Saturday, October 9, 2010

Mining is profitable

What's going on here?

Why is the mining of natural resources so profitable during an economic downturn?

Are there externality issues that should be addressed? If so, how, and how might addressing externalities affect profitability and social well-being?

We'll be starting our study of mineral extraction soon.


Filorux said...

Well, I'm not sure what to say unless these things are inferior goods.

Gold makes the most sense, as everyone says that when economic times are hard you want to get into gold. This is a bit of a self-fulfilling prophecy though, because more people buying it should drive the price up. Given constant or even improving mining operations, that should mean more profit for supplying it. From an abstract point of view, this logic should work for any time period, not only when economic times are bad. What if we had a conventional wisdom that said, "Oh yeah, when the weather gets frightful, that's the time to get into gold." Just as economic times are always hard for some people, the weather is always bad somewhere.

One thing that makes me a bit suspicious of the gold market (I should credit this idea to someone, but I can't recall where I read it) is those commercials you see on late night TV, or hear on AM radio. They tell you how the price of gold has risen steadily for the past X years (cough-inflation-cough) and want to send you a brochure on how you can get into the market. The question is, if the gold market is really that good, why are they putting resources into advertisements when they should be putting them into gold.

Colin Mattis said...
This comment has been removed by the author.
Colin Mattis said...

I think that there are issues with externalities. In terms of gold, prices are the highest that they have ever been for a long time. Many developing countries such as Guyana are earning a lot of revenue from this industry. Even in a time of economic downturn, there are new and continuing investments into the small scale mining industry in Guyana.
The problem occurs when miners do not incur the true cost of production. Observations and other studies have shown that pollution, degradation and deforestation continues while efforts to prevent them were futile.
In these countries and others such as Suriname, miners cry-out when new regulations are put into place because they see that more money will have to be spent in abatement costs, which decreases their profit.
From my experience from working in the mining industry, the exclusion of externalities in the price of the good is a very important factor causing profitability in these hard times.
I perceive that if these issues are addressed, then miners will gain less profit. Some people might even fallout of the industry because the increased costs to buy new technology and to abate the pollution will be too much for them. Some social effects might be unemployment, and increased crime. For developing countries that depend on gold mining, such effects can be devastating, causing governments and political parties to thread softly on the issue.

Anonymous said...

Hi Colin. If the prices of these metals are increasing, why aren't these extracting companies increasing their profit margin as well?

David Gill

Anonymous said...

What I mean, who is receiving the increased rent in these products? The extracting industries? distributors? retailers?

David Gill