Measurement Solutions Blog

When you look past the graphs, economics isn't too difficult to understand.

Figuring out why some mines are closing comes down to assessing variables that impact commodity prices.

Once decision-makers understand the impact of those factors, they can make small investments that aggregately improve their plants' competitiveness. Even seemingly small commitments such as reconfiguring industrial measuring instruments can go a long way in improving a mine's position in the global market.

Listed below are two factors that impact commodity prices:

1. Supply and demand

The relationship between supply and demand seems like an obvious factor to mention, but it's one worth reviewing. Dr Thomas Sowell's "Basic Economics: A Common Sense Guide to the Economy" explained that demand directs resources to where they're most valued. A resource could be iron ore, labour, factory equipment or other goods.

When the supply of coal drops, for example, it's price on the market increases. This is because more people are indirectly placing bids on the commodity. Everybody wants coal, but the firm providing the resource cannot satisfy everybody's desires. To take advantage of this situation, the company in question raises the price of coal, ultimately selling it to a business that can afford to buy it.

2. Competition

A study conducted by the Overseas Development Institute scrutinised Zambia's sugar industry, identifying it as monopolistic. Although Zambia produces more sugar than Bangladesh, Ghana, Viet Nam and Kenya, it's domestic prices are quite high.

Why? Because a company with a monopoly over a particular industry does not have to lower its prices. When two or more companies enter a market, they want to obtain a dominant share. In order to do so, it introduces efficiencies and invests in innovative practices, all for the sake of being able to offer their goods at lower prices than their competitors. 

If a person can buy sugar for $2 per kilogram as opposed to $3 per kilogram, why would he or she pay the extra dollar? Although there may be minor differences in quality between one company's sugar and another firm's, the average consumer may not be able to distinguish the two. 

The major lesson 

What do these two factors have to do with mining? If consumers demand less items made from steel, then there's less incentive for businesses producing those items to procure iron ore and other materials necessary to produce it. 

Also, plant managers shouldn't ignore how big of an impact efficiency can have on an operation's competitiveness. If a mine can produce bulk materials quicker and at a lower cost than another, its products will certainly appear more attractive to manufacturers.