Hennart, J.-F.M.A.

English

Research Papers in Economics

Journal of  hawior and  tim  9 (1 work to explain why the extent of upstream vertical integration is lower in 
tin than in ahuninur~~ 
t  has little informa 
market transaction  costs. 
Transaction cost theory thus isolates three key variables which determine 
the desirability of  vertical integration: the  number of  actual  or  potential 
parties at  each  stage,  the  levei  of  quasi-rents that  can  be  captured  by 
opportunism, and  the  degree of  uncertainty surrounding the  transaction. tin 
its  cost 
the cost 
22. PotentiQl  for 
At a given level of s  the potential  for opportmistic  exploitation 
will vary with certain  on process. Assets which 
are large, immobile, and long lived are  eEy  to be ‘heId up’ by a~ 
opportunistic trader. The cost incurred from an interrupted  input  supply will 
be greater if that input is bulky or perishable  (and thus costly to store) and if 
it is used in fixed, rather than varia  proportions. The same is true for 
flow, as opposed to batch, processes.  tly, the plant’s cost structure is also 284  J.-F.  Ihnruut,  Upstream  vertical integration  in  the  undtin 
ter  the share of fixed costs  in total  costs,  the 
by  a  shortage  of  inputs  (or  a loss of . 
J.E.B.O.-  D trihydrates. Optimal digestion also  calls  for  substantive 
cover [Stuckey (1983, p. 4911. 
High  transportation  costs and the need to design alumina refineries  to fit a 
ular bauxite t  thus lock mine and processor in a bilateral relation- 
2Eigkty-five  percent  of the bauxite mined is  used to produce  ahmina. 3.7.  Conchsion 
The characteristics of the bauxite market, high and War  economies of 
scale at  both  stages, high  transportation costs,  and  high degree of  asset 
specificity, suggest that spot markets and contracts are t  an  i  t 
method of coordinating buyers and sellers of bauxites. As eqwcted, vertical 
integration is the method used for the bulk of bauxite transactions. Long- 288  J.-F.  Hewart,  Upstream omicd  iateg~ation in the uluminm  ud  tin imduak 
term contracts play a subsidiary role, but the  r to constitute a second 
t  solution,  and  their  importauce is 
er the same wnsideratio 
integration in tin. J.-F.  ied 35 to 38 percent of all physical tin is transacted on the Penang market, but 
the influence  of that market is even greater than those figures would suggest: 
a  sign&ant  volume  of  concentrates is  also  bought  by  non-Malaysian 
Bolivia shows that, 
Tin  is  a  reMMy  element. The  onl  mineral  of 
in two very 
dary or alluvial deposits, which result fi-om 
(Malaysia, Burma,  Thail~~ad 
wind or water, are found in Southeast Asia 
Indonesia),  Brazil,  Central A&a,  and parts 
of AustraGa They are low  close to the surface.  They can be mined 
by small scale methods, an  y concentrated  through gravity to XI-77 
use they contain few impurities, they can be smelted easily underground  They 
‘Metric  tons of tin-in-concentrates. 
bEx&ding  Albania, the People’s Republic of China, 
the U.S.S.R and Vietnam. 
=w&iirz$- 
. 
Sowct~  Thobum,  1981,  pp. 41,136; Allen and Engel, 1979. 292  J.-F.  Himmart,  Upstream  odeal  integrution  in the afamhum  ad  tin  indbtds 
tin loss  in the concentration process (the recovery rate) can be reduced by 
investing  ia  cowxntrating  equipment,  final  grade  of 
concentrates  the optimal investment in  ntration, are the 
results of ecoaomic decisions, as low grade concentrates are more expensive to smelt. In gene* the 
$It is increasingly  diEcult to  e use of this technique,  as the governmen  t!3  of most CcwIlttis 
producing alluvial concentrates prohibit their export- 
6From interviews with A.R. Amhews former Managing Director of Consolidated Tim Sti@h 
and PA  Wright, extracthe metabrgist,  and ftom  pawnal  wmmunicatkn  Erom SC.  Pestr~e, 
consuhing metallurgist. 
J.EB.O.-  E 294 
Concentrates can be eiconomidy  shipped to  smelters located  far fkom the 
mines, and the market for tin concentrates is worldwide. 
The potential for opportunistic exploitation in tin is therefore  much lower 
spot prices set on the Penang 
osen to restrict themseives to the 
role  of  providers of  a  service. They have  sub&antially integrated neither 
backward  into  mining nor forward into  the  manufacture of  tin-containing 
‘OfMO~ 
erected. The 
dredges  can he towed to new  locations. 
same applies to gravel pumping plants. 
Onshore dredges  be taken iqartandre- J.-F.  Hemart,  Upstream  nint 
2 
3 
173 
35 
'Approximately. 
source  International  Tm 
Tin council,  1982;  Allen and 
to 
1981; Thoburn,  1981, p.  If;  Schun,  1921; Intemational 
79. 
*Thedataoftable4areinterms  of companies. This, however, understates 
concentration in the dredging sector, as a large proportion 
minority control and/or  t of three major group 
33 
1s 
442 
495 
6.3 296  J.-F.  htnQ?t,  upstreiam  t%?rticfaf  imgmion  in  the 4llmninuln  und tin  if&id 
competitive. The two colluding Malaysian 
in a monopsonistic position vis-&vis 
e strategic position of the smelters vis-8-k 
export of tin 
result  in the IIfting  of such a 
tdled  sometime behe  1 297 
low  grade  and amain  less than  40  percent  tin.‘1  Smeiting  Botivign  ores 
more capital and skilf than for &Nial  ores. 
used  must  be  care&My adjusted  to  the 
market for  such 
tion  costs  are  low  and 
n”s model of vertical htegration  assumes  that firms will choose 
between  spot  market, contractq  and  i&&ii  coordination  on  efficiency 
grounds. The stronger t&e  degree of competition, the more likely that eficient 
firms will prevail. On  the other hand, inefficient fvms  may persist whenever 
competitive pressures are weak Williamson  (1985)J. In the last twenty years, 
l%stimated  from  1967 data  in  Fox  (1970).  In  1978, the avemge  grade of B&im  concentrateS 
was 32 percent  [AlIen  and  Engel (1979,  p. 86)J. 298  J.-F.  Hennurt,  Upstream  uertid  integration  in  the ahminum imd tin ind~ti 

Upstream vertical integration in the world aluminum and tin industries : a comparative study of the choice between market and intrafirm coordination.

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