Editor's note: David J. Kroft, Ph.D., is policy development specialist with Oregon Division of State Lands in Salem, Ore.

Virtually every consumer product contains or is manufactured, processed or grown using minerals. The paper on which this article is printed, the light bulbs and computers in your home or office, the streets and sidewalks you use every day, the fertilizer you apply to your garden and even many of the foods you eat contain or were processed using products which have been mined.

Certainly many people have heard the names of a number of the more commonly used minerals and metals required in these and other consumer products. For example, clay is used in paper; tungsten, aluminum and copper in light bulbs; cobalt, silver and gold in computers; sand and gravel in sidewalks; phosphate, potash and sulfur in fertilizers; and salt in many foods. However, few consumers of these products are aware of where these minerals come from, how they are produced, in what forms they are used and whether substitutes exist for them. Even less well understood by consumers are the problems encountered by manufacturers in obtaining the minerals they required and mining companies in meeting demand for their production.

This article discusses a little-known type of market research used by many types of companies and organizations to forecast the future supply of, demand for and price of mineral commodities. It considers not only how such studies are conducted, but also the difficulties involved in undertaking such analyses.

Who uses mineral market research studies?

Many types of users exist for mineral market research studies. Nearly every mining company relies on mineral market research studies to determine the types of mineral deposits to explore for or acquire, whether a mineral discovery can be profitably mined, the competitive position of a mine, as well as the best way to market the product. Mineral purchasers often rely on such studies to obtain information concerning the projected availability and future price of the minerals they use. Mining equipment manufacturers consult this type of research to forecast the demand for various types of mining and mineral processing equipment, and major land owners to determine the value of mineral deposits on their holdings. Financial institutions and brokerage firms incorporate the results of mineral market studies to decide whether to lend money on mining projects and to evaluate mining companies, stocks and bonds. And lastly, governments often commission mineral commodity studies to use in developing domestic and foreign policy.

To obtain mineral market research, many mining companies and governments employ minerals economists. Other organizations requiring mineral supply-demand-price data often purchase such studies from consulting firms specializing in this discipline. Studies conducted by consulting firms may either be multi-client or proprietary. Their cost can vary markedly depending on the experience of the firm, number of minerals considered, size of the geographic area in which the minerals are produced and/or used, complexity of the market, depth of information required by the client and availability of reliable information.

The nature of mineral market research

Mineral market research is characterized by what are often long forecast periods, a lack of reliable market data, complex supply-demand-price interrelationships, regional economic uncertainties and the unpredictability of government and corporate actions. In many ways, developing a mineral market research forecast is as much an art as a science. To be successful in this endeavor, an analyst must have a good understanding of geology, mineral extraction and processing methods, world economics and history, new technologies and geopolitics. It is also critical that s/he have the ability to collect and analyze what is often disparate, fragmentary and/or unsubstantiated information.

Long-term forecasts: Many forecasts of mineral supply, demand and price attempt to project market conditions under a variety of economic and technological scenarios for periods of 10, 15 and even 20 or more years forward. There are several reasons that such long-term forecasts are necessary:

  • It typically takes many years to bring a mineral discovery into production. Once a discovery is made, considerable time and money must often be spent conducting geological, engineering, environmental and project feasibility studies, as well as obtaining required permits and project financing. If this preliminary work indicates that the deposit can be economically mined, many additional years and millions of dollars are then required to bring the mineral discovery into production. For example, BHP's Escondida copper deposit in northern Chile was discovered in 1981. However, it was not until 1990, after an expenditure of over $836 million, that the first copper concentrate was produced from the mine

A major mine will have reserves sufficient to operate for decades. Additionally, payback periods for project loans may also extend for many years. Therefore, to determine, for example, the competitiveness of a mine over its operating life, such long-term supply-demand-price analyses are required.

Data availability: It is often difficult to obtain even the most basic mineral production, consumption, or price data for many countries, much less information concerning, for example, the operating and capital costs for individual mines. Because many minerals are internationally traded, determining where the output of a mine is processed or ultimately used is frequently subject to considerable speculation. Even when supply or demand data are available, they may be out of date, inadvertently or intentionally misleading, or presented in a way which requires considerable analysis in order to "extract" the requisite information.

Complexity of markets: The complexity of the market for a mineral depends on many factors, among which include the size of the market area, the number of producers and consumers and the variety of end uses. Some minerals, such as sand and gravel, are typically produced by a limited number of producers and consumed by many end-users, all within a relatively small market area. Conversely, other minerals such as gold are produced by many mining operations throughout the world and are internationally traded. Numerous other variations exist in market complexity. In general, as the size of the market area and number of producers and consumers increase, so also does the complexity of the study.

Similarly, the number of uses for and form(s) in which a mineral is consumed also impact the complexity of a mineral market analysis. Many minerals are required in a variety of forms by often thousands of primary consumers and even more secondary users. To forecast demand for a mineral, an analyst must understand what forms of the mineral are required in various uses and whether other minerals may be readily substituted for the mineral under study. Often, a consumer may switch from one mineral or form of that mineral to another, or to a different material completely. It is therefore necessary to understand not only the reasons for and point in time when such a change is likely, but also the impacts such a substitution can/will have on the market balance.

Coproduct-byproduct relationships: A factor complicating a mineral market analysis is that one mineral may frequently occur as a coproduct or byproduct of another mineral. For example, many deposits of copper contain associated lead, zinc, molybdenum, gold and/or silver. Similarly, rutile and ilmenite (titanium-bearing minerals) are often found together with zircon in the same deposit. Many other examples exist.

Because of these geologic relationships, the production and price of the mineral under study may be contingent on the supply of or demand for the other associated mineral(s). When this is the case, market research studies may also have to be conducted for each of the associated minerals as well.

Recycling: Some minerals are consumed fully in their principal end use, for example, petroleum when used in the manufacture of gasoline, or potash in fertilizer. However, many other minerals are typically recycled such as glass, lead, copper, silver and aluminum. The amount of a mineral recoverable for reuse during or after the manufacture of a product can be a significant factor impacting global availability of that mineral. The markets for aluminum and silver illustrate this point. As much as 25 percent of United States demand for aluminum is derived from recycled scrap. Similarly, recycled silver satisfies about one-half of this nation's demand for this metal.

To determine the amount of recycling which can occur, estimates must be made of the useful life of each of the major products containing the mineral, as well as the ease and cost(s) of recovering it. Additionally, the projected price of the mineral and the rate of introduction of new technologies also effect scrap availability. Typically, as the price of a mineral increases, so also does the amount of effort placed on recovering the mineral from products for recycling. It is no coincidence that thefts of copper wire from utility poles increase markedly when the price of that metal reaches new highs.
Economic trends: Critical to determining demand for a mineral is obtaining reliable information concerning economic trends within the study area. For many regions, economic forecasts may not exist or be reliable. Even when such forecasts have been developed, they are generally for a very short term, seldom exceeding five to 10 years. Therefore, analysts must often develop a range of regional economic forecasts to use to drive mineral supply and demand forecasts.

Exogenous factors: Mineral markets can be substantially impacted by unpredictable events. Among these occurrences are labor strikes, perceptions of shortages in supply, wars, energy crises, natural or other disasters and the formation of cartels. Similarly, changes in government policies concerning tariffs, import restrictions, self-sufficiency goals and stockpiling can dramatically affect world markets.

The actions of speculators in the market(s) for a mineral can also dramatically change market dynamics. Such an example occurred in the silver market in late 1970s and early 1980s when the price of the metal sharply increased from around $5 to $48 per troy ounce. This rapid price escalation was due to an attempt by some investors to "corner" the market for silver, an event which could not have been predicted but which had a major impact on the supply of and demand for this metal.

Forecasting methods

As already indicated, conducting mineral market studies is a challenging endeavor. Critical to the preparation of such studies is obtaining and developing reliable production and consumption data, understanding the dynamics of the marketplace and selecting a model which reflects market behavior.

Data collection - marketplace analysis: Because mineral supply and demand data are often not available or may be unreliable, the analyst must frequently develop this information from scratch. One way to do this, and to gain an understanding of market interrelationships, is to conduct extensive reviews of industry trade journals, financial reports and government documents and databases. Another method is to interview mineral producers, consumers and trade organizations. To augment this information, visits to observe, for example, the operations and types of equipment used at a mine, or to transport the mineral to a shipping point or end user can also prove valuable.

In many instances, mining engineers and geologists are asked by an analyst to determine the capital and operating costs, as well as production capability of selected mining operations. With such information, the analyst can determine how much output various mines can produce at different price levels and for how long.

Model selection - development: Numerous types of models and modeling techniques have been developed to forecast mineral supply, demand and price, and to test market sensitivities. The choice of which model to use depends on the nature of the mineral commodity, purpose of the study, length of the forecast period, availability of reliable data and the analyst's understanding of market dynamics.

Unfortunately, given the often unique characteristics inherent in the market(s) for many minerals, no single all-purpose model exists to develop forecasts of mineral supply, demand and price. Although many mineral market supply-demand-price projections are publicly available, most of the models used to develop these forecasts are proprietary. Without a good understanding of how the model used to generate a forecast is constructed, reliance on such projections in a market analysis is risky. Therefore, unless an analyst has previously conducted a market study for the mineral, it will usually be necessary for him/her to create a new model.

When conducting a market study, analysts often combine and/or hybridize various models and modeling techniques to develop the model of the subject mineral market. A model may be very simple, comparing only projected supply and demand, or extremely complex, employing an econometric approach. A relatively simple supply-demand model would typically be used in an analysis of the market for sand and gravel. For this commodity, the most significant factors establishing market area dynamics and competitiveness are the ownership, degree of vertical product integration, transportation costs and relative distance from centers of demand of the aggregate producers. Conversely, a model of the copper market would be much more complex and likely contain a number of interlinked sub-models, the results of which serve to drive the larger model.

Forecasting caveats

Because the market for any mineral is dynamic, any supply-demand-price forecast is subject to change. As new deposits are discovered and brought into production, older mines exhaust their reserves, changes in use occur and government policies are adopted, the conclusions of a market research analysis may not longer be appropriate. Therefore, before any person uses the results of a mineral market research study, s/he must consider how long ago the effort was conducted and whether it is appropriate to commission an update of the analysis.

As in the case of any research analysis, it is important that the person using the results of a mineral market study fully understand how it was prepared and the methodologies and assumptions used. Ideally, the person commissioning a mineral market study should maintain close contact with the analyst during the entire research effort. By so doing, both the analyst and the user benefit: the analyst by being able to ensure that the research provides the results needed by the user; the user by knowing the study's limitations.