The electrical cable I bought this week illustrates basic economics. The 250-foot coil of ’12-2 nonmetallic cable with ground’ cost $80 at my local building supply store. That is three times what I paid for my last coil a decade ago. How will this change output, and thus employment, at copper mines and wire factories?
In general, the higher the market price for something, the more producers are willing to sell at that price. This relationship is called “supply.” Students get to it in the first week of an introductory course. But it isn’t until week five or so that they learn the details. “Supply” depends on what it costs a producer to turn out one more unit of the good. The producer must constantly compare this “marginal cost” to the market price. If price is higher than marginal cost, produce more. If price is below marginal cost, reduce output.
If 12-2 NMC is selling for $80 a roll, compared to $28 a roll the last time I bought some, wire producers must be eagerly ramping up production, right?
Perhaps. Remember, the decision depends on manufacturing cost as well as price. Over the time product price increased by a factor of 2.9, copper rose from 80 cents a pound to about $3.30 today. Plastic for insulation has increased along with oil prices, and even the paper in the little strip that separates the wire from the protective outer jacket is much more expensive than in 1999.
My coil of wire contains about 15 pounds of copper, seven of plastic and a few ounces of paper. The raw copper alone cost $12 in 1999 and $48 now. Plastic and paper are sharply higher, as is transportation. Factor in accumulated inflation of 29 percent, and the wire manufacturer is not in as enviable position as you might think.
What about the copper mining companies? They must be in gravy, with plans for new mines flying off their engineers’ workstations, right?
Well, yes and no. First, back when copper was 80 cents a pound, they were losing their posteriors. As a regional economist for the Minneapolis Federal Reserve, I followed the mining industries in the 1990s. The rule of thumb was that the shutdown point for Montana copper mines was about 85 cents. Below that, they could not even cover such month-to-month costs as labor and fuel, much less pay off fixed costs like machinery and developing the mine in the first place.
There is the rub for future expansion. Yes, copper prices are high. Yes, many existing mines are making tons of money right now. But developing a copper mine is enormously expensive, and it takes decades to mine out a large copper deposit. Even with permits in hand, simply opening a modern open-pit mine can take five years from the time the first ground is moved to shipping the first ore to a smelter.
Thus, a mining company must have some confidence that prices will stay high long enough to pay off more than a billion dollars of initial investment.
Yes, prices are high. But mining companies know nonferrous metal prices are even more volatile than crude oil. Companies that were overly hasty in opening mines in response to past price spikes often got hammered only a few years later.
This hesitancy about long-term trends retards expansion and aggravates short-term price spikes. Over the next year or two, don’t expect any bargains.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.