Chapter 2.
3
PRICING AND TRADING IN METALS AND MINERALS
SIMON D . STRAUSS
2.3.1 INTRODUCTION
In any feasibility study for a metals or minerals project, an
assumption must be made as to the prices at which the project’s
products can be sold. This is a difficult assignment. Prices of
many mineral commodities are volatile, reflecting unpredictable
shifts in the balance between supply and demand. Moreover,
with some exceptions, the significant balance is that prevailing
in the world market rather than any national market—for most
mineral commodities are subject to a high degree of international
trade.
Thus the mining engineer involved in the development of a
mineral deposit needs to understand the pricing of the minerals
that deposit will produce. Above all, he/she needs to recognize
the perils involved in forecasting mineral prices. Even the most
experienced and sophisticated observer of mineral markets is
likely to err in predicting the future course of prices. This is true
even though his/her studies have taken into account what appear
to be all relevant factors.
Moreover, in projects involving mineral deposits previously
unexploited, the forecast of prices must cover an extended pe-
riod. Typically, a “greenfields” project requires several years
for mine development, construction of production facilities, and
provision of necessary infrastructure of transport and power
supply. Following project completion, the price forecast will
cover the years necessary to recoup the original investment and
provide an adequate return. For most projects, this means that
the forecast will cover a period of 10 to 20 years.
The yardsticks by which prices are measured are vastly dif-
ferent from the yardsticks with which engineers are familiar in
the measurement of production, metallurgical efficiency, or labor
productivity. Engineers are used to working with yardsticks that
are constant—measurements of weight in pounds or kilograms;
measurements of distance in feet or meters; measurements of
time in seconds, minutes, hours, or days. Recovery of mineral
content can be measured in percentages.
The yardsticks for prices are in terms of monetary currencies.
The value of a given currency unit tends to change. Thus if the
current price of a given mineral is the exact monetary equivalent
of the price of that mineral 10 years earlier, it nevertheless has
almost certainly changed. Due to the shifting tides of economic
fortune, a given amount in dollars and cents today may be worth
more or less than it was 10 years earlier. It will be worth more
than 10 years ago if the economy has suffered deflation; it will
be worth less than 10 years ago if the economy has suffered
inflation. During the 20th century, with the exception of the
severe depression of the thirties, the general trend worldwide has
been inflationary.
To provide a specific illustration of the shifting value of
currency units in relation to a mineral commodity, consider the
price of copper in 1988 in the United States—it averaged $1.19/
lb ($2.62/kg). Fifty years earlier, in 1938, the average price
of copper was l0¢/lb (22¢/kg). Thus copper appears to have
increased in price nearly twelvefold in 50 years. However, if
these two prices are adjusted to allow for inflation, the compari-
son between them yields a very different picture. A common tool
for making such adjustments is the US consumer price index.
Taking this so-called CPI with the year 1967 equalling 100, the
81
Fig. 2.3.1. London Metal Exchange prices for copper, 1970-1985,
expressed in pounds sterling and US dollar equivalents (Strauss,
1986).
price of copper in 1938 is measured to have been 23.7¢/1b, not
l0¢/lb. And the price of copper in 1988 is measured to have
been 33.6¢/1b, not $l.l9/lb. In other words, by restating the
prices in terms of a constant deflator, the change in the copper
price over this 50-year period was not a gain of 1l00%, but
rather 42%.
The mining engineer who is making a feasibility study of a
mineral project obviously cannot be expected to study the broad
economic picture. Therefore, his projection of price will be based
on what the economists call “money of the day.” If he is prepar-
ing his analysis in, say, the year 1992, his forecast of prices can
appropriately be stated on the basis of 1992 dollars. If future
economic trends significantly alter the value of the dollar, the
presumption must be that roughly corresponding changes will
occur in the prices of mineral commodities—although this may
take time.
An additional difficulty in forecasting prices is that the cur-
rency of any given nation may lose or gain value at a different
rate than the currencies of other nations. This has been particu-
larly true since the early 1970s, when the system of fixed ex-
change rates instituted by the International Monetary Fund at
the end of World War II gave way to a new era of floating
exchange rates.
For most mineral commodities, the currency standard in the
20th century became the US dollar, as it was for many years
the accepted denominator of international trading values. Thus
prices stated in US dollars are the usual measuring stick for
such significant minerals and metals as gold, copper, aluminum,
nickel, zinc, lead, silver, tungsten, iron ore, sulfur, phosphates,
potash, and talc, to name just a few.
But due to the change in the value of other leading currencies
in relation to the dollar, it has frequently happened that a rise
in the price of a commodity in terms of dollars may equate to a
loss in the price of that commodity in terms of a different cur-
rency, say Japanese yen or German marks. See Fig. 2.3.1, espe-
cially after 1980, for an example of this. To further illustrate,
82 MINING ENGINEERING HANDBOOK
between February 1985 and March 1987, the price of gold rose
from $299/oz ($10.55/g) to $409/oz ($14.43/g), a gain of 37%.
But during those 25 months, the value of the dollar fell in relation
to other major currencies. In terms of Japanese yen, the price of
gold declined by 21%, and in terms of German marks, it fell by
24%.
How then can one describe the gold market during those 25
months. Was the price rising? Most US citizens would say so.
Was the price falling? That would be the verdict of the Japanese
or the Germans.
The key point is that on any given day, however, the price of
gold in the United States, Japan, or Germany was approximately
equal—given the high value of the commodity, the ease with
which it can be transported, and the absence of import duties.
For other bulkier commodities, there may at times be significant
differences in prices prevailing in particular markets. And where
there are substantial barriers such as tariffs, quotas, or other
limiting factors, on occasion a wide gap may exist between the
price in one national market as distinct from other countries.
However, with the increased trend toward freer trade and the
continued improvement in transportation facilities, such isolated
instances of large price differentials are becoming increasingly
rare. One contributing factor to maintenance of fairly uniform
pricing throughout the trading world at any given time is the
information explosion resulting from widespread use of comput-
ers, fax machines, international telephone communications, and
a vigilant trade press. Moreover, a substantial share of the
world’s mineral trade is carried on by international dealers or
brokers who have a keen sense of market developments and
hence will focus on sales in strong markets in preference to those
where demand is lagging.
2.3.2 HOW ARE MINERAL PRICES DETERMINED?
The methods by which mineral prices are established differ
widely. Unique patterns have evolved over the years in which
minerals have been traded. Since there are literally hundreds
of distinct mineral commodities being bought and sold, it is
impracticable to attempt in this presentation to describe the
prevailing procedures for each—or even for the 30 or so most
widely used minerals in terms of volume or value.
Instead, an attempt is made to describe some of the more
widely used methods of arriving at price.
In general, minerals are sold on the basis of weight, varying
from carats for gem stones, ounces for precious metals, pounds
or kilograms for the more valuable base metals, and on to tons
(be they short, metric, or long) for less valuable metals, ores, and
most of the industrial minerals. In some cases the price is stated
on the basis of the metal content of certain ores rather than gross
weight—thus, for example, tungsten is sold on the basis of units
of tungsten contained in wolframite or scheelite concentrates.
For any given mineral, market transactions can occur at
several stages of production. Thus there is a market for bauxite
(the usual source of aluminum), for alumina (an intermediate
product), and for aluminum. Prices are quoted for each of these
three products and the trends are not necessarily the same. At
times, aluminum metal may have been in short supply, but there
may have been an abundance of bauxite.
One can identify at least four principal methods by which
the minerals industries arrive at their selling prices. There is
considerable difference of opinion among producers, consumers,
traders, and public officials as to which is the best procedure.
All express a desire to arrive at prices that are fair and reasonable
and promote stability, yet they differ profoundly in their ap-
proaches.
The four broad procedures are
1. Prices established by a producing seller, who periodically
announces the terms and conditions, as well as the prices, at
which he/she will make sales. These are called producer prices.
2. Prices announced periodically by an independent agency,
often a trade periodical, that makes regular surveys among both
buyers and sellers to ascertain the basis at which actual transac-
tions have taken place.
3. Prices negotiated directly between seller and buyer. Fre-
quently, but not always, the result is contracts extending over a
period of several years with provision for price adjustment under
agreed conditions.
4. Prices established on futures markets or commodity ex-
changes. These facilities, open to all to trade, provide auctions
by open outcry, comparable with securities exchanges.
For some commodities, the determination of price in some
markets is by one procedure and in other markets by other
procedures. For example, for many years in the United States,
the price of lead was based on method 1. The major US and
Canadian sellers, the chief suppliers of lead in the United States,
periodically announced the price at which they would market
their product. However, in the European market, the price of
lead has long been customarily based on the quotation of the
London Metal Exchange. In some of the developing countries
of Asia and Latin America, sales of lead are frequently the
result of method 3, negotiation between buyer and seller. In
such negotiations, due attention is always given to the prevailing
prices in the United States and Europe.
Some transactions take place in which two or more of the
pricing methods play a role in a single transaction. Typical of
these are the sale of copper, lead, zinc, or nickel concentrates by
a producing mine to a so-called custom smelter, a processing
facility which secures part or all of its feed from independent
mines. Method 3 (direct negotiation between the miner and the
custom smelter) is universally followed to set the treatment
charges involved. These are characteristically stated in terms of
an amount per ton of concentrate delivered, modified by credits
for byproduct elements that are recovered and penalties for im-
purities. However, payment for the recoverable metal contained
is based on a price determined either by methods 1, 2, or 4. For
example, lead content may be paid on the smelter’s selling price
for lead (method l), a periodical’s published price for lead
(method 2), or the London Metal Exchange price for lead
(method 4). Usually, these are the average price for the month
in which the concentrate has been delivered to the smelter or for
the month following delivery.
Perceived advantages and disadvantages of each method of
pricing will influence both sellers and buyers as to which they
select. Method 4 (trading on a commodity exchange) has not
been found practicable for most mineral commodities even
though it has become a highly acceptable price determinant for
several key metals and has long dominated the field of pricing
of leading agricultural commodities.
In the following, we discuss the salient characteristics of
each of the four methods.
2.3.2.1 Producer Prices
In establishing a producer price, the seller takes into account
his cost of production, his potential markets, the position of his
competition, and the possibilities of increasing his market share.
The competitive factor must always weigh heavily on his deci-
sions.
Historically, there have been two instances of a mineral
monopoly, a single significant seller in the world market. One
was the Chilean nitrate of soda industry prior to World War I,
 PRICING AND TRADING IN METALS AND MINERALS
and the other was the Greenland cryolite industry prior to World
War II. In a sense, these two industries were in a position to
name their own prices without considering competitive factors.
Eventually, however, the very existence of this seemingly unlim-
ited power sparked successful efforts to develop synthetic prod-
ucts that proved to be acceptable substitutes, and the apparent
monopoly ended.
Although monopolies are rare, in the mineral field there
have been numerous instances of what economists call oligopo-
lies. These are markets dominated by a small number of powerful
sellers. As examples of oligopolies, one might cite the aluminum,
molybdenum, and nickel markets. As late as the middle of the
20th century, these markets were examples of producer pricing.
In the case of aluminum, a handful of companies accounted
for the bulk of world production through the 1960s, notably
Alcoa, Alcan, Alusuisse, Kaiser, Pechiney, and Reynolds. In
molybdenum, the dominant seller was Climax, subsequently
merged into the company now known as Amax. In nickel, the
largest seller by far was Inco (formerly International Nickel Co.).
The pricing policies of these companies appeared to be de-
signed for stability (in contrast with the volatile price behavior
of such base metals as copper, lead, and zinc) at levels that would
encourage maximum expansion of consumption. Indeed, in the
third quarter of the century, the consumption of aluminum in-
creased at an average rate of 8% compounded annually, while
consumption of nickel and molybdenum both rose by about 6%
compounded annually. These figures are for world consumption.
Expanding use of these metals was due to intensive research
and promotion efforts by the dominant companies, as well as to
the stable price structure. Since success attracts attention and
imitation, in the long run what happened was that other corpora-
tions were encouraged to enter the aluminum, molybdenum, and
nickel industries. Intensive exploration discovered previously un-
known deposits in many areas (including byproduct resources
of molybdenum in many copper deposits), financing was ar-
ranged, and new producers were launched.
With more sellers competing in the marketplace, gradually
the ability of the previous major firms to control price was
eroded. Stability of price gave way gradually to volatile behavior.
By the 1980s, the prices of aluminum, nickel, and molybdenum
rose and fell in response to market conditions much as had long
been the case with other metals.
Producer pricing has coexisted with prices established on
commodity exchanges in the case of copper, zinc, and lead.
Producers of these metals have attempted to lessen the extreme
swings in price on the exchanges at times in an effort to prevent
a perceived threat of substitution by competing materials. When,
as has happened, a material discrepancy has developed between
the producer price and the exchange price, difficult market dis-
tortions have resulted. Increasingly the trend has been away
from the producer price and toward the exchange-denominated
price.
Two important categories of mineral commodities—the in-
dustrial minerals and the so-called minor metals—tend to be
sold either on the basis of producer prices or prices as determined
by trade periodicals or other independent sources. Recent price
histories of representative nonmetallic minerals appear in Table
2.3.1.
Major industrial minerals tend to be bulk materials of rela-
tively low unit value. They include sulfur, potash, phosphate
rock, barite, gypsum, salt, fluorspar, diatomaceous earth, talc,
and asbestos. An appreciable portion of their cost to the user is
absorbed in transportation costs from mine to market. Keen
competition prevails in these commodities, but they are consid-
ered unsuitable for listing on commodity exchanges because of
83
low value and problems of establishing uniform quality stan-
dards.
Minor metals present a contrast: they have fairly high unit
value but limited volume. Many are byproducts recovered in
processing base-metal ores, for example, bismuth, cadmium, co-
balt, germanium, indium, tellurium, and selenium. Antimony
and mercury are two exceptions in that much of their production
is derived from deposits in which they constitute the chief ele-
ment of value. A problem arises in that output of the byproduct
metals depends on the demand for the major base metals,
whereas demand for byproduct metals does not necessarily coin-
cide with demand for major metals. Hence markets for byprod-
uct metals are at times subject to substantial excesses or short-
falls-with drastic effect on price. This price volatility would
appear to encourage listing on commodity exchanges, but the
prospective trading volume is too small to interest the exchanges.
Producer pricing is not feasible for the two traditional pre-
cious metals, gold and silver. Therefore, they have historically
had prices established by other procedures. Huge supplies of
gold and silver mined in the past exist as bullion, coins, jewelry,
and works of art. These holdings dwarf the current newly mined
product and exercise a dominant role in price determination.
Because supplies of platinum group metals arise chiefly from
two sources—the Soviet Union and South Africa—in the past,
producer pricing arrangements have existed, yet increasingly the
markets are being influenced by commodity exchange trading.
2.3.2.2 Independent Pricing Determination
Responding perhaps to consumer concerns over being sub-
ject to prices unilaterally determined by producers, in many
minerals pricing is sometimes based on quotations as determined
by a source that is neither seller nor buyer. In many but not all
cases, this may be a trade periodical, such as Metals Week or
American Metal Market in the United States or Metal Bulletin
in Great Britain.
The prices quoted in these periodicals are based on can-
vassing producers, consumers, and merchants dealing in the
specific commodity to determine the prices at which actual trans-
actions have taken place at specific dates. The publication then
reports these prices as averages for a given day, week, or month.
Not infrequently, contracts are made between producer-sellers
and consumer-buyers providing that the actual price for a given
tonnage of metal or mineral will be the price as reported in the
publication. Sometimes a seller will give buyers the option of
paying either the seller’s price or the periodical’s average price,
with the option to be decided in advance.
In addition to the trade press, other independent arbiters of
price exist. One of the best known is the Handy & Harman daily
silver quotation. Handy & Harman is a US silver refiner and
fabricator, based in New York, that buys silver from producers
and sells fabricated silver products to ultimate consumers. Each
day, having determined the quantity of silver it requires to meet
that day’s sales commitments, Handy & Harman solicits bids
from principal silver sellers to supply a matching amount of
metal. Its price represents the clearing price at which it can
obtain the amount it requires.
In London, a somewhat similar procedure is undertaken
daily by the leading London bullion dealers to match inquiries
from gold and silver buyers with offers from gold and silver
sellers. Representatives of the firms meet at noon to review offers
and bids received from worldwide sources. The consequence is
announced as the official “fixing” for each of the two metals.
Much of the world’s commerce in the two metals is based on this
daily announcement, although since the mid-1970s, attention is
also paid to prices as announced in Zurich, Tokyo, Singapore,
84 MINING ENGINEERING HANDBOOK
Table 2.3.1. US Prices for Nonmetallic Minerals, 1973–1985
US Gross National Phosphate
Product Deflator Price Barite, Boron, Diatomite, Gypsum, Rock, Salt, Sulfur,
Year Index = 100 $ $ $ $ $ $ $
1973 49.5 16.66 88.18 65.04 4.60 6.24 6.82 17.56
1974 54.0 16.77 108.03 83.77 4.86 12.10 7.87 28.42
1975 59.3 17.70 115.74 88.18 5.04 25.35 9.85 44.91
1976 63.1 25.63 121.25 95.90 5.51 21.26 8.62 45.72
1977 67.3 22.33 130.07 109.13 6.12 17.39 9.85 44.38
1978 72.2 22.71 141.09 122.36 6.87 18.56 11.13 45.17
1979 78.6 28.08 184.08 138.89 7.53 20.04 11.03 55.75
1980 85.7 32.39 186.28 160.94 9.18 22.78 16.15 89.06
1981 94.0 39.64 205.03 180.78 9.40 26.63 15.17 111.48
1982 100.0 41. 53 221.56 194.00 9.33 25.52 15.31 108.27
1983 103.8 42.69 221.56 203.93 8.68 23.97 14.80 87.24
1984 108.1 36.19 229.28 212.74 8.75 23.99 15.19 94.31
1985 111.7 30.86 229.28 230.38 9.15 23.50 15.43 104.68
Change
1973-85 +125.7% +85.2% +160.0% +254.1% +98.8% +176.6% 126.3% +486.1%
Source: US Bureau of Mines 1986 for prices. GNP Deflator Index as reported by American Bureau of Metal Statistics.
All prices are in $US per ton material, f.o.b. shipping point.

and other bullion-trading centers, as well as to the prices prevail-
ing on the New York Commodity Exchange.
In the case of tungsten, two independent sources of price
determination have been established. Metal Bulletin in London
has long been the source of quotations for tungsten content of
scheelite and wolframite concentrates, the form in which most
of the world’s tungsten production is traded. In addition, as a
consequence of meetings arranged under United Nations aus-
pices, a so-called International Tungsten Indicator price is calcu-
lated, based on details of tonnages sold and prices paid provided
by both buyers and sellers, stated in price per unit (1%) of
tungsten content (in US dollars).
2.3.2.3 Negotiated Prices
In many transactions, the applicable price paid for a metal
or mineral is the consequence of direct negotiation between buyer
and seller, rather than the use of a price previously established
by the seller or previously published by an independent agency.
The use of negotiated prices is particularly common in the case
of long-term contracts covering the supply of raw materials to a
processing facility.
Thus, for example, a mine supplying iron ore to a steel mill
or one supplying chrome or manganese ores to a ferroalloying
plant will typically negotiate the price of its product with the
consumer. Because the material involved is bulky and because
transportation arrangements must be worked out on the basis of
a regular schedule, it suits both the buyer and the seller to
commit themselves to a long-term arrangement.
The contract specifies the quality of the product to be deliv-
ered: the seller can only offer material of the particular character-
istics contained in the deposit it is exploiting. The buyer needs
to be certain that his processing facility will receive raw material
it can handle efficiently. There is thus a community of interest
between the two.
In the price negotiation, each party is cognizant of the other’s
requirements. The buyer knows that if the price involved is
inadequate to insure continued operation by the mine, he may
lose a suitable supply of raw material for his plant. To guard
against adverse consequences of major inflationary trends on his
supplier’s operating costs, as a rule he will agree to a provision
for price escalation in the event labor, fuel, supply, or transport
costs change drastically. The seller has to recognize that if he
makes excessive price demands, the buyer will look for alterna-
tive sources. Therefore, possible competition influences the sell-
er’s negotiation stance.
Concentrates of such base metals as copper, lead, zinc, and
nickel are normally sold through long-term contracts negotiated
between a miner and a smelter—or perhaps by a miner and an
intervening trading firm that then sells to a smelter. In such
negotiations, the discussions center about the processing charges
for smelting and/or refining of the concentrates. A separate
matter is the determination of the value of the recoverable metal
content. This is calculated either on the basis of published prices
in trade periodicals or on official quotations from the commodity
exchanges. The payment for the concentrates is the consequence
of deducting the processing charges from the calculated value of
the recoverable metals.
Buyer-seller negotiations also frequently determine the price
paid in transactions involving nonmetallic industrial minerals—
for example, chemical companies purchasing sulfur or other
materials required in fertilizers and similar products. Major con-
struction projects are also likely to negotiate on a long-term basis
for cement, building stone, and other required minerals.
2.3.2.4 Commodity-Exchange Pricing
Prices of a few important nonferrous metals are either deter-
mined on or largely influenced by transactions on commodity
exchanges, the two most widely known being the London Metal
Exchange and the New York Commodity Exchange. There are
other exchanges in operation that trade in metals, but these two
are the ones most frequently referred to in the metals trade. The
number of metals listed for trading in London and New York
changes from time to time. When this chapter was written, Lon-
don was trading in aluminum, copper, lead, nickel, tin, and zinc.
New York was trading in aluminum, copper, gold, and silver.
On the New York Mercantile Exchange, platinum and palladium
were being traded.
Some description of exchange trading is essential for an
understanding of the role played. Essentially, such trading repre-
sents an auction at which contracts for a given commodity are
offered for sale during prescribed hours of each business day.
Trading on an exchange is open to anyone with an appropriate
 PRICING AND TRADING IN METALS AND MINERALS
credit rating, but the actual transaction must be conducted
through a firm or individual that is a member of the particular
exchange.
Exchange contracts specify a standard quantity of the com-
modity being traded. For example, the London copper contract
is for 25 t (metric tons); the New York copper contract is for
25,000 lb. The quality of the metal that constitutes acceptable
delivery under an exchange contract is carefully specified.
Brands that are produced by known refiners must be approved
for listing by the exchange before they can be traded.
Offerings made on the exchange floor are for delivery at a
specific time. London contracts are traded for the prompt or
“cash” position, requiring immediate delivery or for future deliv-
ery on a specified date. New York contracts specify the month
of delivery.
Under exchange contracts, the seller may deliver any accept-
able brand he chooses at any warehouse site approved by the
exchange. This latter option is of great significance since the
London exchange has approved warehouses not only in Britain
but also at major ports throughout the European continent and
even in Singapore. The New York exchange has approved ware-
houses scattered throughout the continental United States.
If the buyer takes delivery at a warehouse location that is
inconvenient for him, or if the brand tendered is not one that he
normally consumes in his plant, as a rule he can arrange to
make an exchange for a more suitable warehouse site or a more
desirable brand through the member firms, but this may involve
paying a premium identified as “exchange for physical.”
However, in the vast majority of exchange transactions,
physical delivery is not made. Instead, the buyer of a contract
may sell or the seller of a contract may buy back the quantities
involved in the original transaction prior to the effective date of
the contract. What then is the purpose of the transaction? Simply
to establish a known price to cover the seller’s output or the
buyer’s raw-material costs.
As an illustration, assume a secondary copper smelter buys
scrap material to be delivered to its plant in 30 days. After
delivery, an additional 45 days may be required for processing.
The price of copper may rise or fall substantially between the
date of the original purchase and the date, 75 days forward,
when metal is available for sale. By selling an equivalent amount
of copper on the exchange the day the scrap material is pur-
chased, for delivery 90 days forward, the secondary smelter has
fixed the price it will receive based on the position of the market
at the time it bought its raw material. When the recovered metal
is available, it is sold to a consumer based on the then prevailing
price and the outstanding exchange contract is bought back.
These two latter transactions offset each other, so the net out-
come is based on the original exchange sale even though no
delivery is made on the exchange.
In addition to the large volume of exchange transactions
based on this type of hedging, there are also trades made by
speculators who believe they can realize capital gains through
purchasing when a rise in price is probable or through selling
when a fall in price seems imminent. Speculators are not actually
involved in the metals business. They are as apt to trade in
orange juice or hog bellies as they are in aluminum or gold.
They too have no interest in holding supplies of metal per se.
Therefore, in the great majority of instances, they either liquidate
their positions prior to maturity or, alternatively, liquidate
nearby positions and roll the contracts forward to more distant
dates.
Obviously, much more could be spelled out in regard to
exchange transactions—volumes have been written in regard to
their operations (see the bibliography for some sources). Because
85
Fig. 2.3. 2. Average prices for aluminum and copper, 1970- 1985,
stated in pounds sterling per ton (Strauss, 1986).
of space limitations, however, a brief summary is all that is
offered here.
The key to the trend of prices on commodity exchanges is
the perceived balance between supply and demand. If supply
exceeds demand, inventories will rise and prices will fall. If
demand exceeds supply, inventories will fall and prices will rise.
The trend of production costs does not immediately affect prices
on an exchange.
It is different with a producer price. Costs are an important
price determinant. Thus after making an expensive wage settle-
ment, a producer will try to increase its price. By contrast,
when a wage settlement is reached, no matter how costly, the
commodity-exchange price of the product will tend to fall be-
cause the market perceives that the risk of a strike and a reduc-
tion in supply has been averted.
As an example, before aluminum had been listed for trading
on the London Metal Exchange, the producer price of aluminum
was increased in 1975—even though at the time there was a
serious economic slump under way. The rationale was that an
expensive wage contract had just been concluded. After trading
started on the London Metal Exchange during the recession of
the early 1980s, the price of aluminum fell sharply—despite
further wage increases (Fig. 2.3.2).
Producer prices are still quoted for some metals traded on
commodity exchanges, but their significance has diminished.
Many producers of the metals traded in London and New York
believe that the volatility of prices is increased by the exchange
mechanism. Yet they are reconciled to living with the prices
quoted on the exchanges and have modified their former market-
ing strategies to take the exchange prices into account.
2.3.3 EFFORTS TO STABILIZE PRICES
Volatile mineral prices create problems for producers, con-
sumers, and governments. Ore has been defined as mineralized
rock that can be profitably extracted. At a given price a deposit
may be profitable; at a lower price it will not be. Therefore a
mine operator’s estimate of ore reserves is dependent on price
and the very existence of his enterprise can be threatened by a
sharp fall in price.
Consumers who produce products containing minerals need
to establish their own selling prices. Frequent changes in those
prices are resented by the buying public. Hence consumers de-
plore constant fluctuation in the cost of essential raw materials-
86 MINING ENGINEERING HANDBOOK
particularly those raw materials that constitute a large part of
their total costs.
Governments—particularly governments of developing
countries that depend on mineral exports for a large share of
their foreign-currency revenues and of their tax incomes—find
it hard to plan their budgets in the face of widely fluctuating
mineral prices.
Not surprisingly, therefore, repeated efforts have been made
to stabilize mineral prices. Sometimes these efforts are made by
private-sector producers of minerals; sometimes they are made
by governments through commodity agreements. With few ex-
ceptions, these efforts have ultimately been unsuccessful because
market forces have proved more powerful than the most ingen-
iously contrived stabilization schemes.
Perhaps the most extensive and longest lasting of the formal
inter-government stabilization arrangements was that under-
taken, beginning in 1956, by the International Tin Council. Al-
though the number of member governments varied from time to
time, during most of the three decades of ITC operation, there
were over 20 tin-consuming and 6 or 7 tin-producing countries
formally allied with this undertaking.
The stated objectives of the ITC were to avoid persistent
disequilibrium between production and consumption of tin and
the accumulation of burdensome stocks, to stabilize employment
in the tin producing and consuming countries, to maintain steady
export revenues for the producing countries, and to minimize
price fluctuations.
Producing and consuming country members shared equally
in decisions, but on major issues a two-thirds majority was re-
quired, ensuring that approved measures were acceptable to
some members from both groups. Individual members had vo-
ting rights proportional to their production or consumption.
The Council set both floor and ceiling prices for tin, with
the objective of keeping the actual price in the trading zone
between floor and ceiling. These prices were subject to periodic
reviews and the underlying agreement was itself renewed every
five years.
The mechanism by which the Council undertook to keep the
price within its desired trading range involved buffer stocks,
financed by contributions from the producing-country members,
and export quotas to be invoked if demand and prices were weak.
Some consumer countries eventually made voluntary contribu-
tions to the buffer-stock fund, thus increasing available re-
sources.
The buffer stock was operated by a manager who was in-
structed to buy tin in the open market if prices dropped toward
the stipulated floor and to sell tin if prices rose toward the ceiling.
The initial funds raised when the Council began operations were
equivalent to about 25,000 tons (22,700 t) of tin, about one-sixth
of the then current rate of world production.
During the 29 years of its existence, the floor and ceiling
prices inexorably moved higher, reflecting worldwide inflation
trends. In this period of time, the floor price was never lowered;
the tin-agreement mechanism worked like a jack that steadily
ratcheted the price upward. There were two consequences—
one was that production of tin by nonmember countries was
encouraged; the other was that consumption of tin was discour-
aged. World tin consumption in the 1980s was roughly at the
same level as in the 1950s, whereas consumption of all other
base metals had increased sharply.
By 1985, the buffer stock manager had not only exhausted all
the funds available from member contributions, he had borrowed
heavily using the buffer stock as a collateral to buy still more
metal. In the lackluster economic situation then prevailing, sup-
ply exceeded demand, and stocks continued to build. In October,
operations of the stock were suspended, the price of tin collapsed
to levels far below the floor price, and the Council’s inability to
meet its obligations resulted in staggering losses of hundreds
of millions of pounds to lenders and London Metal Exchange
member firms. The banks had loaned funds and the traders had
assumed that the member governments would stand behind the
Council’s obligations. They did not. Litigation resulted that con-
tinued until 1990, when settlements were made that mitigated a
fraction of the losses.
The tin agreement was undertaken in good faith by member
governments that operated with the best of intentions. It worked
for a while, but eventually ran afoul of the market because good
intentions are not enough. Consuming countries, wanting to help
the producing nations that were for the most part poor countries
with limited resources, had been persuaded to agree to unrealistic
floor prices based on the costs of production at the most marginal
mines. Once the target was set too high, trouble was inevitable
in the long run.
There have been discussions of intergovernmental price sta-
bilization arrangements for several other minerals—copper,
bauxite, manganese, tungsten, and iron ore to name a few—but
none have gone beyond the talking phase. The collapse of the
tin agreement has reduced the interest in similar schemes.
Of course, history has been replete with efforts to stabilize
prices through private arrangements. Under existing anti-
monopoly legislation in many industrialized countries, such ef-
forts would today be illegal.
One exception that perhaps proves the rule is in the field of
gemstones. A high proportion of the world’s supply of diamonds
is marketed by a group called the Central Selling Organization
(CSO), controlled by De Beers, a prominent South African
diamond-mining firm. With its affiliates, De Beers today ac-
counts for perhaps somewhat less than one-half of world produc-
tion of gem and industrial diamonds. A large part of the balance
of the production is bought by the CSO for classification and
subsequent resale.
De Beers is well financed, able to hold substantial invento-
ries, and prepared to adjust its own production as demand fluctu-
ates. Competitive producers have come to recognize that to mar-
ket diamonds in competition with De Beers could lead to sharp
price declines that, in turn, would destroy the attraction that
diamonds possess as long-term investments. They have therefore
been willing to dispose of their output through the Central Sell-
ing Organization. A case in point is provided by the major
Australian diamond deposits developed by firms independent of
De Beers in the early 1980s. Originally, the operators planned
to do their own selling but before actual production began, they
agreed to sell all gemstones and 75% of industrial stones through
the De Beers mechanism.
At the time this is written, the diamond market is firmly
under CSO control with prices stable—although not inflexible.
Public confidence in diamonds as investment has been main-
tained. Revenues realized by developing countries from their
diamond exports have been stabilized. Nevertheless, in the
United States, the cartel is considered illegal, but efforts to insti-
tute legal proceedings have been unavailing since neither De
Beers nor CSO maintains offices within the United States.
The nonmetallic minerals have been less subject to severe
price volatility than the metals. As previously commented, they
are not traded on commodity exchanges and hence are rarely the
target of speculators. Furthermore, the nature of consumption of
nonmetallics is different from that of the metals: demand tends
to be steadier and less subject to short-term cyclical economic
trends. Because most of them sell at low prices in relation to
bulk, the threat of substitution by competitive materials is much
less pronounced. Indeed, for most of the industrial minerals, the
level of world consumption has shown steady but not spectacular
 PRICING AND TRADING IN METALS AND MINERALS
gains in line with population trends and overall industrial activ-
ity. Hence forecasts of nonmetallic mineral prices can be made
with greater confidence than is the case with the metals.
2.3.4 SOURCES OF PRICING INFORMATION
Mining engineers need reliable information about prices. For
current prices, the best sources are the three publications already
mentioned, Metals Week and American Metal Market in the
United States and Metal Bulletin in Great Britain. Commodity
exchange quotations are available on a daily basis in the Wall
Street Journal in the United States and the Financial Times in
Britain and also in some metropolitan dailies, but these publica-
tions carry only limited information about prices of minerals not
traded on commodity exchanges.
Other professional and trade publications carry price infor-
mation (e.g., Engineering and Mining Journal, Skillings Mining
Review), but it tends to be less current than the data appearing
in the five periodicals mentioned.
When long-term historical pricing data are needed for feasi-
bility studies or basic understanding of macro-economic trends,
useful tabulations can be found in the yearbooks published by
the US Bureau of Mines, the American Bureau of Metal Statis-
tics, and a private German organization, Metallgesellschaft of
Frankfurt A.M. The latter is particularly helpful if data are
desired for prices within some of the principal consuming coun-
tries stated in terms of local currencies.
The World Bureau of Metal Statistics publishes excellent
information on production, consumption, and trade in metals,
but its yearbook does not contain tabulation of prices. However,
it has perhaps more data on production and trade in minerals
between the market-economy countries and the nations of the
Communist bloc than any other source. Much of the production
information is perforce based on informed estimates since official
statistics have not been provided by many of the governments of
the Communist bloc.
Further discussion of the marketing and sale of minerals is
contained in Chapter 25.5.
2.3.5 TRADING IN MINERALS
As commented in the opening paragraph of this chapter,
most minerals are subject to a high degree of international trade.
This is the consequence of the erratic distribution of viable min-
eral deposits around the globe. For example, among the com-
modities that have highly concentrated production, one might
cite platinum-group metals (primarily produced in the Soviet
Union and South Africa), cobalt (Zaire, Zambia, and Canada),
columbium (Brazil), phosphate rock (United States, Soviet
Union, and Morocco), and asbestos (Soviet Union, Canada, and
Zimbabwe).
Even in the case of minerals that are somewhat more widely
distributed—such as tin, nickel, bauxite, and copper—the extent
of international trade is huge because much of the production is
concentrated in countries that are not large consumers while
much of the consumption takes place in countries that have
limited production potential. Western Europe and Japan are
examples of the latter. Highly industrialized, they have only
meager viable mineral resources and must depend on import
sources to provide the mineral raw materials they require.
Particularly illustrative of the extent of international trade
in minerals is the position in iron ore. Deposits of iron ore are
to be found in every country, but the quality and quantity of
these resources vary enormously. Great Britain, Germany, and
Japan in their early stages of industrial development exploited
87
their domestic iron-ore resources, but the best of these deposits
have been long since depleted. Today these countries are huge
importers of ore. The United States was at one time a net exporter
of iron ore, thanks to the resources of its Mesabi Range, but
since World War II has become a major importer.
Among the market economy countries, the largest iron-ore
producers in the last three decades have been Brazil and Austra-
lia. Although they have substantial domestic iron and steel indus-
tries, the bulk of their output is exported. Since they are located
at considerable distances from their potential customers, they
have developed superb port loading facilities served by huge
bulk-carrying freighters to transport their ores to the major con-
suming centers.
For many of the mineral-exporting countries, a major thrust
has been to encourage the development of domestic processing
facilities. Thus, rather than export copper concentrates, the pref-
erence has been to develop domestic smelting and refining facili-
ties so that exports will be in the form of refined copper or
even, perhaps, fabricated copper products. The economics of
downstream processing are complex; considerations such as
availability of fuel, skilled labor, and transport facilities between
mines and processing plants may result in costs that exceed the
charges offered by foreign processors—particularly if the initial
capital cost of building a new facility is high.
A further complication has been the fact that the raw-
material importing country may be encouraging its domestic
processors through high duties on refined product and no duties
on raw material imports. Thus a considerable share of the world
trade in minerals remains in the form of raw materials rather
than semi-finished or refined products.
Nevertheless, the long-term trend has been toward an in-
crease in processing in the country where the minerals originate.
This has been particularly true for ferroalloying materials. Prior
to World War II, most of the trade in manganese and chrome was
represented by ores. By the 1970s, a major share of international
commerce in these two elements was in ferromanganese and
ferrochrome. Indeed, one of the principal manganese export-
ers—India—prohibited the export of ore at one time and permit-
ted only export of ferromanganese.
Although much of the international minerals trade is carried
on through direct contracts between the minerals producer and
the minerals consumer, a very large share—perhaps an increas-
ing share—is carried on through the intermediation of trading
firms. These enterprises, headquartered in Tokyo, London, New
York, Frankfurt, Brussels, Zug (Switzerland), Helsinki, Paris,
or other metropolitan centers, maintain offices or agencies in all
of the principal producing and consuming centers. They deal
in a whole range of minerals and are familiar with customer
requirements of quality and physical characteristics. They under-
stand the mechanics of dealing in foreign exchange and of com-
modity exchange trading. The key to their success lies in their
access to information about both production and consumption
developments.
Following the break-up of the colonial empires and the
granting of independence to most of the developing nations,
public-sector companies have taken over the operation of many
mineral properties previously owned by private foreign investors.
The governments involved have taken an active interest in the
marketing of the mineral products. This has introduced a new
element into minerals trading because on occasion foreign-policy
or social considerations have replaced strictly commercial fac-
tors in determining where and how minerals are to be sold.
In the long run, however, market forces will predominate in
determining what will happen to mineral prices and where the
bulk of mineral trading will occur.
88 MINING ENGINEERING HANDBOOK
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