Metals Report State ownership nothing to fear

Since metal prices collapsed in the early 1980s, North American producers have had a propensity for whining about “unfair” competition from state-owned mining companies in Third World countries.

The Northern Miner has often taken the same stance: state-owned companies continued to produce at high rates despite low demand, thereby further depressing already low metal prices. If losses resulted, their owner-governments assured them of the money to survive while North American producers faced the prospect of going out of business.

But there’s a growing awareness that such a view doesn’t really explain the major dislocation North American producers have faced in the 1980s and continue to face. State-ownership has had very little to do with North Americans’ loss of market share — currency fluctuations have been far and away the most important factor.

In fact, according to this view, the painful process of nationalization of many enterprises in the mining industry during the 1960s and ’70s stopped a trend toward greater concentratioonalization of many enterprises in the mining industry during the 1960s and ’70s stopped a trend toward greater concentration and actually increased competition. In some areas of the industry, nationalization restored a competitive spirit that was being eroded by privately owned firms’ willingness to enter into collusive market arrangements. What really set North American producers on their ears was exchange rate changes that saw the U.S. and Canadian dol lars appreciate markedly since 1980. And even during 1985 and 1986, as the U.S. dollar fell sharply against major currencies such as those of West Germany and Japan it was rising against the currencies of Mexico, Brazil, Chile, Peru, and many other mineral exporting developing countries.

Marian Radetzki, a visiting professor of mineral economics at the Colorado School of Mines, made a persuasive argument for that case in a paper presented at a conference held in Golden, Colo., recently addressing the effect of public policy on the competitiveness of North American metals production.

For instance, in the past, metal industries have co-ordinated efforts to cut supply when prices fell, thereby forcing prices back up. But that required a general willingness of all producers to cut back proportionally. In effect, reducing supply by collusion — hardly a free market approach.

In a free market, lower prices would result in higher cost producers cutting back while lower cost producers would continue to operate at full capacity.

“Scattered evidence for various metals suggest that production costs in North America around 1980 were significantly above the world average,” says Dr. Radetzki.

“Since then, the relative cost levels in the U.S. and Canada increased substantially in consequence of the strong appreciation of the dollar.”

According to the World Bank, between 1980 and 1984 the real appreciation of the dollar (taking inflation into account) was 61% versus Zambia, 52% versus South Africa, 23% versus Australia, 37% versus Indonesia and the Philippines, 35% versus Mexico, 55% versus Chile and 76% versus Sweden but no more than 3% versus Canada.

Metals Week says that from June, 1985, to October, 1986, the dollar rose against Mexico by 70%, Brazil 63%, Chile 22%, Peru 31% and Australia 4%.

“The figures suggest a very strong reduction in the relative competitiveness of the U.S. and Canada as metal producers,” says Dr Radetzki.

“This, along with the relatively weak competitive position in the beginning of the period, may be sufficient to explain why virtually all capacity reductions in response to the weak prices took place in North America.

“State ownership becomes irrelevant in this light. Output of copper from Chile would not have been cut, even if the great mines in that country had remained in private U.S. ownership, simply because the cost of producing that output was lower than the cost of production in most U.S. installations.”

Dr Radetzki also dismisses the perceived advantage mineral producers in developing countries gain through loans made on favorable terms from international agencies such as the World Bank Group.

To be sure, state-owned companies benefit from such loans but, to counterbalance that advantage, they are required by their state owners to make returns that private companies are not. Such social benefits as providing employment, housing, education, skill creation, regional development and technical progress at the national level.

Where North American companies are asked to provide such social benefits at the cost of production efficiency, they, too, are generally compensated in some form or another by the state.

And despite the demands on state-owned companies to provide those social benefits, they are being increasingly called upon by their state owners to turn a profit — albeit perhaps not as large as their privately owned counterparts. So, says Dr Radetzki, it is reasonable to regard the financial benefits of World Bank loans as a compensation for the cost of the social obligations that the state enterprises are asked to fulfill.

“When these obligations are taken into account, it is by no means certain that the state enterprises reaped a net gain in competitive strength from the financial support they received from their owners.”

Finally, while the high rate of nationalizations that took place in the mining industry during the 1960s and 1970s has levelled off and been replaced by more amicable “joint ventures” between governments and private industry, those two decades permanently disrupted the tendency toward vertical integration.

While that was painful in the short term, the lasting effects may well be a more competitive marketplace. Private multinationals that had aimed to control the flow of raw materials from developing countries were left without that source of supply.

As a result, those multinational firms have had to rely to a much greater extent than before on arms- length trade for their raw materials supply.

“One may speculate, however, that the greater degree of competition implied in expanding arms- length trade has reduced the cost of mineral raw materials.

“At the same time, it is hard to find evidence that ruptured vertical integration has reduced the reliability of supply. After all, the supply disruptions from far-away mines that have occurred were usually caused by strikes and political upheaval that would have disturbed the operations of foreign owned subsidiaries in equal measure.”

If Dr Radetzki’s analysis is correct, it seems the U.S. dollar has a long way to fall from today’s levels to make a difference to the competitive position of North American producers. – has a long way to fall from today’s levels to make a difference to the competitive position of North American producers.