| Mineral markets have been characterized by a significant amount of volatility during the past three decades. These periods of disequilibrium have been studied quite extensively from the standpoint of demand because the sensitivity of demand to income fluctuations over the business cycle has been a long-recognized problem. In contrast to previous studies, this dissertation focuses on the supply response in order to facilitate a better understanding of the investment process in the mineral sector.;In order to fully understand the investment process and specify an investment model, a detailed review of technological characteristics, investment history and market structure was undertaken. From a technological standpoint, capacity additions in the aluminum industry have been easier and less lumpy than is the case in other mineral sectors. This implies a rather stable investment relationship. In contrast, the oligopolistic market structure of the aluminum industry argues for a more volatile and less predictable investment function. The most important institutional factor, however, is the preponderant impact of government actions, most notably government-initiated capacity expansion during WWII, the subsequent disposal of these plants to private industry and the government-sponsored additions during the 1950s. In sum, institutional factors, particularly government actions, appear to have had a major influence on investment behavior.;A modified stock adjustment model was specified for the period 1950-77 and regressions for the three major U.S. aluminum companies--Alcoa, Kaiser and Reynolds--as well as the entire domestic industry were run. In general, the results were discouraging in that R-squared values were rather low, some coefficients were insignificant and the adjustment speeds were quite slow. These results were not considered surprising when the many institutional factors which have affected the aluminum industry are taken into account.;Regressions were subsequently made using an abbreviated time series (1960-74) which eliminated those years most influenced by government actions and other institutional factors. Regression results were improved with higher R-squared values and more significant coefficients, despite the loss of degrees of freedom. These results further supported our previous observation on the impact of institutional factors and also led to the acceptance of our hypothesis that a standard investment theory, as represented by a stock adjustment model, can explain a significant amount of investment in the aluminum industry.;The supply side has been recognized as presenting special challenges to the mineral sector because the discovery, delineation and development of ore deposits implies higher risks and longer gestation periods than typical in most manufacturing industries. This dissertation analyzes the investment history and pattern in the aluminum sector and poses the hypothesis that capacity expansion in the aluminum industry can be explained adequately by a standard investment theory, in this case a stock adjustment model. |
