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Constrictions in Components Supply Support Higher Prices

Years ago we were doing some work in the roofing business. In one study, we were working on the asphalt shingle roofing manufacturing business. At the time, this was a terrible business. Returns were low, growth rates were modest, at best, and there was a good deal of overcapacity in the industry. Then the industry caught a break. A shortage in asphalt developed. This shortage of asphalt rolled through the asphalt shingle plants and restricted their output. Immediately, prices jumped, returns became attractive and industry participants breathed a sigh of relief. Unfortunately, this asphalt shortage did not last very long. The industry shortly returned to its previous hostile condition. (See the Perspective, “What Ends Hostility?” on StrategyStreet.com.)

A shortage in any component, or labor, will restrict industry capacity and tend to raise prices. A labor shortage is, in part, responsible for some of the high prices in mining today. Miners work in areas that are often hard to reach. They also are skilled employees. The run-up in commodity prices, especially those related to ores such as silver, gold and copper, has increased the demand for these skilled miners. In addition, the mining industry faces competition for skilled workers from the oil and natural gas industries, which are also growing.

Mining companies are now going to great lengths to attract and retain these skilled workers. Some of these miners are now earning 25% more in compensation than they were a year ago. Some companies are flying workers to and from remote mines. For example, BHP Billiton plans to fly 500 workers from Brisbane, about 500 miles away, to a coal mine site that they are opening and then fly them back home after a couple of weeks.

If this commodity boom continues, the industry’s total capacity will be determined more by labor availability than by its more traditional measures of capacity. (See “Audio Tip #117: Capacity Constraints and Pricing” on StrategyStreet.com.)

Posted 2/14/11

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