Lessons From The Past

This paper discusses the ways in which the metals industries dealt with surplus capacity in the past, primarily the twenty years, 1950 - 1970. During this period, the bulk of metals production in the market-economy countries was controlled by private sector companies. Since then, public sector companies have played an increasingly important role in the metals industries of the market-economy countries. Of course, the change was not overnight. It occurred gradually over a period of many years. Indeed, by 1965, several developing nations had adopted policies of government control of metal operations previously in private hands. The metals industries are so many, so large and so diverse that the constraints of time make it impossible to deal with all segments. To illustrate the problems of surplus capacity in the metals industries during the period, this paper focusses primarily on three metals. One experienced rapid market expansion between 1950 and 1970; one had a growth more or less in line with the expansion of the world economy; and one lagged well behind the pace of industrial expansion. No one will be surprised if aluminum is identified as the metal with rapid growth; copper is identified as the metal that kept pace with the world economy; and tin is identified as the laggard. Individual computations of the rate of growth for these metals show some variations, but most estimates place the increase in aluminum consumption in the market economy countries between 1950 and 1970 at a compound annual rate of about 8%. The corresponding figure for copper is a compound rate of 4%. Tin consumption showed no growth. A widely accepted point of view is that sharply rising demand will force the price of a commodity to increase substantially in order to attract a necessary expansion of supply. The corollary to this is that stagnant demand will hold prices down, as there is no need to stimulate new supply and it may be necessary to force marginal producers out of the market. The experience with aluminum, copper and tin in the years 1950-1970 does not support this theory. In 1950, the average prices in the United States market as reported by the American Bureau of Metal Statistics were 17.74 a pound for aluminum, 21.24 a pound for copper, and 95.54 a pound for tin. The corresponding figures in 1970 were 28.74 a pound for aluminum, 57.74 a pound for copper and 174.24 a pound for tin. Aluminum, with the greatest market growth, rose by 60%, whereas tin rose 82% and copper by 172%. Clearly, other factors were a more important influence on price than was the trend of demand To revert now to the capacity issue, during the period under review aluminum demand was rising so sharply that that industry had no sustained problem with surplus capacity. Instead, if anything, capacity may at times have been a constraint on demand. The industry succeeded in attaining explosive market growth through imaginative research and promotion programs. Some of this growth was the result of substitution of aluminum for other commodities – steel, copper, wood and glass as examples. But much of the growth was the consequence of developing entirely new products through technological innovation. Prior to World War 11, the number of aluminum producers was extremely limited. Alcoa and Alcan in North American and Pechiney and Alusuisse in Europe were the dominant firms. The developing countries had virtually no production and in Japan and Germany production was only a small fraction of the North American output. During the War years the United States had financed the construction of many new facilities. After the war these plants were sold by the government to Reynolds and Kaiser in order to foster more competition in the market. Subsequently many other concerns became aluminum producers, both in the United States and elsewhere and competition for markets intensified.