Economics of Base Metals

Abstract

Doctor of Philosophy in Economics Economics of Base Metals by Nguyen BAO ANH In this thesis I present three papers on the Economics of the base metals industry. The thesis studies production, trading, and investment in the base metals industry, and thus explains some phenomena of the industry in an international context. Using the features of the base metals industry such as the practices in production and trading, physical properties, geology of the deposits and so on, we build theoretical models to simulate the behavior of the industry. In Chapter One, we study the determinants and the trend of base metals prices over time by an equilibrium model of supply and demand. Because the different types of natural resources exhibit different patterns of price changes in history, we particularly simulate the long run equilibrium to study the impacts of the determinants for base metals prices. The Cobb-Douglass production function on the supply side allows substitution among production factors. The demand function for base metals from the economy is also derived. In the long run, equilibrium of aggregate supply and demand determines the systematic price trend. We show how trends of base metals prices depend on technological progress, resource scarcity, natural resource tax, and the interest rate. Assuming constant returns to scale in base metals production, the price elasticity of the supply of base metals is relatively small. Interestingly, a high natural resource tax leads ii to a high price but low rate of price change over time. On the supply side, the decline of base metals relative prices can thus be explained by the inverse supply functions. On the demand side, the relative price is also declining over time as we see the implications of the inverse demand functions and our numerical illustrations. By solving the equilibrium condition, we show that the rental rate of base metals minerals in reserve may decline over time, or even not be valuable in future. The price elasticities of supply and demand are calculated and decomposed into specific effects. These are systematic components of base metal price changes in the world market. Chapter Two deals with the fluctuations in the prices of base metals. We consider the price in the short run as an equilibrium of trade. If the long run equilibrium regulates the prices and sets them in a stabilization, then the fluctuations in price are caused by the trade and speculative activities. By simulating speculative activities and optimizing the utility of agents in international exchanges, we show that the price fluctuations are the response to risk preferences of agents and the scale of international exchanges. We find out the critical point of production investment, which depends on the market demand, profitability of the metal industry, and the distribution of base metal minerals in nature. In the specific case of the industry versus the market condition when the uncertain production is above the critical point, the price of base metal fluctuates more or less according to the number of producer offers in base metal exchanges, the speculative activities, and risk preferences of agents. In contrast, if the investment level of the base metals industry in uncertain production is below the critical point, the effects of base metal exchanges scale to the price are in the reverse direction. The comparative statics inequalities are derived to clarify the