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07 February 2018

Epistemology



This article was written by Bill Prast. All views and opinions expressed are strictly his own.

More than fifty years ago, during the Cold War and shortly after the dawn of the space race between the Americans and the Soviet Union, I was a young post-graduate student at a prominent US college of mineral industries.  As such, on one occasion I was invited to attend a meeting of a professional society of metals and minerals experts.  Among the featured lectures was a presentation on copper by a leading Wall Street analyst.  He delivered a Jeremiad on the fate of the copper industry.

His lamentations were long and mournful, bewailing the low price of copper – which at the time was somewhere north of 30 cents per pound for wirebar – and the unforgiveable negligence of the world in allowing this state of affairs to continue.  He waxed on at length, and thundered, “The price should be one dollar per pound.  That is what the copper producers need and deserve to supply this critical material.”

“If we don’t get a dollar a pound, the wheels will come off the world economy.  Mines will not be profitable and supplies will dwindle,” he continued.  “And then where will we get the copper for all of the miles and miles of telephone cables that will be needed in Africa, in India, across Asia?  Where will we get the copper wires for electrical appliances?  Where will we get the copper for all of the countless pipes that are vital for plumbing and heating?  We won’t!”

This diatribe against the consequences of consumer ignorance took place when annual newly-mined copper output was barely 4 million mt; currently it is approaching five times that figure.  Spot prices today are maybe ten times those of half a century ago, which is more or less an annual increment of 3 percent, essentially in line with inflation.  And several billion folks on the Afro-Eurasian land mass seem to have made do with mobile telephones and plastic pipes, thank you very much.

One conclusion we might draw from all this is that forecasting is inexact.  As Donald Rumsfeld famously said, “There are known unknowns and there are unknown unknowns.”

Recalling this copper speech brought to mind the considerable abilities of the late Orris Herfindahl, an eminent minerals economist who wrote insightfully on the economic theory of natural resources, as well as on copper costs and prices.  He is perhaps best known for the Herfindahl index which he devised as a measure of concentration in the steel industry as part of his doctoral dissertation at Columbia University.

Herfindahl, whom I never met, was described to me by his peers as a fine man who sincerely believed that if sufficient information was at hand, anything could be forecast with absolute accuracy.  Anything.  Not only the price of copper, but even intangibles such as emotions could be forecast perfectly.

This viewpoint expresses logical positivism, which says only statements verified by empirical observations are meaningful.  Amongst its adherents was Ludwig Wittgenstein.  For those less interested in 20th century Viennese thinkers, or who like me are happy to embrace transcendental metaphysics in our lives, it may be instructive to recall that Dr Herfindahl died in his early 50s whilst hiking in Nepal.  His untimely death was a loss to the metals world.  But with better data, perhaps his death might have been avoided.

Perhaps the last word on this subject should go to Richard Morgan, a former editor of “Mining Journal” who for years has been a senior mining analyst in London with a Swiss financial house.  Richard on a recent occasion said, “Forecasting in our business is notoriously inaccurate, but there is nothing anyone can do to change that.  The lead times on large new projects are too great.  The intervening years between final investment decision and first production from a new mine or metallurgical plant will invariably bring unforseen changes that significantly affect the project viability.  Consequently, the range of possible outcomes is and always will be considerable.  But try explaining that to shareholders.”

As has been often said before, “If I could predict the future, I wouldn’t be doing this job.”


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