Tilburg University

Upstream vertical integration in the world aluminum and tin industries

Hennart, J.-F.M.A.

Published in:Journal of Economic Behavior and Organization

Publication date:1988

Link to publication

Citation for published version (APA):Hennart, J-FMA. (1988). Upstream vertical integration in the world aluminum and tin industries: a comparativestudy of the choice between market and intrafirm coordination. Journal of Economic Behavior and Organization,9(3), 281-300.

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Download date: 03. May. 2020

Journal of hawior and tim 9 (1

work to explain why the extent of upstream vertical integration is lower in tin than in ahuninur~~

t has little informa

market transaction costs. Transaction cost theory thus isolates three key variables which determine

the desirability of vertical integration: the number of actual or potential parties at each stage, the levei of quasi-rents that can be captured by opportunism, and the degree of uncertainty surrounding the transaction.

tin

its cost the cost

22. PotentiQl for

At a given level of s the potential for opportmistic exploitation will vary with certain on process. Assets which are large, immobile, and long lived are eEy to be ‘heId up’ by a~ opportunistic trader. The cost incurred from an interrupted input supply will be greater if that input is bulky or perishable (and thus costly to store) and if it is used in fixed, rather than varia proportions. The same is true for flow, as opposed to batch, processes. tly, the plant’s cost structure is also

284 J.-F. Ihnruut, Upstream vertical integration in the undtin

ter the share of fixed costs in total costs, the

by a shortage of inputs (or a loss of

.

J.E.B.O.- D

trihydrates. Optimal digestion also calls for substantive

cover [Stuckey (1983, p. 4911.

High transportation costs and the need to design alumina refineries to fit a ular bauxite t thus lock mine and processor in a bilateral relation-

2Eigkty-five percent of the bauxite mined is used to produce ahmina.

3.7. Conchsion

The characteristics of the bauxite market, high and War economies of scale at both stages, high transportation costs, and high degree of asset specificity, suggest that spot markets and contracts are t an i t

method of coordinating buyers and sellers of bauxites. As eqwcted, vertical integration is the method used for the bulk of bauxite transactions. Long-

288 J.-F. Hewart, Upstream omicd iateg~ation in the uluminm ud tin imduak

term contracts play a subsidiary role, but the r to constitute a second t solution, and their importauce is

er the same wnsideratio integration in tin.

J.-F. ied

35 to 38 percent of all physical tin is transacted on the Penang market, but the influence of that market is even greater than those figures would suggest: a sign&ant volume of concentrates is also bought by non-Malaysian

Bolivia shows that,

Tin is a reMMy element. The onl mineral of in two very

dary or alluvial deposits, which result fi-om

(Malaysia, Burma, Thail~~ad wind or water, are found in Southeast Asia

Indonesia), Brazil, Central A&a, and parts of AustraGa They are low close to the surface. They can be mined by small scale methods, an y concentrated through gravity to XI-77

use they contain few impurities, they can be smelted easily

underground They

‘Metric tons of tin-in-concentrates. bEx&ding Albania, the People’s Republic of China,

the U.S.S.R and Vietnam. =w&iirz$-

.

Sowct~ Thobum, 1981, pp. 41,136; Allen and Engel, 1979.

292 J.-F. Himmart, Upstream odeal integrution in the afamhum ad tin indbtds

tin loss in the concentration process (the recovery rate) can be reduced by investing ia cowxntrating equipment, final grade of concentrates the optimal investment in ntration, are the results of ecoaomic decisions, as low grade concentrates are more expensive

to smelt. In gene* the

$It is increasingly diEcult to e use of this technique, as the governmen t!3 of most CcwIlttis

producing alluvial concentrates prohibit their export- 6From interviews with A.R. Amhews former Managing Director of Consolidated Tim Sti@h

and PA Wright, extracthe metabrgist, and ftom pawnal wmmunicatkn Erom SC. Pestr~e, consuhing metallurgist.

J.EB.O.- E

294

Concentrates can be eiconomidy shipped to smelters located far fkom the mines, and the market for tin concentrates is worldwide.

The potential for opportunistic exploitation in tin is therefore much lower

spot prices set on the Penang osen to restrict themseives to the

role of providers of a service. They have sub&antially integrated neither backward into mining nor forward into the manufacture of tin-containing

‘OfMO~

erected. The dredges can he towed to new locations. same applies to gravel pumping plants.

Onshore dredges be taken iqartandre-

J.-F. Hemart, Upstream nint

2 3

173 35

'Approximately.

source International Tm Tin council, 1982; Allen and

to

1981; Thoburn, 1981, p. If; Schun, 1921; Intemational 79.

*Thedataoftable4areinterms of companies. This, however, understates concentration in the dredging sector, as a large proportion minority control and/or t of three major group

33

1s

442 495 6.3

296 J.-F. htnQ?t, upstreiam t%?rticfaf imgmion in the 4llmninuln und tin if&id

competitive. The two colluding Malaysian in a monopsonistic position vis-&vis

e strategic position of the smelters vis-8-k

export of tin result in the IIfting of such a

tdled sometime behe 1

297

low grade and amain less than 40 percent tin.‘1 Smeiting Botivign ores more capital and skilf than for &Nial ores.

used must be care&My adjusted to the

market for such tion costs are low and

n”s model of vertical htegration assumes that firms will choose between spot market, contractq and i&&ii coordination on efficiency grounds. The stronger t&e degree of competition, the more likely that eficient firms will prevail. On the other hand, inefficient fvms may persist whenever competitive pressures are weak Williamson (1985)J. In the last twenty years,

l%stimated from 1967 data in Fox (1970). In 1978, the avemge grade of B&im concentrateS was 32 percent [AlIen and Engel (1979, p. 86)J.

298 J.-F. Hennurt, Upstream uertid integration in the ahminum imd tin ind~ti