Abstract
In this paper, we explore the relationship between refined and scrap copper prices, considering the possibility that this relationship may vary across various products and over time. Building upon the conjecture put forth by Phillip Crowson (Miner Econ 24(1):1-6, 2011), here referred to as the Crowson Conjecture, our study aims to investigate how the substitution between refined copper and copper scrap No. 1 and No. 2 can impact the prices of each other. To achieve this, we develop a theoretical model that allows us to understand the potential influence of substitution between refined copper and copper scrap No. 1 and No. 2 during different time periods. Additionally, we conduct an empirical test using monthly time series data spanning from January 2004 to June 2022, analyzing structural breaks in these prices. Our empirical analysis successfully identifies three distinct structural breaks: January 2004 to August 2009, September 2009 to July 2017, and August 2017 to June 2022. These breaks serve as critical time periods for measuring Granger causality between the examined prices. Interestingly, our findings indicate that the causal relationships between the refined and scrap copper prices change throughout these three analyzed breaks, providing evidence in support of Crowson Conjecture. By shedding light on the evolving nature of the relationship between refined and scrap copper prices, our study contributes to a deeper understanding of the dynamics within the copper market. These insights have implications for market participants and policymakers, enabling them to make more informed decisions regarding pricing and resource allocation strategies.
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Notes
It contains a minimum of 61.3% copper and a maximum of 5% iron and is made up of tin and bronze solids and chips, and alloyed and contaminated copper scrap (ISRI 2021).
There are various reasons why inertia could exist in the inverse demand function. In particular, this could be caused by the presence of inventories in the market (Williams and Wright 1991). The presence of inventories is indeed the case for refined copper (due to the presence of metal markets such as the London Metal Exchange, Shanghai, and COMEX) as well as No. 1 and No. 2 scrap copper (in this case, there are no specialized markets, but producers and consumers have private inventories). Despite this, we have decided to not explicitly model the existence of inventories in this result, so as to keep the mathematics as simple as possible, in order to demonstrate that the Crowson Conjecture is theoretically feasible and, in fact, very likely.
This condition is equivalent to requiring that the linear algebra system described below (system of equations (4)) has a non-negative determinant to ensure the existence and uniqueness of the solution.
It has been implicitly assumed that the equilibrium conditions are satisfied over the whole time period, particularly not only in t but also in t − 1.
Applying a structural break test for causality would be preferable for testing the Strong Crowson Conjecture, which, according to the authors’ knowledge, is an econometric tool that has not yet been developed. It goes without saying that having this tool could have multiple applications, not only in this case but also in different studies of interest for economics.
The Granger causality test assumes that the relevant information for predicting the respective variables analyzed is only contained in the time series information of these variables (Bhatia et al. 2018).
The null hypothesis in the Granger causality test indicates the non-existence of causality between the variables studied.
Because all the three series present a strong correlation in this period (i.e., they are parallel to a large extend), the lack of causality suggests that they all depend possibly on the same external shocks.
On August 29, 2008, the “Law to Promote the Circular Economy of the Popular Republic of China” was approved in the fourth session of the Xi National Popular Assembly. This is the first law of the Chinese government about the recycling industry, and it began to be implemented in 2009. The Ministry of Finance and State Tax Administration issued a new policy on adjusting VAT policy for the recovery and use of renewable resources. It meant that the VAT for recycling companies rose from 10% or VAT-exempt to 17%. The new policy was applied in 2009, reducing the recyclers’ profitability and the supply of scrap copper in 2009 (ICSG 2018).
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Acknowledgements
We thank Cristian Foix Castillo from CODELCO for providing the No. 1 and No. 2 scrap copper price data. We also thank the reviewers for their valuable feedback and comments.
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Category 1Conception and design of study:Nilza Rivera and Juan Ignacio Guzmán.
Acquisition of data:Nilza Rivera and Juan Ignacio Guzmán.
Analysis and/or interpretation of data:Nilza Rivera and Juan Ignacio Guzmán.
Category 2Drafting the manuscript:Nilza Rivera and Juan Ignacio Guzmán.
Revising the manuscript critically for important intellectual content:Nilza Rivera and Juan Ignacio Guzmán.
Category 3Approval of the version of the manuscript to be published:Nilza Rivera and Juan Ignacio Guzmán.
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Rivera, N., Guzmán, J.I. Dynamic relationship between refined and scrap copper prices. Miner Econ (2023). https://doi.org/10.1007/s13563-023-00401-2
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DOI: https://doi.org/10.1007/s13563-023-00401-2