.450
5.078
1971.195
60.112
" '" 236.330
44.146
903.291
' 48.534 "
1978
3415.772
54.175
-264.385
2298.847
9.965
5.503
-S.49B
2236.129
59.828
171.305
40.656
858.510
48.534
-------
.... SDhHiBf FOB YEARS: 1974-1987
BOST PROBABLE
PABAHETRIC SOLUTIONS POB THE ENDOGENOUS VABIABLES
0
to
I
c
2
o
QD'- TOTAL1 CONSUHPTZOH IB US
RPEHJ - DBPL. AVE REP. PRICK
HE - HET EXPORTS SCRAP > EBP.
-QH - TOTAL PRODUCTION BBFIHBD"
DELIP - STOCK CHANGE PADBICAT.
DELIBB - STOCK CHANGE REPIHER.
~~ DELIBS'=' STOCK CHANCE SCBAP ~ ~
QPB - TOTAL PROD. PRIMARY REP.
BPSB - PRICE SECONDABY BEFIHBD
' - QSB -' PBOD RZPIHED FROM SCBAP
EPS - REAL PRICE OP SCRAP
QSNB - SCRAP RECEIPTS HOT REP.
1979 1980
370B.627 3799.124
73.493 78.289
-292.515 -337.782
Z2UB.181 2315.632
11.909 6.379
-27.588 12.650
10.522 6.336
2039.615 2065.241
78.496 81.577
248.566 250.391
61.252 65.016
1122.775 1171.074
BPPUT1 -' DEPL PUT PRICE (JAN) 59.902 59.902
OUANTITY ESTIMATES IN 1000* S OP SHORT TONS
PBICE ESTIMATES IN CENTS ~PEB~PTO>MD
- _.
-
1981 1982
3899.703 3980.180
80.511 84.538
-391.847 -445.066
"2324.352 2325.362
7.233 15.626
-1.224 2.529
3.580 " 3.766
2072.407 2068.282
82.987 85.484
'251.945 257.080
66.732 69.739
1193.092 1231.673
59.902 59.902
1983
4019.263
88.713
-403.991
2355.758
5.021
4.529
3.641
2095.633
88.119
260.125
72.936
1272.705
59.902
-------
SUHHABX FOB YEARS: 1974 - 1987
MOST PROBABLE
PARAMETRIC SOLUTIONS FOR THE ENDOGENOUS VARIABLES
1984
QD~- TOTAL CONSUMPTION UTOS UT6"2;T5ZB
BPEHJ - DEFL. AVE REF. PRICE 88.290
HE - NET EXPORTS SCBAP * REF. -531.250
QH - TOTAL PRODUCTION BEFIHED 2370. 95U
DELIF - STOCK CHANGE FABBICAT. 6.874
DELIRR - STOCK CHANGE BEPINCR. -.053
DELIRS - STOCK CHANGE SCBAP 1.1U9
QPR - TOTAL PROD. PRIMARY REF. 2110.936
RPSR - PRICE SECONDARY REFINED 87.846
QSR - PROD BEFIHED FRO!! SCRAP 26U.U1H
RPS - REAL PRICE OF SCBAP 72.604
O
^ QSNR - SCRAP RECEIPTS NOT REF. 1268.433
BPFUT1 - DEFL FUT PBICE (JAN) b9.9U)J
QUANTITY ESTIMATES IN 1000* S OF SHOBT TONS
1985 1986
4274.062 4344.416
92.237 98.670
-582.964 -566.333
2399.523 2426.921
8.084 8.932
4.903 4.862
2.!>
-------
APPENDIX D-3
REDUCED CAPACITY
D-14
Arthur D Little Ind
-------
SUMMARY FOR YEARS» 1974 - 1987
a
00 - TOTAL CONSUMPTION IN US
PPEMJ - OEFL. AVE REF. PRICE
" NE - NET EXPORTS SCRAP"* R5F.
OR - TOTAL PRODUCTION REFINED
DEL IF - STOCK CHANGE FABRICAT.
"DELIRR - STOCK 'CHANCE REFINER;
DEL IRS - STOCK CHANGE SCRAP
UPR - TOTAL PROO. PRIMARY REF.
HPSR - PRICE SECONDARY REFINED
OSR - PROO REFINED FROM SCRAP
RPS - REAL PRICE OF SCRAP
CSNR - SCRAP RECEIPTS NOT REF.
RPFUT1 - OEFL FUT PRICE (JAN)
QUANTITY ESTIMATES IN 1000 «S OF SHORT
PRICE ESTIMATES IN CENTS PER POUND
PAI
"1974 "
3396.866
77.270
-167:396
2076.045
-.380
~ 194". 035
65.393
1790.588
8 8". 545"
285.457
69.606
T229.973
71.238
TONS
"MOST PRO
MMETRIC SOLUTIONS
1975 "
2466.669
57.174
50.824
1362.271
36.979
-228.596
-3.906
1146.086
72.235
216.185
48.542
959.699
68.086
BABLE "
FOR THE ENDOGENOUS
1976 " "
3281.998
58.712
-233.031
2024.275
25.656 '
-168.511
7.944
1801.627
59.419
222.649
43.093
889.780
48.636
VARIABLES
1977
3405.940
59.412,
-251.546"
2207.524
10.793
-59.450
5.078
1971.195
60.112
236. 33O
44.146
903.291
48.534
1978
3415.772
54.175
-264.385
2298.847
9.965
5.503
-9.498
2236.129
59.828
171.305
40.656
858.510
48.534
D
"
-------
SUMMARY FOR YEARSt 1974 - 1987
MOST PROBABLE
PARAMETRIC SOLUTIONS FOR THE ENDOGENOUS VARIABLES
00 - TOTAL CONSUMPTION IN US
RPEMJ - OEFL. AVE REF. PRICE
NE - NET EXPORTS SCRAP *• REF.
OR - TOTAL PRODUCTION REFINED
DEL IF - STOCK CHANCE FABRICAT.
bELIRR - STOCK CHANCE Kbl- INtK.
0 OELIRS - STOCK CHANGE SCRAP
<* OPR - TOTAL PROD. PRIMARY REF.
PP5R - PRICE SECONDARY REFINED
QSR - PROD REFINED FROM SCRAP
RPS - REAL PRICE OF SCRAP
CSNR — SCRAP RECEIPTS NOT REF.
HPFUT1 - DEFL FUT PRICE (JANI
QUANTITY ESTIMATES IN 1000* S OF SHORT
PRICE ESTIMATES IN CRNTS PER POUND
1979
3708.627
73.493
-Z?Z.919
2288.181
11.909
10.522
2039.615
78.4^6
248.566
61.252
11ZZ. 779
59.902
TONS
1980
3799.124
78.289
-337. 782
2315.632
6.379
1Z.69U
6.336
2065.241
ni.9f r
250.391
65.016
1 1 r i . o r*
59.902
1981
3899.703
80.511
-391. 84/
2324.352
7.233
— l.ZZ*
3.580
2O72.407
251.945
66.732
59.902
1982
3982.563
84.356
-444.344
2329.989
15.626
3.563
2073.896
H9.39U
256.093
69.635
1Z3O.346
59.902
1989
3917.011
96.577
-439.16*
2133.521
5.021
-11.061
7.968
1867.300
93.058
266.221
78.918
1349.453
59.902
•n
D
LT
-------
SUMMARY FOR YEARS* 1974 - 1987
•
MOST PROBABLfc
PARAMETRIC SOLUTIONS FOR THE ENDOGENOUS VARIABLES
00 - T3TAL CONSUMPTION IN US
RPEMJ - DEFL. AVE REF. PRICE
NE - NET EXPORTS SCRAP * REP.
OR - TOTAL PRODUCTION REFINED
OELIF - STOCK CHANCE FABRICAT.
DELIRR - STOCK tHANttt RtPlNtK.
DELIRS - STOCK CHANGE SCRAP
OPR - TOTAL PROD. PRIMARY REF.
RPSR - PRICE SECONDARY REFINED
QSR - PROD REFINED FROM SCRAP
0 RPS - REAL PRICE OF SCRAP
I
I^J CSNR - SCRAP RECEIPTS NDT K6P.
RPFUT1 - OEFL FUT PRICE IJANI
QUANTITY ESTIMATES IN 1000' S OF SHORT
PRICE ESTIMATES IN CENTS PER POUND
198*
4037.446
95.744
-56O.T97
2148.920
6.874
4.O29
2.609
1883.192
92. 53O
265.728
78.278
1341.239
59.902
TONS
1985 1986
4147.159 4215.607
99.349 105.892
-611.153 -594.998
2173.921 2199.745
8.084 8.932
3.313 5.231
2.902 4.614
1905.544 1926.194
94.793 98.876
268.376 273.551
81.017 85.950
1376.389 1439.681
59.902 59.902
4345.245
107.065
-OB9.611
2217.660
9.579
.930
2.405
1943.035
99.602
274.625
86.823
1490. BB?
59.902
5-
D-
C"
3"
-------
APPENDIX D-4
DEFINITION OF VARIABLES
D-18
Arthur D Li ttklnc
-------
THE ECONOMETRIC SIMULATION AND IMPACT ANALYSIS MODEL
OF THE UNITED STATES COPPER INDUSTRY; DEFINITION OF VARIABLES
MARKET CLEARING MODULE
ENDOGENOUS VARIABLES
No.
1. ATC*
2. AVC*
3. CAPP*
4. DIFF
5. ER
6. FIXCOS*
7. IF*
8. IFR
9. IFS
10. IR
Average total cost, primary producers
Average variable cost, primary producers
Capacity utilization rate for all re-
fining, primary and secondary.
(CAPP = QR/(KAPPR + KAPSR)).
Difference between the deflated LME
price of copper and the EMJ price
(RPLME - RPEMJ = DIFF) in C/lb.
U.S. exports of refined copper. Source:
CDA, Table 1.
Total fixed charges on fixed costs
incurred by the primary producers as a
whole in a given year.
Fabricators stocks of copper, both
scrap and refined (IF = IFS -I- IFR).
AIF = IF(t) - IF9t-l) = DELIF
Refined copper stocks held by wire mills,
brass mills and other fabricators and
semi-fabricators, end of year. Source:
CDA, Table 1, item 16.
Scrap stocks held by brass mills,
foundries and other fabricators and
semi-fabricators, end of year. Source:
CDA, Table 2, item 3.
U.S. imports of refined copper.
CDA, Table 1.
Source:
All quantity series are expressed in thousands of short tons; the
asterisk (*) denotes variables which appear explicitly in the model
while those without (*) are intermediate variables used in computing
those appearing in the model.
D-19
Arthur D Little Inc
-------
No.
11. IRR*
12. IRS
13.
14.
15.
16.
MRPEMJ*
NE*
HER
NES
Refined copper stocks held at re-
fineries, end of year. Source:
CDA, Table 1, item 6.
AIRR = IRR(t) - IRR(t-l) - DELIRR
Scrap stocks held by smelters and re-
fineries, end of year. Source: CDA,
Table 2, item 3.
AIRS = IRS(t) - IRS(t-l) = DELIRS
Marginal revenue, primary producers.
Net exports of copper, scrap and re-
fined) (NE = NES + NER)
Net exports of refined copper from the
U.S. (ER-IR).
Net export of scrap. Source: CDA,
Table 2.
17. PEMJ
18. PFUT1
19. PS
Metals Meek (formerly E&MJ Metal and
Mining Markets) average domestic refinery
price of electrolytic copper wire bars
and ingot bars, FOB refinery; also tabu-
lated in the Yearbook of the American
Bureau of Metal Statistics (ABMS) as
monthly average prices of copper, do-
mestic refinery—New York—C/lb.
Simple average of Closing Future Price
(C/lb) of copper for all of the next 12
months reported starting in January of
the year. Source: Wall Street Journal.
From 1956 on, dealers' buying price for
ti2 heavy copper scrap; before 1956,
dealer's buying price for #1 heavy
copper scrap. C/lb—Metal Statistics.
D-20
Arthur D Lit tie Inc
-------
20.
QD*
21.
QPR*
22. QR • QSR + QPR*
23.
24.
QSNR*
QSR*
25.
26.
27.
RPEMJ*
RPFUT1*
RPS*
Total consumption of refined and scrap
copper in the U.S. by ingot makers,
brass mills, wire mills, foundries,
powder plants and other industries.
Source: CDA, Table 3.
Total production of refined copper from
Primary Sources. Source: Copper Develop-
ment Association (CDA), Table 1, item 13.
Series is adjusted to include refined
copper produced from scrap and sold at
the primary producers price and to
exclude copper produced from ore yet
sold in the secondary market.
Total production of refined copper in the
U.S. in 1,000 short tons. Source: CDA,
Table 1.
Receipts of domestic scrap that are not
sent to secondary smelters and re-
finers. Source: CDA (QS-QSR).
Production of refined copper in the
United States produced from scrap.
Source: CDA, Table 1, item 13. Series
is adjusted to include copper produced
from ore and sold in the outside mar-
ket and to exclude copper produced from
scrap and sold at the primary producers'
price.
Deflated PEMJ. Deflator is alternatively
PUWD or PUWD74.
PFUT1 deflated by PUWD or PUWD74.
The real price of scrap, PS, deflated
by PUWD or PUWD74.
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No.
28.
29. SPRED
A recorded price series for secondary
refined copper is not available in
the literature. Our series has been
built up using the price of scrap, PS,
and the margins characterizing the
secondary sector over the historical
period, SPRED: PSR = PS + SPRED.
RPSR is the real secondary price,
deflated by PUWD or PUWD74.
Average difference between the scrap
price (PS) and the price of secondary
refined copper (PSR) reflecting
commercial costs, operating costs
and gross profits. (Arthur D.
Little, Inc. estimates).
EXOGENOUS AND PREDETERMINED VARIABLES
1. ACRO*
Relative activity variable deter-
mining net exports of copper.
It is defined as the ratio of indices
of manufacturing production in the
U.S. and the Federal Republic of
Germany (ACRO = YUD/Y.GR). Alternative
ratios have been investigated involving
the indices of manufacturing pro-
duction in Japan, France, the U.K., EEC
and the OECD.
2. DSTE2*
Dummy variable indicating whether a
strike is expected next year and how
many months it is expected to last.
For example, if a 2-1/2 month strike
is expected to affect between 75-100%
of production next year, DSTE2 =2.5.
DSTE2 = 0 if no strike is espected.
(DSTE2(t) = DUMST2(T+1)).
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3.
DUMST2*
5.
6.
IGOV*
KAPP*
KAPPR*
7.
KAPSR*
8. PAUSC
Dummy variable for strikes affecting
the smelting and refining stages of
copper production. Dummy estimates
number of months a major strike affected
more than 75% of the production workers
in the industry; 0.0 when no strike.
Source: Interviews with Asarco, Phelps
Dodge, Kennecott and Anaconda.
Refined copper stocks held in government
stockpile, end of year. Source: CDA,
Table 1, item 16.
AIGOV - IGOV(t) - IGOV(t-l) = DIGOV
KAPPR + KAPSR
Copper refining capacity of the primary
producers beginning of the year in 1,000
short-tons per year. Source: ASMS
Yearbook. KAPPR is endogenous in the in-
vestment module.
Copper refinery capacity, secondary pro-
ducers at beginning of year in 1,000
short-tons per year. Both primary and
secondary capacity definitions are aimed
at estimating capacity utilized for pro-
ducing copper for sale at the primary
producers' price or the outside market
price. Capacity in the secondary mar-
ket has therefore been that of AMAX and
Cerro, since production of the two
companies has been predominantly sold at
competitive outside market prices.
Scrap aluminum clipping prices, monthly
averages of dealers' buying prices of new
aluminum clippings in New York, American
Metal Market, c/lb.
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9. PLME
The London Metals Exchange Price of
Copper: electrolytic, delivered for 1946
to 1953; electrolytic wire bars monthly
average settlement price for 1953 to 1974.
Asked quotation for spot is converted to
C/lb by the annual average exchange rate
for sterling. Both series found in
ABMS Yearbook~"Average Prices of
Principal Metals," (p. 147 in the 1973
Yearbook).
10. QFAB*
11. RPAL*
12.
13.
14.
RPLME*
VARCOS*
YGR
15. YUD
Supply of mill, foundry and power products
to domestic market-total. Source: CDA,
Table 4.
Deflated price of scrap aluminum clip-
pings (PAUSC deflated by PUWD or
PUWD74) in C/lb.
Deflated LME price of copper (PLME deflated
by PUWD or PUWD74) in C/lb.
Unit average variable cost of operating
cost of the primary producers.
Index of manufacturing production, Federal
Republic of West Germany, 1963 base year
converted to 1974 = 100. Source:' IMF,
International Financial Statistics,
.Washington.
Federal Reserve Board Index of Durable
Manufacturers Production, 1967 base year
converted to 1974 = 100.
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INVESTMENT MODULE
ENDOGENOUS VARIABLES
No.
1. QCU*
2. NETY*
The supply primary copper in the
United States from mine production.
Source: CDA, Table 1.
Net-income, the calculation of earnings
after deductions for costs and taxes,
often called earnings to surplus.
The seven companies included in the com-
pilation of net income are: Phelps
Dodge, Kennecott, Anaconda, AMAX, Asarco,
Inspiration, Consolidated Copper and
Copper Range. Source: Moody's.
EXOGENOUS AND PREDETERMINED VARIABLES
1. CCAP*
2. DGNP74
3. PDGNP
4. PDPDE
5. PUWD74
-Weighted average cost of debt and equity
capital to the primary producers, the
weights being the levels of debt and
equity capitalzation. Many alternative
definitions of this cost of capital are
possible. The alternatives developed
for our analysis are discussed fully in
Appendix F.
Implicit deflator of GNP for the U.S. con-
verted to 1974 base year from 1958 base year.
Source: U.S. Department of Commerce,
Survey of Current Business.
Implicit price deflator, gross national
product. Source: Department of Commerce,
Bureau of Economic Analysis. 1972 = 100,
updated to 1974 = 100.
Implicit price deflator, fixed investment,
non-residential producers' durable equipment.
Source: Department of Commerce, Bureau of
Economic Analysis. 1972 = 100, updated to 1974
= 100.
Wholesale price index of durable manufacturing,
1974 = 100. Source: BLS.
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6. KAPP* KAPPR + KAPSR
7. KAPPR* Copper refining capacity of the primary
producers beginning of the year in 1,000
short-tons per year. Source: ABMS
Yearbook. KAPPR is endogenous in the
investment module.
8. KAPSR* Copper refinery capacity, secondary pro-
ducers at beginning of year in 1,000
short-tons per year. Both primary and
secondary capacity definitions are aimed at
estimating capacity utilized for producing
copper for sale at the primary producers'
price or the outside market price. Capacity
in the secondary market has therefore been
that of AMAX and Cerro, since production of
the two companies has been predominantly
sold at competitive outside market prices.
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