Discussion - Copper and Its Byproducts Technical Papers, MINING ENGINEERING, vol. 35, No. 4, April 1983, p. 343-347

G. Campbell The paper by M. Lonoff looks at the importance of byproduct prices on copper production. The paper develops several interesting points on this topic, but there are some points in the theoretical discussion that could use further development. A couple of these theoretical topics will be considered here using the paper's framework of assumptions without concern about how realistic the assumptions are for the copper industry. Lonoff's theoretical model is based on a static, homogenous world where all copper/byproduct deposits are identical, and these deposits are the main source of these metals. Due to the importance of the byproducts to the production decision, the term coproducts will be substituted for the term byproducts to reflect more accurately this condition. The conclusion is drawn that a rise in coproduct prices necessitates a decrease in copper prices because copper production is increased as a consequence of increased coproduct production. The observation that real world behavior does not always follow this pattern is dismissed as "speculation." However, it can be easily shown that within this simple framework market forces might create the observed behavior. The key question to be answered is what causes coproduct prices to rise. Three possible cases will be used as illustrations. The first case is the one implicity assumed by Lonoff. Here, the demand for coproducts increases at all prices (an outward parallel shift of the demand curve) with the demand for copper remaining constant. As reported in the paper, the results are higher coproduct prices, an increase in coproduct production, and lower copper prices due to the resulting increase in copper production. The second case is when the supply of coproducts are constrained-leading to higher market prices. Copper production, as required by the simple model, is also reduced which Reply by M. Lonoff Campbell's comments give me an opportunity to clarify a few points in "Copper and Its Byproducts." That paper examined the affect of byproducts on the copper market and considered the relative riskiness of multi-metal deposits from an investment standpoint. That brief note made no attempt to be exhaustive. Nevertheless, Campbell's comments miss the point of the paper and necessitate a response. My "theoretical model" was static and I freely conceded after introducing the assumption of identical deposits that "none of the assumptions hold." These simplifying assumptions allowed me to bound the possible effects of higher byproduct prices on the copper price by assuming identical deposits and computing average price effects. I took great pains to subsequently explain that since deposits are not identical the identity of the marginal deposit might change due to byproduct price changes. In this case, average price affects will overstate the affect of byproducts on copper prices. According to Campbell, I dismiss as speculation any "real world behavior that does not always follow this pattern" (of metals prices moving in opposite directions). In the byproducts paper I noted that gold, copper, and silver price movements often parallel each other on an intra-day or day-to-day basis. Such movements are largely due to market anticipation of or reaction to changes in interest rates that affect carrying costs of metals stocks. Other movements may be due to anticipated changes in available supply or physical requirements. I loosely grouped these effects as speculative. To distinguish this statement from the main thrust of the paper, I contined "In the long run if gold and silver prices remain high the equilibrium copper price will be lower." The paper set out long run equilibrium conditions rather than attempting to explain price movements on a daily basis or on a year-to-year basis.