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Cyclical and secular determinants of productivity in the copper, aluminum, iron ore, and coal industries

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Abstract

Over the past decade, both labor and multifactor productivity have fallen in copper, iron ore, coal, and many other mining operations, causing production costs to rise. This decline, following years of rising productivity, has led many to conclude that new technology can no longer offset the adverse effects of resource depletion. As a result, real mineral commodity prices will be permanently higher in the future. This article questions this hypothesis. It first provides a conceptual analysis that shows that much or perhaps even all of the recent drop in productivity could be due to the unanticipated growth in market demand and the sharp jump in prices it provoked. It then surveys a number of the available empirical studies of productivity trends. For copper, iron ore, and coal, it finds substantial support for the view that much of the recent drop in productivity can be attributed to higher prices. Aluminum on the other hand did not experience the same jump in real price over the 2000s nor did it suffer a significant drop in productivity. These findings have important implications. In particular, they suggest that new technology may well continue to offset most or all of the cost-increasing effects of resource depletion. If so, real commodity prices will be lower over the long run than many now assume. This possibility has important consequences for mineral-producing firms making large investments in future capacity, for mineral-producing countries dependent on revenues from mining, and for society as a whole in terms of the long-run availability of nonrenewable commodities and the future threat of mineral depletion.

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Notes

  1. See Syverson (2011) for a fuller description of the measurement issues encountered in calculating MFP.

  2. There are a few exceptions, including Topp et al. (2008), that attempt to measure changes in ore quality and to assess its specific influence on productivity. See Topp et al. (2008, Box 3.1) for a description of such studies.

  3. This follows from the fact that had the average ore grade remained at 1.11 t instead of falling to 0.86 t per employee, the amount of copper produced would have been (1.11–0.86)/0.86 = 0.29) or 29 % higher. As noted in the text, Chilean productivity in 2012 averaged 100 t per employee. So a 29 % increase equates to a 29-t increase in output per employee.

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Acknowledgments

The author is grateful to Rio Tinto Economics & Markets for its financial support and permission to publish this study and to David Humphreys and Marian Radetzki for their thoughtful comments.

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  1. Division of Economics and Business, Colorado School of Mines, Golden, USA

    John E. Tilton

  2. Department of Mining Engineering, Pontificia Universidad Católica de Chile, Santiago, Chile

    John E. Tilton

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Tilton, J.E. Cyclical and secular determinants of productivity in the copper, aluminum, iron ore, and coal industries. Miner Econ 27, 1–19 (2014). https://doi.org/10.1007/s13563-014-0045-9

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