Australia's factor endowments in nonferrous mineral resources are significant. Early stage processing in the domestic market and exporting of crude minerals is a mature and economically important industry. The concern for industry participants and policy makers is that early stage processed commodities are subject to both volatility in demand trends and periodic over-supply problems which have plagued raw material markets since the industrial revolution. Downstream processing of nonferrous metals, at least to the semi-manufactured stage, offers some potential for adding value to commodities as well as allowing diversification and differentiation of Australia's export base. The conceptual framework provided by the Ricardo and Heckscher-Ohlin models of international trade suggest that an industrial strategy directed towards such downstream processing can diminish the comparative advantages derived from natural resource endowments by redistribution of scarce economic resources which impose costs on the Australian economy, at least in the short and medium term.
These models apply the theory of comparative advantage whereby gains will accrue from trade if a country specialises in those products that it can produce more efficiently than other products. The theory of international trade indicates that there are two main sources of comparative advantage - policy induced and locational sources. Industrial policy in Australia has since the 1950's concentrated upon the development of Australia's crude .mineral and agricultural commodity export industries as well as import replacement manufacturing. Rising demand in the post war Japanese and European economies was exploited in Australia through large scale development of mining and early stage processing opportunities designed to maximise the output of an exportable product such as mineral ores, concentrates and metals. Australia became the 'resources quarry' for Japan and Europe and manufacturing was promoted mainly in labour intensive import replacement sectors, often at the expense of the value added natural resource intensive industries. While the emphasis of policy has changed in recent years, addressing the issue of microeconomic reform and removing trade impediments, locational factors and industry specific externalities are unlikely to bring about an immediate improvement in the levels of mineral related value added processing.
The structure and strategic direction of the nonferrous metals industry was irrevocably changed during successive market downturns in the 1970s and 1980s. Rationalisation of processing operations produced opportunities for alliances to develop between large multinational metal groups who sought control of metal operations from mining through smelting and refining to fabrication-trading and end-user marketing. Traditional smelting/refinery and fabricating operations in Europe, Japan, Taiwan, Korea and North America are now part of a complex processing infrastructure which is designed to optimise the processing and marketing of nonferrous metals and valuable byproducts such as precious metals, cadmium, chemicals and recyclable materials. Consolidation of these industries through rationalisation, merger and strategic corporate alliances has created greater opportunities to maximise scale economies derived from servicing large metal markets with established infrastructure and support services. The structural changes to the international metals industries and the existence of externalities tends to highlight the limitations posed by Ricardo's factor immobility and Heckscher-Ohlin's reliance on factor intensities of variables such as labour and capital. The strategy of MIM Holdings Limited serves to highlight the shortcomings of models of perceived comparative advantage. MIM, in the past ten years, has sought to locate several downstream processing opportunities within the worlds major metal markets. (The company's stated strategy is to 'get closer to customers' in I order to respond rapidly to changing market demands as well as to invest in new extended processing opportunities. Recent decisions to participate in consortiums to build a new zinc smelter in Japan and a lead smelter in the United States illustrates MIM's emphasis on these market demand factors.
The implication of processing case studies such as MIM is that there is no simplistic method of ……