Assessing the Materials Threat

A major concern following the oil crisis precipitated by the OPEC cartel has been that other exporters might take similar action to raise the prices of nonfuel minerals. This concern has been given some substance by the recent decision of Jamaica to increase its take from bauxite exports, and some less pointed moves of other Caribbean bauxite exporters. Nonetheless, I think that there is little likelihood that materials exporters can emulate the success to date of the OPEC Countries (though one should not discount the possibility altogether). There are several reasons for this view:

1. There is more geographic and political diversity among producers and exporters of nonfuel minerals than in the petroleum market. At the present time, significant amounts of major commodities are located in traditionally friendly, or at least not unfriendly countries such as Canada, Australia, and Latin America. The unifying political and perhaps cultural catalyst present in the Arab world is not as easy to find in countries producing most other materials. It is not that groupings of politically or otherwise heterogeneous nations are unimaginable, but that they would find it harder to agree on and persist in openly aggressive actions.
2. Although it is sometimes implied otherwise, the potential confrontation in materials is not between developed and developing countries. For instance, the developed, free market countries hold more than half the world's reserves of lead, zinc, chromium, molybdenum, titanium, and potash. The centrally planned economies predominate in tungsten, vanadium, and land-based magnesium (which is also readily available from seawater).
3. Financial staying power differs widely among these countries, but is generally far inferior to that of the important oil exporters. Dependence upon a continuing flow of foreign exchange earnings, for both import procurement and budget support, is important and would militate against risking production or export interruptions. So would the role of mining activities in providing local employment.
   In this respect it is worth noting, for example, that Chile and Zambia derive about 80 percent of their foreign exchange earnings from copper, Zaire about 50 percent, and Peru about 30 percent. Such differences, coupled with widely varying prospects for capacity expansion in these countries suggest that attitudes toward aggressive supply and price actions on materials would differ.
4. Many of the supplier countries are heavily involved with the importing countries in a diversified trade pattern, pointing to the potential for negotiation rather than unilateral action. Moreover, in the broad context of both environmental and foreign assistance policies it is quite feasible, and an example of a positive approach, to think of broad long-term changes in the pattern of trade and division of labor that would, as volume expands, transfer a growing share of processing to the raw materials suppliers. While at first glance one might expect this to increase the future bargaining power of the raw materials countries, I am inclined to believe that steps toward their industrialization would meet long-standing aspirations on their part, help diffuse the chances and severity of confrontation between haves and have-nots, and provide for increased interchangeability of imported supplies as compared with ores.
5. The success of an operation patterned on that of the OPEC countries depends on control of a large share of output and on specific elasticity characteristics. These are (1) that the price elasticity of demand, and especially the cross elasticity, remain low, i.e., that price increases would not call forth substantial declines in demand or substantial shifts to consumption of a near substitute; and (2) that the price elasticity of supply for the same material produced in the rest of the world remain low. Since one of the immediate responses to materials price increases or supply shortages is substitution, cross elasticity may be so high it would preclude successful manipulation of the market.
6. In the long run, the sharp downturn in economic activity and growth predicted for OECD countries by the World Bank (from 6.6 percent in 1973 down to 1 or 2 percent in 1974) will also mean low growth rates for developing countries. Moreover, there are sharp signs that the price of materials may have crested. Thus, producers may be more interested in consolidating present gains rather than working to increase future prices.

Despite the poor odds for its success, suppose an OPEC-type action does take place. What then?

Administratively, the handling of any sudden shortages would be much easier than in the case of oil, since by and large the consumers are a moderate number of processors and converters and not, as in the case of oil, tens of millions end-users that heat homes or dove automobiles. By the same token, most materials purchases are more readily postponable, and allocations to high-priority areas and uses more easily designed and carried out.

For the short run, a well-thought-out allocation scheme of the sort practiced in wartime, supplemented by utilizing stockpiles, is the most immediate response. Subsidized recycling activities, accompanied by adjustment of product specifications downward would come next. Wide dissemination of information on feasible substitutions would be another activity. In addition, where warranted by the impact of supply and price manipulation, political and economic pressure on the countries involved always remains an ultimate weapon.

The long-term response to materials shortages is somewhat more complicated. Revisions of design to eliminate scarce or costly materials may be possible in many cases. For instance, Chrysler has recently redesigned its automobile ignition system to use electronic ignition, thus eliminating the need for critical and expensive alloying materials.

In situations where this is not possible, the development of a standby technology that would be ready to utilize substitute materials has been proposed. While such an approach may become necessary, its implementation poses problems of financing, degree of development, and choice of the developers.

The cost of setting up a pilot Plant is not inconsiderable and even if the plant is operative, it does not necessarily mean that a commercialized plant will be successful. Knowing how to derive aluminum from domestic clays is a far cry from having proved it in a commercial-sized plant, and having done the latter a far cry from having sufficient capacity ready to go into operation on short notice.

The decision to install "standby capacity" rather than rely on "standby technology" alone would be a momentous one, to be evaluated in terms of the credibility and likely impact of the threat.

It is important to recognize that effects of price increases in materials would be considerably less disruptive than the increases in oil prices because the value of ores is heavily diluted in the end product. For example, bauxite at the price prevailing until recently of $9 to $15 a ton is less than 10 percent of the total cost of an aluminum ingot (over $600/ton), even considering it takes 4 tons of bauxite to produce 1 ton of aluminum. The cost is further diluted in the end product. Thus, even sharp increases in the price of bauxite tend to be dissipated. By comparison, a barrel of oil refinery products will typically be less than double the value of a barrel of crude. To give another example, in 1972 a 25-HP motor sold for about $170. The 18 pounds of copper it contained were worth $9, or a little over 5 percent of the cost of the motor. At $1.30 per pound of copper, the cost of the motor would rise less than 10 percent. While these are simplified examples, they suffice to make the point regarding impact.

Closely related is the difference in effect on balance of payments. In 1972, out of a total U.S. import of $56 billion, so-called crude materials accounted for $3.9 billion, or 7 percent (down, incidentally, from 18 percent in 1960). Of this, "ores and metal scrap" totaled $1 billion. If we add nonferrous metals in their intermediate form, the import bill is increased by another $1.8 billion, but even that does not make it an imposing amount. According to the Second Annual Report of the Secretary of the Interior Under the Mining and Minerals Policy Act, 1972 gross imports of raw and processed minerals broke down roughly as follows (in million dollars): nickel—$300; copper— $300; bauxite—$200; alumina— $200; aluminum—$300; iron ore— $400. Trade statistics reveal the composition by country of origin: of the $1 billion of "ores and scrap," Canada shipped $400 million; various Latin American countries $200 million; Far Eastern countries $40 million; with the balance scattered. Canada predominated equally among the shippers of nonferrous metal, supplying nearly half of U.S. imports, followed by Western Europe with not quite 25 percent (much probably processed from imported ores). The balance-of-payments impact would thus be minor compared to petroleum, even if there were concerted action among the diverse suppliers to raise prices. To illustrate the contrast, the value of annual world bauxite output has in recent years run at about $350 million; that is the equivalent of perhaps two weeks' oil production in Saudi Arabia at pre-embargo prices.

To sum up, therefore, assessing the odds on the threat posed by materials exporters and its impact if enacted, is the first order of business. In addition, there is a need for a more thorough, material-by-material analysis of the situation and preparation of contingency plans, including the evaluation of need for technology, capacity, and governmental instrumentalities designed to stay abreast of developments. At the same time, it would be tragic if legitimate concern were to launch us rapidly in the direction of self sufficiency, across the board and at all costs, to the detriment of the advantages that all who share in it can draw from increased foreign trade.