AD-AOI 2-92 OREGON UNIV EUGENE DEPT OF ECONOMICS

F/6 5/3INTERNATIONAL COLLUSIVE ACTION IN WORLD MARKETS FOR NONFUEL MIN-ETC(U)JUL 74 R F MIKESELL

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UNCLASSIFIED INR-X- 1July 25, 1974

INTERNATIONAL QOLLUSIVE ACTION IN tORLD .1ARKETS FOR/

NONFUEL AINERALS: 'RKET TRtUCTURF ANDA ETH'ODS OF IIARKETING.CONTROLe "

,,N. by ~Raymond F./MikesellI

'University of Oregon

DTICELECTE

SMAR 3 1980U

A Consultant Paper / . _

prepared for

The Bureau of IntelZigence and Research

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Publication of this paper does not DISTREBUTION STATEMENT Aconstitute endorsement by the De-partment of State nor should the " f pcontents be construed as reflectingthe official position of the Depart- i usti i . Ub o unlmitedmerit.

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FOREWORD

In 1973 and 1974 the Organization of PetroleumExporting Countries (OPEC) has had remarkable successin raising taxes on vertically integrated petroleum firms.These firms have been able to pass on the increases toconsumers of refined products. Such actions have raisedquestions about the extent to which existing or potentialassociations of countries producing nonfuel commoditiesmight use these same methods.

As part of a Department of State analysis of thesituation, the Department's Bureau of Intelligence andResearch, Office of Economic Research and Analysis(INR/REC), asked INR consultant Professor Raymond F.Mikesell to undertake this study. Professor Mikesell,associated with the Department of Economics at theUniversity of Oregon, is noted for his studies of theeconomic aspects of the mineral industries.

INR's consultant program is managed by the Officeof External Research. Consultant studies are designedto supplement the Department's in-house research capa-bilities by providing independent, expert views on keyquestions.

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SUMMARY

OPEC members have employed collusive action in theraising of taxes on vertically integrated petroleum firmsthat have been able to pass on the increased taxes to con-sumers of the refined products. This approach has made itunnecessary for OPEC members to reach agreements on productionor export quotas. In addition to vertical integration ofthe petroleum companies, OPEC's success may be attributedto a high concentration of world petroleum production inthe OPEC countries, an inelastic demand for the product,and a higher rate of growth than anticipated in world demandfor petroleum.

These conditions are not approximated in any of thenonfuel mineral industries. Of these, the bauxite industrycomes closest to meeting the criteria for OPEC-type marketcontrol because: (1) the major producing firms are ver-tically integrated, and (2) a high proportion of the world'ssupply of bauxite is produced by members of the newly formedInternational Bauxite Association (IBA). However, there aresubstitutes for aluminum in many areas; aluminum scrap couldsupply a substantial proportion of the demand; and IBA membersare unlikely to unite on an aggressive program for achievinga substantial increase in the price of bauxite. Moreover,the price of bauxite is only a small fraction of the valueof aluminum, whereas two barrels of crude oil have approxi-mately the same value as one barrel of the refined product.

Imperfect competition and product differentiation inores and concentrates facilitate market control by inter-national firms with worldwide marketing organizations andestablished relations with purchasers which are based onconfidence in product quality and the ability to meetdelivery schedules under contracts. These conditions mayenable international mining firms to pass on increasedtaxes imposed by host governments to the consumers of theirproducts. Nationalized mining enterprises, however, lackthese prerequisites for market control and usually mustcompete on a price basis.

Agreements among members of governmental producers'associations on minimum prices in sales contracts are

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likely to break down as soon as some members begin accumu-lating surpluses. Members' agreements on export quotashave proved exceedingly difficult to reach and to enforce,especially without the cooperation of consumer countries.Although such agreements might operate successfully in theshort run, each association member is anxious to expandits productive capacity, and the negotiation of a workableformula for allocating world market shares presents almostinsuperable difficulties. Agreements on export quotas arelikely to succeed, if at all, only in response to declin-ing prices arising from increases in world supply relativeto demand.

For minerals traded on commodity exchanges, marketcontrol is more readily achieved by means of buffer stockoperations. If large stock accumulations are to beavoided, however, a buffer stock device can be used onlyto reduce price fluctuations above and below predictedlong-term equilibrium levels.

The United States is now or may become dependent onforeign supplies for some minerals over the next decade.Of the principal nonfuel minerals, only bauxite andcopper appear to be candidates for collusive action whichmight result in substantial raising of world prices. Thisjudgment is premised in part on: (1) the availability ofsupplies at reasonable prices of several important nonfuelminerals from Canada, and (2) the unlikely prospect ofcollusive action among major world producers with widelydiffering political and economic orientation, such as themajor producers of chromium. In any case, collusive actionfor raising world prices of nonfuel minerals is not likelyto be effective for more than 2 years from the time of itsinitiation. Potentially harmful effects of such actions onthe US economy can be avoided by adequate stockpiles.

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INTERNATIONAL COLLUSIVE ACTION IN WORLD MARKETS FOR

NONFUEL MINERALS: MARKET STRUCTURE AND

METHODS OF MARKET CONTROL

byRaymond F. Mikesell

University of Oregon

INTRODUCTION

The ability of an association of producers of a rawmaterial to raise the price of that material by means of col-lusive action and to sustain the increase for a year or moredepends on a number of factors, including:

(a) the share of the world market supplied by membersof the association;

(b) the elasticity of world demand for the commodity;

(c) the elasticity of the supply of the commoditycontrolled by nonmembers, and of substitutes for the commodity;

(d) the structure of the world market for the commodity;

(e) the financial positions of the members of theassociation; and

(f) the cohesiveness and discipline of the member- ofthe association for carrying out a joint policy.

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A full assessment of these factors with respect toeach of the major nonfuel minerals would require a series ofcomprehensive industry studies. This study exploresalternative methods of controlling world prices of selectednonfuel minerals by producer associations.

The feasibility of any mechanism for controlling pricesthrough collusive action depends on the factors relating tothe world market listed above. For example, it may bedifficult for the members of an existing or potentialproducers' association in a commodity to establish andimplement production or export quotas; but the associationmight be successful in achieving its price objectives bysome other means, such as raising taxes on private internationalfirms producing the commodity in the territories of theassociation members.

To cite another example, where a substantial proportionof world trade in a commodity takes place on commodityexchanges or where the prices used in contracts for the saleof the commodity are tied to quotations on internationalcommodity exchanges, the most suitable method for controllinginternational prices is likely to involve some form of bufferstock arrangement designed to control directly prices on thecommodity exchanges.

MARKET STRUCTURE AND THE EQUILIBRIUM PRICE

Most of the important nonfuel minerals, including copper,lead, tin, zinc, silver, and mercury, are traded on thecommodity exchanges in London, New York, and certainother financial centers. Other important commodities, suchas steel, are not traded on the commodity exchanges. Evenwhere minerals are traded on commodity exchanges, most ofthe transactions do not go through the exchanges but areconducted by contracts between buyers and sellers. In somecases, transactions may take the form of transfers from theproducing company to its affiliates that process the commodityor use it as a minor input in the production of some othercommodity, as is the case with chromium or manganese in theproduction of steel.

Frequently prices used in the contracts departsubstantially from the prices quoted on the commodity exchanges.This is true, for example, in the case of contracts for thesale of copper in the United States. Producers' prices for

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copper are frequently above or below copper quotations onthe New York Commodity Exchange (COMEX) or the London MetalExchange (LME). Producers' prices for copper and other metalsoften are determined by tacit agreement among producers, orthey may be subject to governmental control.

In the case of mineral ores or partially processed oressuch as concentrates or alumina, trading does not take placeat all on the organized exchanges. Prices are governed bynegotiations between producers and purchasers, or,in the caseof vertically integrated industries, transfer prices betweenproducers and downstream affiliates may be determined inaccordance with the objectives of intracorporate accounting.

In some casescontracts for semiprocessed minerals suchas copper concentrates may be governed by price quotationsfor the refined product on the commodity exchanges. Thisis true for most of the copper concentrates produced outsidethe United States. For bauxite and iron ore, the price ofraw materials is generally not related to the price of thefinished product.

Where a raw material is produced by a private internationalfirm and where royalties and income taxes levied by the hostgovernment are calculated on the basis of the price of theproduct, the absence of an international market price createsa problem as to what price to use for tax purposes. Forcopper produced by international mining firms in developingcountries, the LME price is generally used as a basis forcalculating royalties and income taxes. In the case ofbauxite it has been necessary for the host government and theproducing firm to reach some agreement regarding the price tobe used as a basis for taxation. In Venezuela an elaboratesystem of determining the "reference price" for iron ore hasbeen used as a basis for yiculating taxes on producers ofiron ore in that country./

I/For a discussion of the system of establishing pricesof iron ore for tax purposes in Venezuela, see Henry Gomez,"Venezuela's Iron Ore Industry," in Foreign Investment in thePetroleum and Mineral Industries, Raymond F. Mikesell andAssociates, Baltimore: Johns Hopkins Press for Resourcesfor the Future, Inc., 1971, pp. 312-44.

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Although competitive forces operate in determining theprice of virtually all minerals, the markets are far fromperfect and the world price structure tends to be quitecomplex.!/ Even where sales are not made to affiliatesof the producing firm, trade relations between firms areoften determined by considerations other than price andquality. Purchasers are often more concerned with thereliability of supply and the ability of sellers to makegood on their contracts. Moreover, there is considerabledifferentiation in quality among ores (or concentrates) ofthe same mineral, and buyers differ in their preferences forone type or the other. Thus under conditions of imperfectcompetition and product differentiation, the "equilibriumprice" is often difficult to discover or even to define.

The existence of vertical integration and imperfectcompetition, and the absence of a clearly defined equilibriumprice for a mineral at a particular stage in processing mayenable international mining firms to exercise considerablecontrol over the prices of their products. Under theseconditions, prices can be increased by sellers without animmediate and substantial loss of their market shares, ascontrasted with the case under conditions of perfect competi-tion. Also producers' costs may differ substantially; and arise in costs for one group of producers, say, as a consequenceof increased taxes, might lead them to pass on some of thehigher costs to purchasers in the form of higher prices andto absorb the remainder. The high overhead costs in miningtend to inhibit a reduction in output in response to increasedtaxes, while the relatively inelastic demand faced by individ-ual producers facilitates the raising of prices to compensatefor increased costs.

The conditions described above are more likely to applyto private international mining firms than to nationalizedmining enterprises in producing countries. Governmentmining enterprises lack worldwide marketing organizations

i/See Garald Manners, The Changing World Market for IronOre, 1950-1980, Baltimore: Johns Hopkins Press for Resourcesfor the Future, Inc., 1971; and Sterling Brubaker, Trends inthe World Aluminum Industry, Baltimore: Johns Hopkins Pressfor Resources for the Future, Inc., 1967.

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and established relations with foreign purchasers. Evenwhere private mining firms are not directly affiliated withprocessors and fabricators abroad, their market outletsare often based on the confidence of foreign purchasers inthe standardized quality of their products and in theirability to meet delivery schedules under contracts.

In contrast, nationalized mining enterprises are oftenrequired to compete with one another and with privateinternational firms solely on a price basis. For example,following the expropriation of Alcan's bauxite operationsin 1973, Guyana had difficulty in finding markets for itsmetallurgical bauxite; and Chile has had difficulty innegotiating contracts on the basis of LME copper pricesfollowing the expropriation of the American copper companies.For these reasons, governments are in a better position toexercise control over the prices of their country's mineralswhen those minerals are sold by international firms operatingtheir mine s. Such control can most readily be exercisedby raising taxes on the foreign mining firms.

THE LESSONS OF OPEC/'

The problem of determining prices of raw materials notsold on commodity exchanges as a basis for government revenuesis well illustrated by the history of the internationalpetroleum industry. Until a decade or so ago the prices atwhich crude oil was sold to refineries in areas of the worldoutside the United States were controlled by a handful ofinternational petroleum firms. These firms employed variousmeasures to limit the area of competition. The fact that

I/This point has been made by Theodore H. Moran in anarticle titled "New Deal or Raw Deal in Raw Materials,"Foreign Policy, No. 5, Winter 1971-72, pp. 119-34. John E.Tilton also points out that most sales of aluminum, bauxite,copper, lead, manganese, tin, and zinc are based on strongerand more dependable ties than mere price considerations:"The Choice of Trading Partners: An Analysis of InternationalTrade in Aluminum, Bauxite, Copper, Lead, Manganese, Tin andZinc," Yale Economic Essays, Fall 1966.

I/Organization of Petroleum Exporting Countries.

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these firms refined and marketed the bulk of their ownproduction rather than selling in competitive internationalmarkets enabled them to control the prices of crude

petroleum on which their royalties and income tax paymentswere based. They generally limited competition by meansof a basing point system and established so-called postedprices for various grades of crude oil in the countrieswhere the crude was produced.

It was the reaction of the governments of the petroleum-producing countries to an attempt by the oil companies toreduce the artificially determined posted prices in 1959-60that sparked OPEC's formation. The major function of OPECis to assist members in establishing their own arbitrarilyposted prices as a basis for tax revenues from the inter-national petroleum companies. Thus, in the case of OPEC,control over world petroleum prices has been achieved, notthrough output restriction (until October 1973), but byputting a floor on international prices of crude oil viataxation of the international oil companies.

Recently this control was reinforced by participationagreements between the host governments and the producingcompanies. Under the agreements the host governments receivea certain portion of the crude output from the companies(sometimes related to the host government's share in theequity of the producing company), and then sell the petroleumback to the producing company at the posted price set by thegovernment. In this way the governments of the oil-producingcountries are relieved of any responsibility for marketingthe output and of making contracts for the sale of crude oil.The international firms are in a position to pass on theincreased taxes to consumers of the products of theirdownstream refineries and distribution outlets.

The OPEC experience suggests that where nonfuel mineralindustries are vertically integrated or where the marketfor the product is imperfect, an increase in revenues ofproducer countries might be achieved by raising taxes onprivate international producing firms that are able to passon the increased taxes to downstream affiliates.

But if one country increases its taxes on foreigninvestors, will not the international firm reduce outputand investment in this country and shift production andinvestment to other countries where it may have producing

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facilities? This is, of course, what should happen, but thescenario is often quite different. When one country raisestaxes on investors in an extractive industry, it frequentlyencourages others to follow. This has been the pattern inpetroleum,and one of OPEC's important functions has been toprevent a country that takes the lead in raising taxes fromlosing output to other OPEC members.

The demonstration effect in taxation is evident in theinternational nonfuel mining industry as well as in petroleum.Also, governments have acquired sufficient control to preventcompanies from reducing output in order to supply theiraffiliates from other sources. In some cases, host governmentshave succeeded in inducing companies to increase theirinvestment in the face of increased taxes in order to avoidexpropriation.

Finally, under conditions of imperfect competition,vertical integration, and expanding demand, a large inter-national company that announces a rise in prices as aconsequence of an increase in host government taxes oftentriggers a rise in prices by other companies. Internationalcompanies frequently state that a threatened rise in theirtaxes will make it impossible for them to remain competitivein world markets. Very often the actual outcome is that thecompany succeeds in passing the taxes on to the consumers,provided its competitors are also faced with increasedtaxes. This is why Professor M. A. Adelman of the MassachusettsInstitute of Technology has called the international oilcompanies the tax collectors for the OPEC members.

Professor Adelman has argued that if the internationaloil companies were forced out of their role as producersin the OPEC countries, petroleum prices would quickly falltoward the long-run marginal cos of crude, which he estimatesto be about 20 cents per barrel. / This position has beenchallenged both by the oil compa es and by other petroleumeconomists, such as James McKie.- They argue that, giventhe rapid growth in the world demand for petroleum (running

I/See M. A. Adelman, The World Petroleum Market, Baltimore,Johns Hopkins Press for Resources for the Future, Inc., 1972.

2/James W. McKie, "The Political Economy of World Petroleum,"American Economic Review, May 1974, pp. 51-57.

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at about 8 percent per annum prior to October 1973), SaudiArabia and a few other OPEC countries that are not in anyhurry to increase their output in line with the growth ofworld demand are well able to maintain and possibly evento increase the present real price of crude petroleum.Moreover, so long as these countries believe they areoperating on the inelastic portion of the demand curve, theycan hold back production and still increase their revenueseven though Iran and a few other OPEC countries might reapmuch larger benefits.

Even if we reject the Adelman hypothesis as applied tothe nonfuel mineral industries and assume that producers'associations would be able to exercise direct market controlby production, by export quotas, or by agreeing to maintain theprice at a certain level, the prospects for success are farless promising than in the case of petroleum.

First, the world demand for nonfuel minerals has notbeen growing at anything like the rate of growth in demandfor petroleum.

Second, nearly all the major nonfuel mineral producingcountries in the developing world are urgently in need offoreign exchange income.

Third, the high overhead costs in the mining industryand the large debt service constrain producing countriesfrom cutting back production.

Fourth, although there are readily available substitutesfor most nonfuel minerals, in the case of petroleum a majorexpansion of energy substitutes may require decades.

Finally, there is a substantial difference in thedistribution of world reserves of petroleum from that ofmost nonfuel minerals. The bulk of the known and probablereserves of petroleum is in the OPEC countries with a veryheavy concentration in a few Middle Eastern countries.Reserves of most of the important nonfuel minerals arewidely distributed around the world, and there is lessconcentration of reserves and productive capacity withinthe developing countries than in industrial countries.

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PRICE CONTROL IN THE ABSENCE OF VERTICAL INTEGRATIONAND MARKET IMPERFECTION

Where markets are reasonably competitive and theproducing firms are not vertically integrated, producers'associations may not be able to influence prices by raisingtaxes on the private producing firms. If taxes are raisedand not passed on to the consumers, the profits of theprivate companies will decline and they may not be able orwilling to expand productive capacity or even to replaceobsolescent or worn-out equipment and structures.

If the producers' association seeks to maintain anagreed-upon price by requiring that all contracts benegotiated at or above that price, those members whoseproduction is in the hands of private international firmswith superior marketing organizations or with downstreamaffiliates are likely to achieve a larger market share thanmembers with nationalized industries and relatively poormarketing organizations. Purchasers may also prefer tonegotiate contracts with international firms with severalsources of supply rather than contracts with nationalizedenterprises. Under these circumstances some members maysoon accumulate surpluses or be forced to violate the priceagreement by shading contract prices.

The alternative will be to establish production orexport quotas. Reaching an agreement on quotas, however,is exceedingly difficult except for short periods of timebecause each member is anxious to maintain or expand outputfrom existing capacity. In addition, developing countrieswith ample mineral reserves usually have plans underwayfor expanding their mine capacity. Although members of aproducers' association have a common interest in maintainingor raising the price of their product, basically they areall in competition with one another for shares of the worldmarket. Even the OPEC members have never been able to agreeon export quotas, although the OPEC Secretariat has proposedsuch quotas. Likewise, suggestions for the establishmentof export quotas by members of the Intergovernmental Councilof Copper Exporting Countries (CIPEC) have not provedacceptable to some members.

Where commodity exchanges for products exist, membersof a producers' association might establish a buffer stockarrangement for maintaining prices alonq the lines of theInternational Tin Agreement. However, buffer stocks are

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generally useful only to reduce the amplitude of pricefluctuations. Continuous purchases for maintaining marketprices above long-term equilibrium levels would requirelarge financial outlays which most developing countriescould not afford.!/ It has been rumored that OPEC memberswould be willing to finance large purchases of copper fromthe CIPEC countries in order to maintain high copper prices.Although such action is conceivable, thus far OPEC membershave largely limited the investment of their reserves toassets which are both relatively liquid and provide areasonably high yield.

MARKET SHARE, SUBSTITUTION, AND ELASTICITY OF DEMANDFOR THE OUTPUT OF MEMBERS OF A

NONFUEL MINERALS PRODUCERS' ASSOCIATION

Regardless of the world market structure of a commodityand the ability of members of a producers' association tocontrol prices over relatively short periods of time, theability to sustain prices through collusive action over timeis a function of:

(a) the collective share of the world supply of thecommodity controlled by the association;

(b) the supply elasticity of the output of nonmemberproducers of the commodity; and

(c) the price elasticity of world demand for theproduct.

/Although the International Monetary Fund (IMF) providesspecial financial assistance to members of the InternationalTin Council, the IMF is willing to finance only those bufferstock arrangements that include consumers as well as producersand have as their purpose the ironing out of price fluctuationsabove and below the estimated long-term equilibrium level.

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For example, the price elasticity of demand for copperproduced by the CIPEC countries is a function of the priceelasticity of world demand for all copper, the priceelasticity of copper supply (including s ap) outside CIPEC,and CIPEC's share in total world supply.-!

The price elasticity of world demand for a nonfuelmineral is in part a function of the elasticity of substitu-tion between the nonfuel mineral and other commodities whichserve as substitutes for the mineral in question and of theelasticity of supply of the substitute materials.

The above factors determine both the ability of aproducers' association to control prices over a given periodof time and the financial advantage of market controls tothe producers' association. Although a producers' associationcontrolling no more than, say, one-fourth of the world'ssupply of a mineral may be able to raise prices substantiallyin the short run, in the longer run the expansion of output jby nonmembers of the association and by producers ofsubstitutes will tend to drive down the price of the mineralin question.

Also, if the price elasticity of demand for the outputof the producers' association members is greater than unity,total receipts will decline with a rise in prices andassociation members will find that they are losing their

/We may express these relationships algebraicallyas follows:

1 1E = .Edw- .(l-m).E

Ecp m dw m srw

where Ecp = price elasticity of demand for CIPEC'scopper exports

E d = price elasticity of world demand for alldw copper

E = price elasticity of copper supply outsidesrw CIPEC

m - CIPEC's share of total world supply

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share of the market in the effort to maintain prices. Thechange in the price elasticity of demand over time is inpart a function of the time required for the adjustment ofproduction to the use of substitutes; but in many cases,once substitute commodities are adopted for certain usesof a mineral, that market is lost for all time. For mostnonfuel minerals, price elasticity of demand is likely tobe less than unity in the short run but higher than unity inthe longer run.

Where minerals have substitutes with reasonably highsupply elasticities, producers are usually concerned aboutthe relationship between the prices of their products andthose of substitutes. CIPEC members are well aware of thepossible effects of current high copper prices on the longerrun world demand for their output since once substitutescome to be employed for copper in certain uses, that part ofthe demand usually cannot be regained.-

CIPEC has undertaken several studies of the priceelasticity of demand for CIPEC copper, and it is perhapssignificant that CIPEC's annual and quarterly reports containcharts on the ratio of world copper prices to the prices ofaluminum. However, if through collusive action betweenCIPEC and the International Bauxite Association the pricesof both minerals could be raised, there would be less impacton the longer run demand for both minerals.

Although rational conduct requires that producers payclose attention to the price elasticity of demand for theirproduct, producers have not always been rational -- asevidenced by attempts on the part of private associationsto raise and maintain high prices for their products.Moreover, in a world free of depressions and growingmaterials shortages, an increase in the world price ofone commodity may induce a rise in the price of a close

/ According to a World Bank study, the shortrunelasticity of world demand for CIPEC copper is sufficientlyclose to unity that CIPEC's ability to improve the exportearnings of its members by an increase in prices is onlymarginal. According to this study the longrun elasticityof demand for CIPEC copper is significantly above unity.

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substitute, with the result that the producers of bothcommodities may gain without a permanent loss of asubstantial portion of the market for either product.

SOME POLITICAL CONSIDERATIONS

In addition to the economic factors discussed above, onemust take account of political factors in assessing possibleactions among producers of nonfuel minerals. Clearly one ofthe strengths of OPEC has been the broad area of commoninterest among its members. Although Canada and Australiamay well become members of some type of producers' association,they are unlikely to become members of any world organizationthat would seek to achieve more than reasonable price stabilityfor a raw material. It is true that Canada put an export taxon its petroleum exports to the United States, but the allegedpurpose was to bring the price of crude petroleum exportsmore in line with what Canada itself is paying forimported crude. Canada does not appear to be a likelyprospect for membership in either OPEC or CIPEC.

The USSR, South Africa, Rhodesia, and Turkey producethe bulk of the world's chromium. They would be strangebedfellows, indeed, in an association designed to controlthe price of chromium. Moreover, given South Africa'spolitical and economic orientation, it is unlikely to forceup the world price of chromium by a special tax on chrominumproducers. Nor is South Africa likely to join with Gabon,Zaire, and Brazil in order to raise the price of manganese.

METHODS OF WORLD MARKET CONTROL

Methods of world market control which might be employedby governments of producer countries may be summarized asfollows:

1. The OPEC formula. This requires the existence ofinternational producing companies that deliver the bulk oftheir output to downstream affiliates. World prices can beraised by increasing taxes or by having the producergovernment take title to the product and then selling theproduct back to the producing companies at an arbitraryprice for distribution to affiliates. A minimum ofcooperation among the producer governments is required.One possible type of cooperation would be preventing theaffiliates of a company operating in one country, whose

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taxes have been raised by more than are taxes in other producercountries, from shifting their source of supply to the lowertax countries. Another type of cooperation would be toestablish more or less uniform levels of taxation by theproducer countries.

2. Marketing by governments of producer countries atprices agreed on among members of the producers' association.If there are private producing companies, they may buysome of the output from the government marketing enterpriseat the association price, or they may act as selling agentsfor the producer governments within the price guidelines.Where the private companies have affiliates (or a superiormarketing organization), this would constitute an advantageto the producer country over producer countries that hadcompletely nationalized their industry. If the lattercountries began losing their share of the market, it wouldlead to price shading, special bilateral deals, etc., therebyendangering the viability of the price agreement.

3. Production or export quotas assigned to eachproducing country by the association. This approach createsserious difficulties in industries in which producer countriesare in longrun competition for markets and are planningsubstantial increases in mining and processing capacities.

4. Buffer stock arrangements designed to control priceson organized exchange markets. This type of arrangement isbest exemplified by the International Tin Agreement, and theproblems of managing a buffer stock are well known. It ismost useful when the objective is one of true price stabiliza-tion rather than an attempt to achieve a particular priceobjective.

POTENTIALITY FOR COLLUSIVE ACTION AMONGPRODUCER COUNTRIES OF MAJOR WORLD MINERALS ANDPOSSIBLE METHODS FOR ACHIEVING MARKET CONTROLS

The above discussion suggests that in considering boththe potentialities for raising world prices of minerals bymeans of collusive action by the principal exporters and themethods for achieving market control, attention should bepaid to the following:

a. The nature of the demand for the product, includingthe existence of substitute materials and the rate of growthof demand.

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b. The organization of the industry and the structureof the world market for the product.

c. The degree of concentration of productive capacityand reserves.

d. The political and economic orientation of the majorworld exporters of the product.

In the following discussion consideration will be givenonly to those nonfuel minerals that are important in worldtrade and where the interests of the United States might bedirectly or indirectly affected by collusive action to raiseworld prices. For example, molybdenum or phosphate rock,i/of which the United States is a substantial exporter, will notbe considered.

Copper

CIPEC's share of Free World copper production (includingconcentrates, blister, and refined) in 1972 was 36 percent,and CIPEC members accounted for 53 percent of copper exportsin 1971. The addition of other large LDC (less developedcountries) copper producers, such as Papua New Guinea (PNG)and the Philippines, to CIPEC membership would increaseCIPEC's proportion of world exports to nearly two-thirds.In the CIPEC countries well over half of the production isin government hands, and marketing is almost wholly controlledby the government. Almost none of Chile's output goes tofirms with an interest in Chilean production. A substantialproportion of Peruvian and Zambian output, however, goes toaffiliates of international firms engaged in production inthese countries. Nearly all of Zaire's output has been

I/The ability of Morocco to triple the export price ofphosphate rock within the past year or so has some interestingimplications for world market controls. Morocco holds73 percent of the Free World's known reserves of phosphaterock and is Western Europe's principal source of supply.Morocco is apparently in a position to control the worldprice without collusion with other exporters.

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marketed by a Belgian firm, SGM, which has a managementcontract with Zaire's nationalized copper industry (SGM isaffiliated with European copper fabricators). A smallportion of Zaire's output is produced by a Japanese firmwhich ships concentrates to its Japanese affiliates. Theoutput of PNG and of the Philippines is exported in the formof concentrates under long-term agreements with Japanese andEuropean firms with prices tied to the LME.

Clearly the CIPEC countries could exercise a stronginfluence on the world price of copper. However, theirability to employ the OPEC formula by influencing worldprices simply by raising taxes on private producers isgreatly limited because only a small portion of their outputis taken by the affiliates of firms with substantial invest-ment in CIPEC members. No CIPEC member is sufficientlydominant in the world market to begin to negotiate contracts,say, at a price significantly above the LME price. Conceivablyin periods of shortage a price leadership role could beexercised with success, but the price leader is likely tolose its share of the market rapidly when surpluses at thecontrolled price begin to appear. Hence, CIPEC's opportunitiesfor market control would depend upon the use of eitherproduction or export quotas or the employment of a bufferstock arrangement in an attempt to control the LME price.

For several years the CIPEC countries have been debatingthe question of what methods they should use in achievingsome degree of world market control. Recently the highprices for copper in relation to aluminum have not onlyrendered collusive action unnecessary, but there has beensome concern regarding the Oppact of the high prices on thelongrun demand for copper.-/

All four CIPEC members are anxious to expand productivecapacity and output. The country with the largest undevelopedreserves, Peru, is producing only about one-fourth the amountproduced by Chile or Zambia and is very anxious to double or

1 1over the past decade the demand for copper outside theUS has increased at a rate of about 6 percent per annum.However, this rate is expected to decline to about 4 percentover the next two decades.

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triple its productive capacity. This makes unlikely anylong-term agreement on production or export quotas. CIPECmembers are discussing the possibility of a buffer stockfor controlling the LME price to which contracts for salesof their output have been tied. Another approach, of course,would be to reach periodic agreements on contract pricesabove the LME price, say, when the LME price declined belowa certain level. Such an agreement, however, would be verydifficult to police.

As has already been noted, CIPEC members are quiteconcerned with the relationship between the price of copperand that of copper's principal substitute, aluminum.Undoubtedly CIPEC would welcome a strong association inthe aluminum industry which would raise prices of thatcommodity, and one could even envisage short-term agreementsfor maintaining a certain ratio of the prices of the twocommodities.

Bauxite

Approximately 75 percent of the world's exports ofbauxite and alumina is accounted for by the recentlyorganized International Bauxite Association, comprisingseven countries--Australia, Guinea, Guyana, Jamaica,Sierra Leone, Surinam, and Yugoslavia. Without Australiathe six developing countries account for about 60 percentof world exports of bauxite and alumina. Except for Guyana,which recently nationalized the Alcan properties, productionof bauxite and alumina is largely controlled by verticallyintegrated international firms. The vast bulk of thereserves and production of bauxite is in the developingcountries plus Australia, while nearly all of the aluminummetal is produced in the developed countries. The rate ofgrowth in US domestic demand is relatively high (7 percent),and the growth rate for the rest of the world has beenconsiderably higher.

This industry presents perhaps the closest parallel tothe OPEC situation. The governments of the producercountries might be able to force a rise in prices by raisingtaxes which the companies would pass on to the consumers.In May 1974 Jamaica proposed to aise taxes on the foreigncompanies by nea-ly eight-fold.. Jamaica accounts for

I/See "Jamaica Proposes Bauxite Legislation to Produce- $200 Million Over 13 Months," Wall Street Journal, May 17,

1974, p. 3.

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about 30 percent of the world's exports of bauxite andalumina. Possibly with the assistance of similar tax demandson the part of some of the other producing countries, Jamaicamight be able to achieve a several-fold rise in tax revenueswithout a significant loss of output.

There are, of course, important differences betweenbauxite and petroleum. There is a range of substitutes foraluminum, and most of the bauxite-producing countries arein great need of foreign exchange. On the demand side,four tons of bauxite at $9 to $15 per ton are needed toproduce a ton of aluminum ingots selling at over $600 perton. By comparison, the value of a barrel of refinerypetroleum products is ordinarily less than double the valueof a barrel of crude. Thus, doubling the price of bauxitewould increase the price of aluminum by less than 10 percent.

Tin

Four countries--Bolivia, Indonesia, Malaysia, andThailand--account for 80 percent of the Free World productionof tin and for a somewhat larger share of world exports oftin ore and metal. The industry is not concentrated in thehands of a few vertically integrated private companies asin the case of bauxite, and the principal measure of marketcontrol has been through the International Tin Agreement,which was designed to stabilize tin prices rather than toraise them well above the equilibrium level. A potentialfor raising prices through production and export quotasexists because of the high concentration of production ina few developing countries. However, the existence of theUS stockpile and a wide range of substitutes for tin in itsimportant uses make it likely that tin producers willcontinue to rely on the buffer stock for preventing sharpdeclines in tin prices, a mechanism which has the supportof major consumer countries (excluding the US) and of the IMF.

Chromium

South Africa, Rhodesia, Turkey, the Philippines, and theUSSR account for nearly 80 percent of world mine productionof chromium and an even larger share of world exports.Although chromium is essential for many uses, and the

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short-term elasticity of demand is probably fairly low,/the structure of the industry and the differing political-economic orientation of the major exporters render thelikelihood of collusion rather small. Nevertheless, if oneof the major producers, say, South Africa. should take theinitiative to raise prices (by putting a special tax onexporters), other producing countries might very well followby raising prices. The United States is wholly dependent uponimports of chromium, and imports approximately equal the amountsfrom the USSR, South Africa, and Turkey. US domestic demand isgrowing at about 5 percent per annum.

Manganese

The world production and export of manganese ore israther heavily concentrated in the USSR, South Africa, Brazil,Gabon, and India, with these countries accounting for more than80 percent of world production, and a somewhat smallerpercentage of world exports (since the USSR consumes a largeportion of its output). World demand for manganese isprobably rather inelastic since there is no satisfactorysubstitute for the metal as an input in steelmaking, itsprincipal use. The bulk of US importscomes from subsidiariesof US steel firms, so that there exists the possibility ofincreased taxation which would be passed on to US consumersof steel.

Despite its geographical concentration, the diversepolitical orientation of the major producers would makeeffective collusion difficult. Output control would bedifficult because much of the manganese is produced as abyproduct of iron and other metals. The United States isdependent upon foreign sources for about 95 percent of itsconsumption, and the bulk of its imports come from Gabon,Brazil, South Africa, and Zaire. US domestic demand isgrowing at only 3 percent per annum.

Cobalt

World production and exports of cobalt are dominatedby Zaire. Like manganese and chromium, cobalt is used inthe production of steel and in certain chemical products.However, nickel can be substituted for cobalt in many uses.

-/Since most ferroalloys are substitutes for oneanother, longrun demand is probably fairly elastic.

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As a byproduct of copper in Zaire and in other countries,the supply of cobalt is inelastic. Moreover, there are verylarge reserves of cobalt in Canada, New Caledonia, andAustralia, and an attempt to maintain very high prices forcobalt would probably result in substantial expansion ofsources outside of Zaire.

Iron Ore

Iron ore production and reserves are rather widelydistributed around the world among both developed anddeveloping countries. Although some of the production iscontrolled by vertically integrated international firm, asin the case of Canada, Brazil, Liberia, and Venezuela,f y

much of the world's output in the developing countries hasbeen nationalized. The absence of concentration of reserves,production, and exports, and the wide differences in politicalorientation of the major exporting countries would makeeffective collusion quite difficult. The United States iscurrently dependent on foreign sources for about 30 percentof its iron ore requirements, and this dependence willincrease over the coming decades. However, the United Statescould supply its own requirements with lower grade ores.Despite the production of iron ore by vertically integratedfirms, world output and reserves are too well dispersed toenable any likely grouping of foreign suppliers to achieveeffective market control.

Lead and Zinc

The United States has the world's largest reserves andthe largest output of lead; it also has large reserves ofzinc and is the world's second largest producer. Althoughthe United States is expected to be increasingly dependentupon foreign supplies for both lead and zinc, most of itsimports will probably continue to come from Canada, withsmaller amounts coming from Australia and the Latin Americancountries. Forward integration in the industry outside the

1/The new Venezuelan Government has recently announcedits intention to nationalize the Venezuelan iron ore industrycurrently controlled by US Steel and Bethlehem Steel.

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United States is not substantial. On the whole, the worldmarket structure does not appear to be conducive to collusionfor market control.

Other minerals

The United States is heavily dependent upon foreignsources of nickel, potash, tungsten, and mercury, and willbecome increasingly dependent on foreign sources of sulphur.Currently Canada is the major source of US imports for allof these minerals, and in most cases collusive action amongworld producers would probably require Canada's cooperation.

CONCLUSION

The best candidate for world market control by means ofOPEC-type action is bauxite. However, even a substantialrise in taxes on bauxite producers is unlikely to causesignificant injury to the aluminum industry in the UnitedStates. Collusive action for raising copper prices is areal possibility, but the financial position of the CIPECmembers precludes their ability to restrict exports overlong periods or to accumulate large stocks of copper. Thethreat would be more serious if collusive action involvedproducers of both bauxite and copper.

For most other commodities, there appear to be politicalbarriers to effective collusion and, in many commodities,the inclusion of Canada in the collusive association wouldprobably be essential. In any case, significant harm tothe US economy could be avoided by a stockpile equivalentto 1 or 2 years' import requirements because successfulmarket control by means of collusive action by producers'associations over longer periods of time does not appearto be feasible.

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