Contemporary Business Cycles, Currency Fluctuations, and Metal Industry Capacity

Few factors are as important as fluctuations in aggregate economic activity and exchange rates in determining the profitability of mineral investments. Macroeconamic theory explains how the two factors are interconnected in today's world and in tomorrow's. We can use macro¬economic theory to lessen some of the risks in mineral investments. And in the current state of the world the risks are high. The above paragraph summarizes our argument. Our goal in this paper is to examine the nature of contemporary business cycles so as to explain their implications for the metal industries, particularly the implications for capacity. Thus, our first section examines the workings, causes, and history of the recent economic fluc¬tuations. In doing so we must understand how current world economy is interconnected, that is, how economic events in one country are trans¬mitted to the rest of the world. Our view is that governments and central banks are key actors in the creating of economic fluctuations. Then, in section two, we work out the implications of section one for the metal industries focussing on comparative advantage, trade, and capacity decisions. Over the last fifteen years the world economic system has had slow overall economic growth and has had strangely unpleasant recessions. While future business cycle will not repeat the de¬tailed pattern we have seen, there will be similarities. The similarities need to be under¬stood before investment occurs. The slow growth in the world economy since the early 1970s has aggravated the problems from business cycles, created its own problems, and has partially hidden the effects of other events. Major realignments of currencies are likely to take place over a business cycle. The nature of the causes of the cycle will determine the direc¬tion of change in the exchange rates. For example, whether a USA recession will be accompanied by a weaker or a stronger dollar will be determined by the cause of the recession. The realignment of currencies over a business cycle leads to a realignment of comparative advantage in the metal industries. Thus, not only will world metal consumption vary over the business cycle but the impact on various countries' metals industries will differ consi¬derably. Competitiveness often depends more on the value of the dollar than it does on inherent efficiency and wage rates. Capacity decisions are inherently riskier due to the country specific nature of exchange rate risk. A realignment of currencies changes the pattern of trade if and only if the country with the cheaper currency also has idle capacity. The importance of our topic is indicated by Table 1 which shows the impact of cyclical and exchange rate shocks on the USA metal industry. In the cyclical downturn, from the peak of 1979 to the trough of 1982, consumption dropped by a fifth to a third. Metal price moved in the same