Economic and Technological Determinants of the Material Intensity of Use

Abstract

Slow demand growth has been a major problem facing the steel industry in the U.S. Compared with aluminum and plastic materials, growth in apparent steel consumption has been far less, averaging one percent per annum from 1960 to 1985 (Considine 1989). This changing mix of material use suggests that substitution may be just as important as the well-known link between material consumption and goods production. The reasons for this substitution-economic and technological-have implications for U.S. trade and regulatory policy. Trade restrictions may provide the steel industry with short-term relief in the form of higher prices but possibly at the cost of a long-term erosion in material market shares. Other forms of government intervention, such as energy efficiency and product safety regulations, may induce technical change and, thereby, change the mix of material utilization in our economy. Accordingly, the purpose of this study is to examine the role of technical change and relative prices in material consumption. Material substitution can be analyzed at several stages of the production process. For instance, steel firms combine scrap, iron ore, and metal alloy inputs in the production of various steel products. Similarly, automobile manufacturers select steel, aluminum, plastics, and other material inputs. Hence, can refer to raw inputs or to semi-finished materials depending upon the stage in the production process under examination. This study examines the determinants of the level and mix of finished material inputs. The focus here is on sheet, strip, pipe, and wire products made from steel, copper, and aluminum alloys, and thermoplastic and thermosetting plastic resins. These materials are used in the production of a wide array of manufactured goods including containers, automobiles, machinery, and computers. The production of these materials involves the single largest use of metallic minerals and the second largest use of energy in U.S. manufacturing. Substitution between metallic and plastic inputs in manufacturing is an example of compositional shifts in economic activity that can alter the level and mix of energy and mineral consumption. Hence, material substitution could have some major implications for the structure of the industrial economy. Given the focus of this study on material substitution, a partial equilibrium framework is adopted. Hence, the effects of material prices on the output of material intensive goods are not explicitly measured. Lower real spending on material intensive durable goods since 1973 has been identified as one factor leading to the slowdown in U.S. steel consumption (Considine 1987). Another popular explanation is that imports of automobiles and other steel-containing goods displaced domestic steel consumption indirectly. This hypothesis, however, is really a corollary of the first. Competition from imported goods affects the level of domestic goods production, which in turn affects domestic material consumption. Hence, redefining apparent steel consumption to include steel embodied in the net trade of goods is unnecessary. In addition to relative material prices;