Why haven't the supermines shut down?

Supermines Add to Glut of Metals

by: John W. Miller
Jan 05, 2015
Click here to view the full article on WSJ.com

TOPICS: Production, Supply and Demand

SUMMARY: Giant mines, begun when prices were high, are adding to the oversupply of copper, iron ore and other metals, compounding the woes of the depressed mining sector.

CLASSROOM APPLICATION: With an increase in the supply of copper due to the startup of new supermines, prices of metals and iron ore have declined. As a result, mining companies have not shut down mines, but rather have kept them operating and reduced labor inputs. The article notes that while profit margins are declining, prices continue to be above shut-down prices. "The mine's huge scale keeps its operating costs down, at under $1.50 per pound. That means even with copper prices now just above $2 a pound, a six-year low, it will continue to make money on an operational basis."

QUESTIONS: 
1. (Introductory) What is the effect of the opening of supermines on the prices of metals and iron ore?

2. (Advanced) What is the effect of depressed metals and iron ore prices on the profit margins of mining companies? Are the companies currently losing money? If so, then why are the mining companies continuing to operate?

3. (Advanced) The article states: "The big mines cost so much to build and extract minerals so efficiently that mothballing them is unthinkable-running them generates cash to pay down debts, and huge mines are expensive to simply maintain while idle." Is "the big mines cost so much to build" a good rationale for not shutting them down in the short run? Discuss the effect of fixed costs on operating decisions.

Reviewed By: James Dearden, Lehigh University