Big Government in Europe is worried about Glencore cornering the Zinc Market

Posted by PITHOCRATES - November 24th, 2012

Week in Review

With the price of natural gas falling some providers are capping their wells until prices go up.  During the Eighties the price of oil soared, pulling oil producers into the oil business left and right.  Resulting with the oil glut of the Eighties as supply greatly outpaced demand.  OPEC tried to set the price of oil by limiting production.  But they sometimes fail as member states often cheat, selling a little more than their quota to profit from those high prices.  In America, when John D. Rockefeller was selling refined oil products cheaper than any of his competitors it was his competitors who urged the government to bring antitrust actions against him.  Not the people buying his products at low prices.  President Obama has shut down most drilling on federal lands.  But because of demand drilling on private lands is soaring.

Trying to maintain monopoly control is difficult.  And rarely can be done without the help of government (even with the help of government it’s not that easy).  Or by selling at a price below your competition.  Which rarely hurts consumers.  No, low prices hurt those who can’t sell at low prices.  Those who want consumers to pay their higher prices.  This is the power of market forces.  And greed.  For when prices go up greed lures others into the market place to cash in on those high prices.  Which brings prices down.  Supply and demand.  It’s how we have pretty much whatever we want in a complex economy.  Even just the right amount of zinc (see EU steelmakers unhappy with EU conditions on Glenstrata deal by Silvia Antonioli posted 11/22/2012 on Reuters).

EU steelmakers said Europe’s antitrust conditions for Glencore (GLEN.L) to go ahead with its $33 billion takeover of Xstrata (XTA.L) are not sufficient to prevent the dominant influence of one zinc supplier…

“The European steel industry, which uses the lion’s share of zinc metal traded in Europe, will still have to face a leading provider effectively controlling the zinc supply chain from mining to warehousing operations,” Eurofer said in a statement.

Post-merger, the parties will still have a share of around 35 per cent of the European zinc market and the vertical integration of the new entity, which includes mining, smelting, trading, logistics and warehousing, is also concerning according to Eurofer.

What’s really of concern here?  Economies of scale.  The bigger Glencore gets the lower its production costs per unit become.  And the lower their selling price can be.   This is what economies of scales get you.  Not monopoly power.  And who is hurt by lower selling prices?  Glencore’s competition.  And those supplying the other 65% of the European zinc market.

Of course, the argument always goes once someone corners the market (by driving their competition out of business with low prices) they’ll then start raising their prices.  A lot.  Oh my.  Imagine what would happen if zinc prices soared.  It would pull zinc suppliers into the European zinc market left and right to cash in on those high prices.  Can anyone name a supplier who cornered the market with low prices and now is selling at high prices that isn’t propped up by the government?

No.  Because it doesn’t happen.  Because it can’t happen.  Not with free markets.  Because of greed.  For if prices go up more people enter the market out of greed.  And the greater this greed the greater the supply brought onto market.  And the greater prices fall.

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