HMIE 516

MARKET

STRUCTURES

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 HMIE 516
The law of demand: as price falls, the corresponding
quantity demanded tends to increase. The higher the
price of a product, the less it is demanded. Thus, the
curve slops downwards to the right.
The law of supply: it shows us the quantities that
suppliers are willing to offer at various prices.

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 Market Structures - Introduction
The underlying features of supply and demand
determine the structure of any particular market.
A structural analysis must thus consider the number,
geographic distribution, and market participation of
producers and consumers as well as the
communications and competition between them.
 The form of market is defined by the extent of free
competition. It constitutes the sum of all factors
influencing competition and hence pricing. Empirical
investigations on market structure are usually confined
to determining the number, size, and market position of
the buyers and sellers.

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 Market Structures - Introduction
It is assumed that a large number of producers and
consumers implies competition resulting in an
economically efficient price; a small number, imperfect
competition, where the price can be influenced; and
one single producer or consumer, there is absence of
competition and the possibility of price fixing.
Prices are determined by the interaction of the supply-
demand forces in the market place – “it is a response
parameter”.
The market structure dictate precisely how demand
and supply interact to set the prices of individual
products depending on the geographical location of
demand, the end users and the nature and sources of
supply.

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 Market Structures
Market theory thus differentiates according to the
number of participants as follows:
Competition: – markets with large number of small
suppliers in atomistic competition. Each supplier sells
the same product and has no influence on price.
Oligopoly: - markets with a small number of large
suppliers in imperfect competition, in which the
members have a certain influence on the pricing. If the
market has small number of large buyers, it is referred
to as oligopoly.
Monopoly: - markets with only one or few suppliers in
which competition is absent and the monopolist
exercises considerable influence on prices. If the
market has only one buyer, it is known as a monopsony.

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 Market Structures

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 Market Structures
Where ore deposits are readily discovered and easily
exploitable with existing technology at prevailing price
levels the barriers to entry are low. (many companies
can enter that market)
Conversely, a scarcity of exploitable deposits keeps the
barriers high.
Another important factor when analyzing market forms
is the behavior of the members, which has a decisive
influence on pricing.
This can take the form of peaceful adjustment to
market conditions or aggressive strategies.
Examples are quantity adjustment (typical in
competitive markets), price or quantity fixing (typical in
monopolistic markets and in oligopolistic markets).

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 Market Structures
Agreements to restrict competition (cartels) or to
integrate competitors (trusts) are instances of
aggressive strategies.
The crucial question for a structural analysis of markets
is, of course, the size of the share needed to influence
the market and hence prices, or to dominate the
market and thereby fix prices. This share is particular to
the market and depends on the competitive conditions
and substitution possibilities for the mineral.

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 Market Structures
Market structures may change significantly over time
due to:
Nationalization in the mining sector, as occurred in
several developing countries in the past.
Extensive changes in ownership relations, as occurred in
the early 1980s, when oil companies acquired a number
of mining enterprises.
Discovery and development of new mineral deposits.

REFER TO PHOTOCOPIES FOR EXAMPLES OF MARKET

STRUCTURES AND PRODUCERS ASSOCIATIONS.
Gold
Aluminium
Tin
Oil –OPEC example to be explored in detail.

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 INTERANATIONAL COMMODITY AGREEMENTS
International commodity agreements are signed
between countries producing and consuming a
particular commodity for the purpose of regulating the
market.
The major aim of the producing countries (export
countries) is to secure foreign exchange revenue; to
attain the highest and most stable world market price.
The major aim of the consuming countries is to ensure
that the market is adequately supplied at reasonable
prices.
******* Buffer Stock********

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 MINERAL PRICING
A price is established on the markets when goods or
services are exchanged.
Pricing takes various forms, depending upon the form
of market, such as for example:
A competitive price formed under conditions of perfect or
nerly perfect competition;
A monopoly price determined by a sole supplier or major
supplier according to his price-demand function – it is usually
higher than the competitive price;
An oligopoly price fixed by the oligopolists according to their
own profit functions and the estimated parameter of action
of the competitors. It usually ranges between competitive
and monopoly prices.
Pricing can also result from cartel agreements and it
can be on an organized (exchanges) or informal basis.

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 MINERAL PRICING
Pricing on mineral commodities can thus occur in four
different ways:
Established on an exchange according to competitive
supply and demand.
Regulated by international cartel or commodity
agreement;
Negotiated between producers and consumers
Fixed by monopolistic or oligopolistic producers as
posted prices.
Strickly speaking, there is no perfectly competitive
pricing on mineral commodity markets.
The reasons for this has to do with the geology and the
structure of the markets.

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 MINERAL PRICING
The margins of adjustment of mineral production to
changes in demand is very narrow; mining reacts to
increases in demand, for example, by exploring for and
opening up new deposits, which involves a delay of 5 to
10 years.
Supply on mineral commodity markets in relation to
price is this inelastic; at least in the short term.
The quantities offered and demanded are determined
by a number of factors as discussed in the following
slides:

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 Determination of Mineral Supply
The quantity offered in mineral markets is influenced
by costs, which in turn are determined by a variety of
geologic, technological factors and economic factors,
usually having a long term effect on the production
trends.
The short-term determinants which can often
destabilize the market and induce substantial price
fluctuations.
The factors that determine the production/supply
trends are:
The mineral reserves available, i.e. for long term supply
of minable deposits of the mineral.
The quality of reserves, the ore grade, the associated
minerals, the grain size of the minerals, etc.
The type of deposits, above all the geometry, depth,
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and size of the ore body
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 Determination of Mineral Supply
The paragenetic association of minerals, such as the
simultaneous occurrence of copper and cobalt, copper
and molybdenum, lead and silver, etc
The mining and processing technology available,
including the efficiency of extraction of the valuable
minerals, the relative importance of capital and labour
and the operational capability.
The possibility of financing new mineral exploration
and mining projects
The infrastructural conditions in the regions in which
the deposits are located; i.e. the accessibility for mines
and processing plants.
The overall legal and economic conditions for mining in
mineral-producing countries.

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 Determination of Mineral Supply – Special Supply Factors.
A number of market conditions can, in the short-term,
increase or reduce supply, this affecting prices. These
conditions are:
Stocks – the increase and decrease of stocks can have a
substantial effect on short-term supply in mineral
commodity markets. Stockpiling takes two basic forms
depending on functions and aims:
Commercial stocks of industry to furnish the production
process with material;
Governemnet strategic stockpiles to ensure the supply of vital
sectors of industry in the case of scarce supply resulting from
political instability.
Recycling – this is the recovery of metals from scrap.

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 Determination of Mineral Supply – Special Supply Factors.
Recycling affects metal markets as follows:
Supply is further increased.
The new suppliers can weaken oligopolistic or monopolistic
market positions.
World trade diminishes, because recycling takes place
directly in the consuming countries;
In general, recycling has positive effects
Mineral resources are preserved
Recycling of waste contributes to protecting the
environment.
Energy can be saved, because the specific energy
consumption in recycling is generally lower.
Recycling is cheap especially when costs of dumping are
factored in.

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 Determination of Mineral Demand.
The consumption of energy, metals and industrial
mineral is closely linked to the industrial production
of goods.
Forecasts for future demand trends therefore make
use of a number of indicators:
The ratio of energy consumption or metal
consumption to the gross national product of the
country. Industrialized nations with a high GNP tend to
consume more than developing countries with a low
GNP.
The ratio of mineral consumption to the proportion of
industrial production in relation to the GNP.
The ratio of mineral consumption to that of mass-
consumption goods or to the “living standard” in a
country.
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 Determination of Mineral Demand.
Market studies of mineral demand trends will have to consider
both final consumption and the manufacture of semi-finished
products.
The following determinants are of importance:
The results of research into new areas of application for
specific commodities (new alloys) leading to an increase in
demand.
Technological innovations in the processing of minerals to
reduce the specific consumption.
Changes in end users’ habits of consumption, which can cause
the market for certain consumer goods to decline (bismuth
used in lipstick)
Substitution of expensive or rare minerals by cheap ones that
are more easily available (substitution of tinplate by
aluminium).
Laws and regulations on the processing of certain metals for
ecological reasons (i.e. the use of unleaded gasoline) leading to
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a Marketing
decrease in demand.
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 Determination of Mineral Demand.

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 PRICE DISCOVERY.
That prices and volumes will settle at the unique point
where the demand and supply curves intersect does
not describe the actual process of price discovery,
except in an auction market.
There, bids and offers are made in public until a price
is derived that just clears the market. At that price all
purchasers and suppliers are satisfied.
The method is similar for gold, silver and the non-
ferrous metals in that their prices are settled in terminal
markets.

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 MARKET STRUCTURES
The structure of the market is determined by four
different market characteristics:
the number and size of the firms in the market,
the ease with which firms may enter and exit the
market,
the degree to which firms' products are differentiated,
and the amount of information available to both
buyers and sellers regarding prices, product
characteristics, and production techniques.

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 PERFECT COMPETITION
Four characteristics or conditions must be present for a
perfectly competitive market structure to exist.
First, there must be many firms in the market, none of
which is large in terms of its sales.
Second, firms should be able to enter and exit the market
easily.
Third, each firm in the market produces and sells a no
differentiated or homogeneous product.
Fourth, all firms and consumers in the market have
complete information about prices, product quality, and
production techniques.
A firm that is operating in a perfectly competitive market
will be a price‐taker.
A price‐taker cannot control the price of the good it sells;
it simply takes the market price as given.

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 PERFECT COMPETITION
The conditions that cause a market to be perfectly
competitive also cause the firms in that market to be
price‐takers.
When there are many firms, all producing and selling the
same product using the same inputs and technology,
competition forces each firm to charge the same market
price for its good.
Because each firm in the market sells the same,
homogeneous product, no single firm can increase the
price that it charges above the price charged by the other
firms in the market without losing business.
It is also impossible for a single firm to affect the market
price by changing the quantity of output it supplies
because, by assumption, there are many firms and each
firm is small in size.

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 PERFECT COMPETITION
The demand and supply curves for a perfectly
competitive market are illustrated in Figure (a); the
demand curve for the output of an individual firm
operating in this perfectly competitive market is
illustrated in Figure (b).

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 PERFECT COMPETITION
Note that the demand curve for the market, which
includes all firms, is downward sloping, while the demand
curve for the individual firm is flat or perfectly elastic,
reflecting the fact that the individual takes the market
price, P, as given.
The difference in the slopes of the market demand curve
and the individual firm's demand curve is due to the
assumption that each firm is small in size.
No matter how much output an individual firm provides,
it will be unable to affect the market price.
Note that the individual firm's equilibrium quantity of
output will be completely determined by the amount of
output the individual firm chooses to supply.

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 PERFECT COMPETITION
When prices are very low there is no supply, as costs exceed prices.
Increasing or higher prices allow producers to cover their costs and
enter the market until supply is constrained by the available capacity.
The price and the quantity supplied settle at the point where the supply
and demand curves intersect (P and Q when the demand curve is D). If
the demand curve rises to D1 (green), higher cost producers will be
able to supply and the price and quantity will rise to P1 and Q1.
Conversely, when demand drops back to D2 (red) (perhaps because of
economic recession or some technological change in end-use markets)
higher cost producers will be unable to cover their costs and price and
output will fall to P2 and Q2 respectively. (NB: D1 and D2 are added in
class)
This assumes that suppliers merely have regard to near-term demand
and prices. In practice their reactions will be much more complex. If
they believe that a price fall is temporary they may be prepared to
stockpile rather than reduce their output, or to incur losses for a
period. The costs of closure, including the repayment of debt,
environmental remediation and redundancy payments, may exceed the
costs of continued operation
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 PERFECT COMPETITION
The non-ferrous metals, gold and silver, are the mineral
products whose markets most closely approximate the
competitive model. They are typical commodities, in the
sense that the products of different producers are
reasonably homogeneous and any individual supplier’s
product can readily substitute for that of another.
There are many customers and a variety of end uses,
each with common standards and specifications. Producers
can exert little or no influence over the markets for their
products, which are usually regional or global, and there is
hardly any after-sales service, such as technical support.
Because prices are uniform for the standard grades and
the producers concentrate on controlling their relative
costs. There are many suppliers spread throughout the
world and no single producer can influence the level of
prices, except for very short periods.
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 PERFECT COMPETITION
If there are many ore deposits being exploited or
under development, or it appears relatively easy to
discover new ones, or secondary materials are readily
available and transport costs are generally low
relative to product prices then the market is
competitive.
Information about recent and prospective trends in
supply and demand is rapidly and widely diffused and
the markets are reasonably transparent.

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 MARKET STRUCTURES
The markets for most mineral products depart in varying degrees from
the competitive model. The geological availability of many minerals is
much more limited or the technology needed for their extraction and
processing is far more complex.
The accessibility of ore deposits for commercial mining may be
restricted by a variety of political, environmental or economic factors.
For example, many developing countries either totally prohibited or
severely circumscribed mineral developments by privately owned
companies through much of the 1960-1990 period, especially where
such companies were foreign-owned.
Many countries prevent the mining of known ore deposits in national
parks or wilderness areas.
Unstable political conditions increase the risks of mineral exploration in
many regions, particularly in Africa and parts of Asia, to unacceptable
levels. These various influences, either alone or in combination, raise
the barriers to entry and limit the number of producers.

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 MONOPOLISTIC MARKETS
The source of the market power is that there are comparatively
fewer competitors than in a competitive market, so businesses
focus on product differentiation, or differences unrelated to
price.
By differentiating its products, firms in a monopolistically
competitive market ensure that its products are imperfect
substitutes for each other. As a result, a business that works on
its branding can increase its prices without risking its consumer
base.
The owners of the more accessible deposits are able to cream
off monopoly profits, especially where they also control
innovative processing technology.
These profits naturally attract the envious attentions of other
companies, stimulating both exploration and research into
processes. Often both are successful and the initially high
barriers to entry are reduced. (Consider Lithium use in lithium
ion batteries for electric cars, - the future generation).
a firm is a price setter not a price taker (at least to some
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degree).
 MONOPOLISTIC MARKET
In practice there are no instances of natural total
monopoly in the mineral industries on a global scale,
although there have been cases of contrived (planned)
monopoly through cartels and similar collusive actions in
restraint of trade.
The availability of secondary materials and of substitutes
of varying degrees of effectiveness for most mineral
products means that any individual supplier’s power to
raise prices by holding back supplies is strictly limited.
That substitutes exist and that there are usually
competing suppliers to global markets does not rule out
the probability of more restricted monopolies. The key is
the height of any barriers to entry. These can be artificially
raised for domestic producers in a national market by
protection against imports through tariffs or quotas.

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 CONDITIONS FOR MONOPOLY
In a perfectly competitive market, there are many firms,
none of which is large in size.
In contrast, in a monopolistic market there is only one
firm, which is large in size.
This one firm provides all of the market's supply.
Hence, in a monopolistic market, there is no difference
between the firm's supply and market supply.
Three conditions characterize a monopolistic market
structure.
First, there is only one firm operating in the market.
Second, there are high barriers to entry. These barriers are
so high that they prevent any other firm from entering the
market.
Third, there are no close substitutes for the good the
monopoly firm produces. Because there are no close
substitutes, the monopoly does not face any competition.
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 CONDITIONS FOR MONOPOLY
Barriers to entry.
A barrier to entry is anything that prevents firms from
entering a market.
Many types of barriers to entry give rise to a
monopolistic market structure.
Some of the more common barriers to entry are:
a) Patents: If a firm holds a patent on a production
process, it can legally exclude other firms from using that
process for a number of years. If there are no other
production processes that can be used, the firm that
holds the patent will have a monopoly.
b) Large start‐up costs: In some markets, firms will face
large start‐up costs—for example, the cost of building a
new production facility. If these start‐up costs are large
enough, most firms will be discouraged from entering the
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market.
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 CONDITIONS FOR MONOPOLY
Barriers to entry.
Some of the more common barriers to entry are:
c) Limited access to resources: A monopolistic market
structure is likely to arise when access to
resources needed for production is limited. The market
for diamonds, for example, is dominated by a single
firm that owns most of the world's diamond mines.
 Natural monopolies.
 Not all monopolies arise from these kinds of barriers to
entry.
 A few monopolies arise naturally, in markets where
there are large economies of scale.

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 CONDITIONS FOR MONOPOLY
A monopolist produces less output and sells it at a higher
price than a perfectly competitive firm.
The monopolist's behaviour is costly to the consumers
who demand the monopolist's output.

The cost of
monopoly
that is borne
by
consumers is
illustrated in
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the Figure. 10/23/2025
 CARTELS
At the theoretical extreme of a market with just one
supplier, or pure monopoly, the demand curves of the
supplier and the industry are the same.
Monopolists can choose that combination of price and
volume that best suits their objectives. Assuming that their
objective is profit maximisation they will produce to the
point where the marginal revenue equals the marginal
cost.
The demand curve of a monopolistic competitive market
slopes downward. This means that as price decreases, the
quantity demanded for that good increases. While this
appears to be relatively straightforward, the shape of the
demand curve has several important implications for firms
in a monopolistic competitive market.
Firms have market power: they can raise prices without
losing all of their customers. In this type of market, these
37 firms
Marketinghave a oflimited
and Transportation Minerals @ M Togaability to dictate the price of its
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 CARTELS
There are several preconditions for successful cartel
action:
members should share some common interests and
objectives;
there should not be a wide range of grades or qualities of
the product involved, but different producers’ output
should be closely substitutable (the scope for cheating
tends to vary inversely with the homogeneity of the
product); There should be few viable substitutes in the
product’s major uses and the price-elasticity of demand
should be very low.
A high level of concentration of production and reserves
is required. a wide diversity of sources of production and
undeveloped reserves raises the prospect of new entrants
undermining the cartel. In essence, the barriers to entry
need to be fairly high and not just in the short run.
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 CARTELS
the cost structures of each producer should be broadly
comparable. Where costs of production diverge widely
there is little community of interest between the lower
and higher cost producers.
The diamond market provides the longest running
example of a price setting cartel. For many years De
Beers operated an effective cartel amongst the mining
countries and controlled market prices through its sales
policies and by stockpiling.

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 CARTELS
There are fewer than 200 people or companies
authorized to buy rough diamonds from De Beers.
These people are called sight-holders, and they
purchase the diamonds through the Central Selling
Organization (CSO), a subsidiary of De Beers that
markets about 70 percent to 80 percent of the
world's diamonds.
De Beers sells a parcel of rough diamonds to a sight-
holder, who in turn sends the diamonds to cutting
facilities and then to distributors
Some rough diamonds are sold outside the CSO.
These diamonds come from small producers in
Australia, Russia and some African countries. The
cost of these diamonds is still largely influenced by
the prices set by the CSO
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 CARTELS
A considerable degree of market discipline remains
however, largely because of the nature of the market
for diamond gems. Consumers, perhaps even more
than producers, have an interest in maintaining high
prices for a product whose value is as a status object
rather than for its intrinsic properties in use.

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 OLIGOPOLY MARKET STRUCTURE
Where there are only a few major producers, the
suppliers do not have to take the demand curve as
given and their actions can have some influence on
prices. The demand curve (for individual firms) is
sloping downwards to the right, just like the industry.
As there are usually few suppliers the supply curve
is likely to be stepped.
Producers can exert some control, even if strictly
limited, over the prices they receive by
differentiating the characteristics of their products
from those of their competitors.
In many instances there is considerable competition
in the non-price dimensions of the product, such as
technical service or delivery schedules. The chemical
and physical characteristics of the product are varied
42
not just for particular end uses, but often also
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 OLIGOPOLY MARKET STRUCTURE
The chemical and physical characteristics of the
product are varied not just for particular end uses,
but often also for individual users.
There is a wide variation in grades and
specifications, which is reflected in widely differing
prices for apparently similar products.
The costs of mining the raw ore are less important
than its characteristics and the methods whereby it
can be modified to serve the end-uses that offer the
highest prices.
Even producers of commodity metals and minerals
look for ways to upgrade and differentiate their
products from those of their rivals in order to achieve
a premium over the basic market prices.
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 OLIGOPOLY MARKET STRUCTURE
Their objective, which is sometimes attained, is to
create a market for their own output that is distinct
in some way from the market as a whole.

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 OLIGOPOLY MARKET STRUCTURE

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 OLIGOPOLY MARKET STRUCTURE
As the producer faces a downward-sloping demand
curve for output, the marginal revenue from
additional sales will also decline with increasing
output.
Assuming that the producer aims to maximise
profits, they will produce to the level of output (Q)
where marginal revenue equals marginal cost of
production.
The price (P) is rather higher than would be set in a
completely competitive market and the producer
would earn above-normal profits.

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 OLIGOPOLY MARKET STRUCTURE
That is not a stable position because such profits
would induce a variety of competitive responses.
Exploration and new mine development would be
stimulated and technological research on lower-cost
processes encouraged.
On the demand side, the use of substitutes would be
encouraged. In consequence the demand curve facing
the ‘representative’ producer would be pushed
downwards, lowering the level of output associated with
a given level of prices.

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 OLIGOPOLY MARKET STRUCTURE
The producer would still maximise profits at the
point where marginal cost equalled marginal
revenue, but with only a ‘normal’ rate of profit.
Also, the level of output would be rather lower than
would be reached in a perfectly competitive market,
were that to exist in the real world.
As markets develop, and the number and range of
producers expand, prices drop towards the marginal
costs of production and any monopoly profits are
gradually whittled away.
The theoretically relevant marginal costs are those
likely to pertain over the long run. In other words,
they will incorporate the opportunity costs of capital
of the facilities just needed to meet expanding
demand over the long term.
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 OLIGOPOLY MARKET STRUCTURE
Markets with only a few suppliers are described as
oligopolies, and those with only a few customers, are
given the less common description of oligopsonies.
In many such markets there may be a number of
smaller suppliers or users around the few large firms.
Small customers are liable to absorb an unduly large
amount of time and effort from the suppliers’ sales
staff and they are often serviced through distributors.
Although small producers are unlikely to produce a full
range of products, their persistence in selling their own
grades can undermine established price structures.
and of their likely policies.

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 OLIGOPOLY MARKET STRUCTURE
Major suppliers of many industrial minerals and minor
metals therefore have to take full account of their
activities and potential actions.
The power of the major producers to control their
markets is accordingly circumscribed (restricted). In all
cases each producer has to take account of the
possible impact any decisions about pricing and
production volume may have on competitors and of
their likely policies.

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 OLIGOPOLY MARKET STRUCTURE
SUMMARY
There are only a few producers in this market.
The oligopolistic market structure is characterised by
high entry barriers.
Since there are only a few firms, each firm enjoys a
large share of the market and has significance
influence on the price and output decisions.
The producers try to differentiate their offering to the
market so that they control their market.
Each firm determines price of its own product but
takes into account the reaction of the other firms to its
own actions.

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 THE ALUMINIUM OLIGOPOLY STRUCTURE
There are few producers in the aluminium industry due
to high entry barriers.
Alcoa (USA) and Pechiney (Europe) had exclusive
patents relating to the Bayer process for alumina and
the Hall-Heroult process for aluminium.
This technological monopoly enabled them to acquire
hydroelectric facilities and bauxite deposits while
increasing their production scale
When monopoly ended, they found themselves in
strong positions of economic of scale, and therefore
continued to control the industry.

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 Producer pricing
• Prices for some are posted by producers, almost on a ‘take it or
leave it’ basis. Such producer pricing, was once much more
widespread. In effect, the producer acts like a monopolist,
offering to sell at a given price, with an implicit assumption that
output will be reduced to maintain that price when market
conditions are weak, and that some customers may be
unsatisfied when demand runs against the limits of capacity.
• Other producers may voluntarily decide to follow the lead set by
the price-setting producer and accept satisfactory rather than
maximised profits. In other instances producer pricing may be
sustained through collusive behaviour, ranging from informal
discussions to formal cartels.
• Where there are only a few major participants on each side of
the pricing equation (which is true for many mineral products)
prices are largely determined by negotiation. Each participant
has to take account not only of the likely responses of the
customer to their actions, but also of the possible reactions of
existing and potential competitors. Such intelligence is usually
more important for the producers than the purchasers.
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 Producer pricing
• Each mineral product effectively forms a small village where
all the major participants know each other. This village-like
nature of global mineral markets facilitates the rapid
transmission of gossip and information and the sense of
prevailing market conditions, even where there is no explicit
market place.
• Where there are few, if any, viable undeveloped ore deposits,
or where complex proprietary technology is required in the
production process, the existing producers’ bargaining
position is strong. It weakens markedly where there is ample
existing and prospective capacity and technology is readily
available.
• History suggests that price wars, once started, are difficult to
stop and that they normally benefit only the customers. Even
that benefit may be strictly short term if lower prices inhibit
investment in additional capacity to meet growing demand.
Much depends on whether the major producers concentrate
54 their
Marketattention
Structures - Chapter 2on maximising prices and profitability, or on
@ M Toga

volume.
 Producer pricing negotiations
• The pursuit of market share is a common corporate objective,
on the assumption that it can enhance a company’s market
power. One possible argument in favour of maximising volume,
even at the expense of weaker prices, is that it enables a
producer to achieve the designed economies of scale from
existing capacity. The structure of costs may be such that the
burden of fixed costs per unit of output rises sharply when the
mine and equipment are not fully utilised. The gains from
increasing the volume of sales may more than outweigh any
fall in prices.
• Where there are only a few suppliers to a market but many
end-uses and customers, producers may quote list prices. Such
producer prices may be set by a dominant producer or price
leader and followed fairly closely by the other suppliers. They
may have similar cost structures and have learned from bitter
experience that vigorous price competition brings only
temporary gains in market share that are usually whittled
55 away in the next round of price cuts, to the benefit of users
rather than producers.
Market Structures - Chapter 2 @ M Toga
 Producer Pricing
• Where producers set prices they tend to keep them fixed
for long periods. They often set them not by reference to
marginal costs, whether their own or those of the industry,
but to some form of average cost. Prices change in
response to clear external stimuli, like movements in the
costs of major raw materials such as crude oil. They are
also responsive to their setter’s financial needs and
changes in productive capacity, which often go together.
• It is impossible to maintain complete control over both
prices and the volume purchased, except under total
monopoly. No matter how clever the forecasters, there are
always unexpected changes in the balance between
supply and demand. Stable prices are only realisable
where suppliers are prepared to reduce their offerings
when markets are over-supplied and to expand their
offerings rapidly in times of shortage. That in turn means a
willingness to stockpile and even reduce production in
56
weak markets and to raise output rapidly in the boom.
Market Structures - Chapter 2 @ M Toga
 Terminal Markets
• The essence of terminal markets is that prices are set at
least on a daily basis to balance that day’s marginal
offerings and demand.
• The offerings and demand may come not only from
industrial companies, whether producers or users, but also
from merchants and investors of all types. Thus supply
and demand in these markets are much broader than
production (whether of primary or secondary material) and
industrial usage.
• Terminal markets may have four main interlocking
functions, which they fulfil in varying degrees. These are:
• the determination of daily reference prices for the products traded;
• the provision of facilities for hedging against price risk;
• acting as a market of last resort through a dedicated warehouse
network; and
• giving opportunities for investment in metals as assets.

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 Terminal Markets
• The leading terminal market for trading non-ferrous
metals is the London Metal Exchange (LME), which
accounts for over 90 per cent of global exchange
business for those metals it trades.
• These are aluminium, aluminium alloy or secondary
aluminium, copper, lead, nickel, tin and zinc. The
New York Mercantile Exchange (Nymex) trades
copper and aluminium through its Comex Division,
the Tokyo Commodity Exchange started an
aluminium contract in 1997, Kuala Lumpur trades tin
and Shanghai deals in several metals.

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 Terminal markets
• Only a very small percentage of the volume of non-ferrous
metal produced and traded is physically delivered into LME
registered warehouses, but the bulk of the world’s non-ferrous
metals are traded by reference to LME prices, and the LME
captures by far the greater share of hedging business. Trading
is by open outcry across a ring, in which the dealers sit and
shout their bids or offers. This is backed up by a telephone-
based inter-dealer market outside ring trading sessions and by
a screen trading system
• The prices established by open outcry at the close of the
second or official rings become the official settlement prices
for each day’s trading. These rings concentrate bids and offers
from the whole world into one brief and orgasmic trading
session, which reaches its climax at the closing bell. The prices
reflect the marginal tonnage offered and demanded that day,
no matter the source or the destination. They inevitably
fluctuate daily, but broadly reflect, under normal
circumstances, the global markets’ balance of supply and
59 demand.
Market Structures - Chapter 2 @ M Toga
 Terminal markets
• Trade is conducted in lots rather than tonnes, with each lot of
aluminium, copper, lead and zinc amounting to 25 tonnes.
Nickel is traded in six tonne lots, tin in five tonnes and
aluminium alloys in 20 tonnes. Prices are set for metal that
meets the prevailing contract specifications, which are
established with reference to the needs of the producing and
using industries.
• LME contracts provide for physical delivery, and in support
there is a network of registered warehouses throughout the
world. The Exchange itself does not own or operate the
warehouses nor does it own the metal they contain. It
approves warehouse locations, with the objective of having a
widespread network throughout the world in all important
areas of net consumption. Warehouse locations must have
appropriate fiscal and regulatory systems, be served by a good
transport network, have the facility to store goods without
payment of duty and enjoy political and economic stability

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