The international copper market has historically been characterized by extreme
price swings due to short-term changes in supply and demand. This price
volatility has led to disruptions in third world national economies that
depend on copper for foreign exchange and a stable balance of payments.
Because the price of copper is usually a small part of the cost of the
finished goods in which copper is used, the short-term elasticity of demand
for copper is relatively low. Because of the limited number of ways in which
copper supply can be expanded in the short run, the short-term elasticity
of supply is also relatively low. Finally, since much copper is bought and
sold through long-term contracts, the amount of copper traded on the
international metal exchanges is relatively small. These three factors
combine to cause large swings in copper prices on the international
exchanges. Since contract prices are often tied to exchange prices, the
volatility has the same effect on developing countries as if all the metal
were traded on these exchanges.
As a result of the success of the international oil cartel, OPEC,
to control prices, the copper producing countries began to determine
the viability of an international copper cartel. What factors made OPEC
work in the short run. What factors would make it vulnerable in the long
run? In 1980 the principal of IMS Quantum developed a simulation model to
evaluate the potential effectiveness of a large international copper
stockpile to stabilize prices by purchasing copper when the price fell
below a predetermined floor and selling copper when the price moved
above a predetermined ceiling. The model simulated operations in the
historic period from 1965 to 1980. It examined a number of trading
rules to determine the stockpile's ability to stabilize prices and
create a profit for its administrators.
The process of building and running such a simulation model was
invaluable in determining the factors that influenced success. The
subtleties associated with defining success were evident. The kinds
of tradeoffs that stockpile administrators must make became abundantly
clear. The importance of market characteristics as a basis for short
and long-term performance was crucial to the success of the operation.
The choice of optimal trading rules was fundamental in influencing
long-term stockpile impact on the market and in maximizing return on
invested capital.
IMS Quantum specialized in developing Integrated Decision and
Planning Models that uncover hidden factors that can determine the
success or failure of an enterprise. Whether the goal is to maximize
the effectiveness of a government agency, optimize a manufacturing
operation, or to seek strategies in the global economy, IMS Quantum
is prepared to provide the tools for charting courses in complex
and changing business and public policy environments.
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