Hedging a Commodity Power Rate

Many of the aluminium smelters in the Pacific Northwest served by the Bonneville Power Administration (BPA) have become non-competitive and operate in the role of swing producer in the US and world markets. To avoid these cyclical swings in power demand, BPA is presently studying methods designed to link the price of power charged to smelters with the market price of aluminium. A linked-rate system tends to stabilize incomes to smelters, but increases fluctuations to the utility. These, in turn, could be stabilized by a hedging operation on the London Metals Exchange.     

Market transparency in the international aluminium industry

Transparency requires many buyers and sellers with transactions executed at arms length in an open environment. The paper highlights the influence on transparency of the ownership and production structure; price formation; and the nature of the product. The world aluminium industry is analysed in light of the above in view of the emergence of terminal markets for aluminium. The disjuncture between the interests of physical traders and those speculating futures contracts is analysed in terms of the latter's effect on investment. Finally, the benefits and difficulties associated with terminal markets are explored, trends in the aluminium industry reviewed, and a framework within which to cope with aluminium as a commodity is proposed.     

INCOME AND PRICE ELASTICITIES OF DEMAND FOR WATER IN DEVELOPING COUNTRIES1

ABSTRACT: The income and proce elasticity of demand for domestic water is estimated for Penang Island, Malaysia. A cross-sectional analysis of a random sample of 1400 households indicated an income-elasticity of zero for low-income families (per capita income less than US$300) and an elasticity of 0.2-0.4 for higher-income families. A time-series analysis of a subsample of individuals of varying income levels suggests a short-run price elasticity of -0.1 to -0.2. The implications of these results for demand forecasting are discussed.     

ESTIMATING THE DEMAND FOR IRRIGATION WATER IN THE CENTRAL VALLEY OF CALIFORNIA1

ABSTRACT: This paper computes estimates of the demand for surface irrigation water directly from disaggregated profit functions for fields in the San Joaquin Valley of California. It finds that treating delivered surface water and pumped ground water as separate, imperfectly substitutable inputs to production matters a great deal. We find substantial ranges of inelastic demand for delivered water, and thresholds across which demand then becomes highly elastic. The results imply that moves toward freer water markets could lead to large quantities reallocated from agriculture to urban uses in the Western U.S., but would require large price increases and would induce extensive ground water mining and major changes in cropping patterns. While these results are dependent on our particular model and simplifying assumptions, evidence exists that they may be robust.     

Investor demand and spot commodity prices

The on-going debate over the influence of investor demand on spot commodity prices largely attempts to assess this influence by measuring the growth in investor demand in recent years. Given the serious data problems that plague such analyses, this article pursues another approach in the hope of providing useful insights into the impact of investor demand on spot commodity prices. It focuses on the mechanisms by which investor demand affects spot prices, and in particular on two questions. First, how does an increase in investor demand on the futures markets affect the spot market and spot price? Second, when investor demand is increasing and pushing a commodity's price up, do physical stocks of the commodity also have to be rising, as economists and others widely assume?On the first question, the article concludes that a surge in investor demand raising prices on the futures markets will have a direct and comparable effect on the spot market prices when these markets are in strong contango. However, when markets are in weak contango or backwardation, price movements in the futures markets have a much looser effect on spot prices. As a result, changes in investor demand on the futures markets may have little or no influence on spot prices in the absence of a strong contango. Instead, changes in fundamentals (that is, producer supply and consumer demand) and possibly changes in investor demand taking place directly on the spot market largely determine the spot price at such times.On the second question, the article shows that investor demand can be pushing up a commodity's price even when investor stocks are falling, despite the widespread presumption to the contrary.     

Short-run price formation in non-fuel minerals markets: An algebraic note

Simple flow models are inadequate for understanding short-run price behaviour in non-fuel mineral markets. In this note the author derives a simple model of mineral price behaviour in terms of stocks, and shows how this may successfully explain some short-term features of mineral price behaviour.     

An economic model of the US aluminium market

An economic model of the US aluminium industry is constructed and estimated with annual data over the period 1960–1978. The authors' analysis shows that both the short- and long-term price elasticities of demand are relatively low, and that demand is highly dependent on aluminium end-use activity. A forecasting exercise is also undertaken, and the errors of forecast calculated.     

Supply responses in tropical forestry: A Malaysian case study

The rapid exhaustion of Malaysia's commercial primaeval forest base has raised questions regarding the management and economic responses in the sector. The article assesses the institutional and management structure of Malaysian forestry which, together with the social and political barriers at work, prevent an orderly programme of harvesting and reforestation. The supply is then set out in terms of an econometric model, formulated both in static and dynamic terms to measure, among other things, the responses of output to price changes. The model, which is the first of its kind to be tested for the Malaysian forestry sector, is applied on three wood-based commodities — sawlogs, sawnwood and plywood. To learn of possible regional variations, the model is also applied to data of the country's three principal components — Peninsular Malaysia, Sarawak and Sabah. The results indicate that short-run price elasticities of supply are low, and in some cases, even contrary to expectations based on economic theory. Allowing for data inconsistencies, the slow responses of output to changes in price may be attributed to the method of wood disposal, its timing as well as the social and political barriers to entry at work in the sector.     

Gold demand and supply

Western mine production of gold has been declining in the past five years — at the same time as the price of gold has risen dramatically. Predictions of a continued high demand for gold and the current US interest in adopting some form of ‘gold standard’ have focused attention on the supply of new gold. This paper discusses the structure of gold supply and demand, the present pattern of production of new gold and the possible effect of future price changes on Western gold mine production in the 1980s.     

碳市场和电力市场耦合研究

低碳化、清洁化是我国电力行业未来发展的方向。碳市场启动,电力作为试点行业,碳市场和电力市场面临着协调和融合问题。为研究碳市场和电力市场的耦合关系,本文首先分析了碳市场机制的成本节约效应以及与电力市场改革的互动效应;然后给出考虑碳排放价格的电力市场发电电能成本模型——LCOEe;最后以广东省为例,对广东碳市场碳价传导至电价设定情景并进行模拟分析。结果显示,碳市场和电力市场存在相互制约的关系,碳排放外部成本内部化影响电力市场出清电价,而电力市场能够缓解碳市场的减排压力,抑制碳市场的活跃度。两市场的耦合研究对于优化电源结构、促进新能源市场的发展,以及启发政策制定者重视两大市场的协同发展具有非常重要的现实意义。     

Bauxite and alumina - Jamaica's reach for the future

Jamaica has developed a new strategy designed to allow it to expand its bauxite and alumina production, to diversify both its markets and its sources of investment and, to move downstream into the production of aluminium and semi-finished products. Some benefits of this new strategy are already evident, several bauxite mines are being expanded, alumina plants are being re-opened while others are adding additional capacity, and the countries of Europe, Asia and North America are showing renewed interest in investing in Jamaica. With its new strategy, Jamaica intends to participate more fully in the world economy.     

World demand for cobalt: An econometric study

This article analyses the world demand for cobalt. It estimates short- and long-run elasticities with respect to price, activity and in some cases with respect to substitute-complement variables. For the USA these estimates have been obtained for all the important end-use categories. Aggregate elasticities are estimated for Japan, West Germany, France and for the non-communist world (excluding the USA). The appendix to the paper models price setting in the cobalt market and presents two simple simulations conducted on the world cobalt market.     

A simple mineral market model: Can it produce super cycles in prices?

This paper develops a stylized supply–demand model for a mineral/nonrenewable commodity. It embodies important distinctions between short-run and long-run mineral supply and the derived demand for minerals as intermediate goods in production sectors with differing intensities of use. This framework is used to address the question: under what conditions might one expect to observe super cycles (i.e. cycles with a period of 20–70 years) in minerals prices? A plausible time path for GDP$GDP$ growth and the structural transformation that accompanies economic development in an emerging region is specified. Using these drivers and reasonable supply and demand parameters, price dynamics are simulated. The result is an asymmetric price cycle with a peak price that is about 250% above trend and an expansion phase that lasts for about 20 years. Thus, this simple model is capable of producing a single cycle with a frequency and amplitude in the range estimated in the empirical literature on super cycles. As other regions reach the development ‘take-off' phase, additional super cycles should emerge.     

POLICY IMPACTS ON AGRICULTURAL IRRIGATION ELECTRICITY DEMAND IN THE COLUMBIA BASIN1

ABSTRACT: Accurately estimating the price elasticity of demand for irrigation electricity is important to major electricity suppliers such as the Bonneville Power Administration (BPA) of the Pacific Northwest. The BPA has a revenue maximization objective, and the elasticity of demand is central to its rate setting process. Several studies have attempted to estimate demand for irrigation electricity, but none has explicitly included federal agricultural policy and program variables. Tins paper discusses how agricultural programs may influence farmers irrigation decisions and thus their demand for irrigation electricity. It suggests that existing programs serve to make farmers more responsive to electricity rate increases than would otherwise be the case. Thus, studies that fail to include them may underestimate the responsiveness of farmers to electricity rate increases.     

RESIDENTIAL WATER DEMAND IN METRO MANILA1

ABSTRACT: An econometric demand function is estimated for residential water use in Metropolitan Manila. Regression results using annual time series data from 1970 to 1981 show that residential water consumption responds to changes in economic variables. Residential demand showed an income (household) elasticity of 0.542 and a combined price elasticity of -0.287. Implications for planning and management are discussed.     

Mineral commodity stabilisation: The producers' view

The author compares the relative merits of production cuts and buffer stocks as measures for market stabilisation in mineral commodity markets. He concludes that, although under certain conditions producers may gain by building up buffer stocks at times of relatively low demand, the low global price elasticities in most minerals markets make it likely that producers' interests would usually be better served by production cuts when demand falls.     

International oil market – new directions

This article focuses on changes in the international petroleum industry during the past 20 years and examines some major trends, especially since the oil price collapse of 1986. The resumption of rapid increases in oil demand since 1986 in the developed market economies and the developing world has already led to a pronounced production shift to OPEC member countries where output increased by 6.6 million barrels per day or, 37% since 1985. Cutbacks in petroleum investments in non-OPEC countries are likely to result in even more dependence on the vast proved oil reserves of OPEC. However, the gap between peak output and sustainable production capacities in OPEC has narrowed and there is an urgent need for sizeable investments to expand capacities. Such investment programmes are already being implemented by transnational oil corporations in countries such as Indonesia and Nigeria where the companies had retained equity participation. In other countries such as Iraq and Venezuela where oil operations had been nationalized, transnational oil corporations are being invited to participate in new arrangements for oil production. New arrangements are also being considered in Eastern Europe and the USSR. New understandings, dialogue and cooperation between oil-consuming and producing countries will be necessary for the security of investments, supplies and markets in this process. The unanswered question is whether such cooperation can be achieved in time in order to avoid yet another energy crisis.     

What caused the slack demand for metals after 1974?

This paper explores the general reasons for the sudden decline in the growth of world metal demand which began after 1974 and continues to impact the metal industries. For all of the eight metals studied, except aluminium, the dominant cause of this atrophy in demand is the stagnation in total world economic growth, which has caused reduced demand for all goods and services. In addition, consumer preferences have shifted away from metal-intensive goods, further reducing the need for metals. However, materials substitutions and manufacturing technologies have continued to evolve towards lower use of metal in each product at much the same rate after 1974 as before. Therefore, these aspects do not explain the sudden shortfall after 1974 except in the case of aluminium which experienced a dramatic change during the energy crisis years.     

Welfare gains from aluminium recycling in the USA

In this paper we estimate a flexible form cost function of the aluminium industry in the USA and use our estimates to obtain derived demand curves for aluminium inputs such as electricity and bauxite. We then calculate the welfare gains arising from decreased energy use when the level of secondary recycling is increased. The process is repeated for several model specifications. All of our tests, however, yield similar results and indicate that substitution of scrap for only 5% of the bauxite presently used in US aluminium manufacturing would result in annual savings of close to a quarter of a billion dollars.     

Instability in primary commodity markets

The two principal objectives of this paper are, first, to consider the behaviour of primary commodity prices on world markets. In particular, the degree of price instability in each of 19 primary commodity markets in the period 1953–1974, and the long-run behaviour of primary commodity prices relative to the price of manufactures (‘the terms of trade’) are analysed. Secondly, measures of export earnings instability are presented which determine its degree and geographical extent. The importance of world primary commodity trade both for the developed countries as major importers and exporters and for the less developed countries as large exporters is also pointed out.