Thieves are breaking into vacant houses in North Minneapolis and St. Paul to steal copper plumbing and wiring. Similarly, electric lines are disappearing in the Dominican Republic and other developing countries. High metals prices are affecting economies around the world, offering myriad applied economics lessons.
Prices certainly have increased, particularly for nonferrous base metals like copper, lead, tin and zinc. All have at least tripled since 2000, more than steel or even crude oil. The booming economies of China and other Asian nations drive much of the demand.
Commodity prices still play an important role for many developing countries. Metals exporters like Chile, Zambia, Peru, Malaysia and Russia all enjoy booming international sales that broadly bolster their domestic economies. The question is whether this favorable situation will translate into longer-run sustained growth or be dissipated in short-run spending binges.
High metal prices also demonstrate how recycling, broadly defined, relates to prices of virgin materials. Consumers envision recycling as putting empty cans and bottle out on the curb. But in tonnage and dollar terms, most recycling occurs at a commercial level.
Many discarded materials – metals, glass, paper, used crankcase or frying oil – have value, but require labor and other resources to be recycled. The higher the cost of virgin material, the higher the price paid for scrap and thus the more resources firms can profitably devote to recycling.
All things being equal, countries with low labor costs can recycle more than ones with high labor costs, since recycling tends to be labor-intensive, whether on the consumer or industrial level.
When labor earnings are low, the temptation for people to steal recyclable scrap is higher than when high-paying jobs are readily available. Rising scrap prices increase the temptation. The same is true at the industrial level. The Dominican Republic and Trinidad are suffering power outages caused by theft of electrical transmission wires for sale as copper scrap.
Such behavior is nothing new. Theft of scrap metal also happened when I lived in Brazil in 1969. When I worked in Peru in 1980, people had to drive with care because the cast-iron manhole covers were often stolen. In Bulgaria, in 1997, horse-drawn gypsy wagons loaded with aluminum traffic signs were a common sight. And Minneapolis and St. Paul are not the only U.S. cities suffering from a spate of break-ins as thieves strip copper plumbing and wiring from vacant houses.
There are economies of scale and information problems in material re-use. It is easier for a large country like India, Brazil or the United States to have viable commercial recycling operations than tiny ones like the Dominican Republic. But when materials prices get high enough, even small, physically isolated countries start to collect and export scrap.
While some see this as a facet of recent globalization, international sales of scrap have been important for over a century. Remember that the Roosevelt Administration’s 1941 ban on scrap-metal sales to Japan was received as a hostile act pushing that country to war. And, as for many other items, lower shipping costs foster greater international trade in scrap. Copper, brass and lead are now all valuable enough to put in shipping containers.
High prices stimulate increased recycling almost immediately, because the capital investment required is low. High prices also foster primary production – new mines and smelters – but this takes longer.
The capital costs of a new mine can be tremendous and building the required infrastructure can take years. A new open-pit copper mine can cost more than a billion dollars before it produces a pound of copper. Investors cannot commit this much money based on short-term spikes in metals prices. The fact that copper has exceeded $3 per pound is of little relevance. The key question is what it will average over the next 20 to 40 years.
High prices are motivating interest in new ore sources, as in recent investigation of deposits of copper, nickel and other nonferrous metals on Minnesota’s Iron Range. But it will take years before any new facilities actually produce metal.
Reopening idle facilities can be easier. U.S. metal mining declined drastically over the last half-century, not because all ores were exhausted, but because there were cheaper sources elsewhere. There still is a lot of copper in Arizona, Montana and even the Upper Peninsula of Michigan.
When copper prices lingered in the doldrums below 90 cents, as they did during the 1990s, even the cheapest U.S. mines had trouble making money. At more than $2.50 a pound, many idled operations can be refurbished and make money. But just as for a new mine, one must expect prices to stay high long enough to pay off the investment.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.