Dealing with Mineral Shortages

Once again there is a crescendo of concern about mineral supplies. Price gouging by cartels, instability in exporting countries, and even an extended “resource war” with the Soviet Union are among the issues raised. Remedies being offered range from building up stockpiles and opening wilderness areas to mining, to reestablishing extensive military bases abroad and moving jurisdiction over mineral exploration into the Department of Defense.

What is the extent of the threat, if any? Are federal precautionary responses at least prudent, if not imperative? The answers to these questions are not simple. They involve first of all an assessment of the degree of US vulnerability. This requires an evaluation of the specific forms of minerals consumed in the United States, the capacity here and elsewhere to process crude minerals into the forms actually consumed, the sources of supply, and the potential for supply interruption. Imports of any given mineral reach the United States in a number of different forms. Manganese and chromium, for example, arrive both as ore and ferroalloy. Aluminum comes as bauxite, as alumina (a first-processed form), and as aluminum metal. Moreover, we import two rather different kinds of bauxite, and plants designed to process one cannot readily accommodate the other. This means that even when there is an “adequate” supply of a particular mineral, processing plants may still have raw material difficulties. It also follows that an interruption in the supply of the metallic form of a mineral may not necessarily be mitigated by importing more of the ore.

Take the case of ferrochromium, an essential ingredient of stainless steel. The world’s supply both of chromite (the ore) and ferrochromium have become more and more concentrated in the Republic of South Africa, and US dependence on that country for this metal has increased. At the same time, US capacity for converting chromite into ferrochromium has become so reduced that, even though there are alternative sources of the ore (at a price), we would be hard put to produce the needed ferroalloy. Potential alternative suppliers of ferrochromium in Japan and Europe would be in the same boat. Moreover, if an embargo were in effect on South Africa—a conceivable occurrence—most of the ferroalloy plants elsewhere in the world would be competing for the limited remaining chromite supply, creating a sharp price rise.

This leads to a second important consideration. Potential supply difficulties, or “contingencies,” can vary in form, duration, and severity. They can be price-raising actions or supply interruptions having both physical shortage and price implications. It is almost impossible, however, for the entire US supply to be affected, and it is very unlikely that any interruption would affect a large portion of the supply for a long time. The most likely interruption is one whose size and duration are such that the shortfall is readily made up out of domestic industry stocks.

Industry stocks often are adjusted to industry perceptions of supply vulnerability, but overreaction or late recognition (as in the case of cobalt during the military conflict in Zaire a few years ago), may exacerbate a shortage or lead to steep price rises. Even the most knowledgeable experts can only guess at the probability of different combinations of severity and duration. The estimates generally will vary with commodity form and depend upon an appraisal of the likelihood and implications of the causes of a supply contingency.

Such causes fall more or less into four categories:

1. An international concurrence of economic booms which stretches supplies unusually thin;
2. Deliberate price increases or supply-curtailing actions, such as might be taken by a cartel or by a government seeking to achieve political ends via a supply embargo;
3. Actions, such as strikes or military operations, which interrupt supply, although this may not be their principal aim; and
4. Natural disasters.

Only the first two are likely to result in a supply contingency for nonfuel minerals that is both lengthy and severe. Typical of the first were the shortages and prolonged price rises during the 1973 international economic boom. Speculative hoarding prolonged the supply problems even after the boom began to abate, but this was a relatively unique occurrence (outside of wartime) and the likelihood of any recurrence is modest at best.

The most significant recent example of the second type was not an individual country’s action but the United Nations embargo imposed on what was then Rhodesia, now Zimbabwe. For various reasons, this had only a moderate and progressively attenuated effect on world availability of either chromite or ferro-chromium. Regardless of political convictions, countries rarely opt to forgo for any length of time the foreign exchange associated with an important mineral commodity.

The key consideration in deciding what the government’s role should be in dealing with contingency problems is the potential degree of damage. To be more precise, from a federal policy standpoint, it is the net damage, taking into account the precautionary and ameliorative measures already taken or likely to be taken by private industry. Thus, the net damage from price-raising may be assessed by determining the cost of the mineral commodity relative to its end products. The damage from a supply interruption is measured not only by the volume of inventories but also by the degree to which other inputs can be substituted for the mineral commodity or by the degree to which other end products can be substituted for those in which the mineral is used.

The more severe the contingency, the more difficult the accommodation. A more protracted contingency may or may not have a more severe impact than a short-term one, however, because the longer a problem lasts, the more time there is for substitution and other adjustments. Much depends on the accuracy of the industrial consumers’ appraisal. If they overestimate, the result may be inventory hoarding, which will make things worse, even though an equally likely result is a stepped-up pace of substitution. If consumers underestimate, they are unlikely to undertake the needed long-term adjustments. Historically, the appraisal of supply problems has tended to be overdrawn.

Once the net impact is appraised, the operational question is one of insurance. How much is it worth either to avert or to lessen the damage? The question is clearly one of comparing the pain of the damage with the pain (meaning usually government outlays) of doing something about it.

There are a number of countervailing measures from which to choose: among the least expensive, generally, are increases in stock levels, resulting either from tax or other incentives to private holders or from the establishment of federal stockpiles. It is also possible to encourage an increase in domestic mining or processing capacity, though if it is to be the latter alone, adequate feedstocks must be assured.

Other measures involve foreign policy—adjusting our relationships with present or prospective supplying countries, associating or disassociating ourselves with international initiatives that affect mineral supply, working out contingency arrangements with other consuming countries, or altering our capacity and willingness to engage in armed intervention. These remedies range from the least costly to the most costly and are usually the most difficult to evaluate. Whether such insurance measures aim to prevent supply contingencies or reduce the potential damage, the important point is that there is less incentive for disruption when it is apparent that the damage can be avoided or at least significantly lessened.

In short, one way to ward off problems is to make the game less worth the candle.