Mining industry myths in the making

Abstract

It has been argued that the privatisations of recent years will increase the responsiveness of supply to falling prices. That is because privately owned mines are dominated largely by the profit motive, rather than by the conflicting objectives of state owned companies. This comment disputes that conventional wisdom. Privately owned mines have complex and conflicting objectives and constraints that often override the quest for short-run profit maximisation. Because of the high prices that were often paid for state-owned assets, and the performance targets attached to privatisations, privatised companies have strong incentives to raise and/ or sustain their output, irrespective of the supply-demand balance. Paradoxically, therefore, privatisation could lead to increased, rather than reduced price volatility.