ECONOMICS 9732/01

PAPER 1 Case Study 13 September 2010

Additional Materials: Answer Paper 2 hours 15 minutes





READ THESE INSTRUCTIONS FIRST

Write your name and CT on all the work you hand in.
Write in dark blue or black pen on both sides of the paper.
You may use a soft pencil for any diagrams, graphs or rough working.
Do not use staples, paper clips, highlighters, glue or correction fluid and tape.

Answer ALL the questions.

At the end of the examination, fasten the answer scripts to Questions 1 and 2 separately with the
cover pages provided.
The number of marks is given in brackets [ ] at the end of each question or part question.
You are advised to spend several minutes per question reading through the data before you begin
writing your answers.





















This document consists of 9 printed pages and 1 blank page.

[Turn over
HWA CHONG INSTITUTION
College 2 Preliminary Examination 2010
General Certificate of Education Advanced Level
Higher 2

HWA CHONG INSTITUTION



HCI Preliminary Exam 2010 9732/01/S/10


2

Answer all questions.

Question 1
Platinum and Palladium
Extract 1 Uses of platinum and palladium
Platinum and palladium are essential components in the production of electrical circuits and
computers. They are also used for making jewellery and catalytic converters for car exhausts. The
amount of platinum or palladium used in each product is small implying that the firms that
manufacture them and the consumers that buy them are relatively insensitive to significant
increases in the price of platinum or palladium. Catalytic converter legislation recently spread to
Latin America and East Asia such that platinum and palladium consumption for the converters in
such emerging market economies will surpass the total now consumed in North America, Japan and
Europe. Meanwhile, the peak of 50% of all platinum demand dedicated to jewellery dropped to 40%
in 2005 and is projected to account for only 20% of demand. Platinum's loss of demand in jewelry is
palladium's, a poor cousin to platinum, gain.
Sources: www.azom.com and www1.energy.gov, 2006
Chart 1: Prices of platinum and palladium from 1992 to 2007

Source: www.agmetalminer.com, 2008




HCI Preliminary Exam 2010 9732/01/S/10


3

Table 1: Platinum supply and demand 2003-2007
Platinum supply and demand (000oz)
Calendar year *2007 2006 2005 2004 2003
Demand
Automotive 4,245 4,035 3,570 3,260 2,995
Jewellery 1,635 1,685 1,960 2,160 2,505
Industrial (including investment) 2,010 1,860 1,730 1,630 1,465
Total 7,890 7,580 7,260 7,050 6,965
Supply
Total 7,685 7,670 7,270 7,065 6,830
Surplus/(shortage) (205) 90 10 15 (135)
* Estimate Source: www.implats.com.za/market/supply_demand.asp, 2008
Table 2: Palladium supply and demand 2003-2007
Palladium supply and demand (000oz)
Calendar year *2007 2006 2005 2004 2003
Demand
Automotive 5,300 4,990 4,605 4,515 4,465
Jewellery 1,090 995 1,430 930 260
Electronics 990 960 890 875 850
Other 1,540 1,440 1,715 1,450 1,230
Total 8,920 8,385 8,640 7,770 6,805
Supply
Total 9,040 9,925 8,975 9,255 7,415
Surplus 120 1,540 335 1,485 610
* Estimate Source: www.implats.com.za/market/supply_demand.asp, 2008
Table 3: Market share of platinum companies in 2004
Company Platinum Supply (million ounces) Implied Worldwide market share (%)
Anglo Platinum 2.45 37.69
Impala Platinum 1.09 16.77
Lonmin Platinum 0.94 14.46
Aquarius Platinum

0.21 3.23
Northam Platinum

0.20 3.08
Southern Platinum 0.09 1.38
Source: www.comptrib.co.za, 2005

HCI Preliminary Exam 2010 9732/01/S/10


4

Extract 2 Merger approved in the platinum industry
In 2002 the Competition Tribunal of South Africa unconditionally approved the merger between
Rustenburg Platinum Mines (RPM) and Eastern Platinum Mines Ltd (EPL).The transaction will
facilitate the establishment of a large mine (Pandora Mine) to mine the entire area of the UG2 Reef
more efficiently than having to mine each area separately. The companies stated that it was not
feasible for Rusternberg Mines (which owned the mineral rights to two of the mines and which had
secured mining rights of the third farm from the state) to mine the entire area on its own, as it would
require much infrastructure investment. It is more economical to upgrade existing Eastern Mines
infrastructure than erecting an entirely new plant, and also, Eastern Mines has the experience to
manage this project. Generally, the acquisition would permit better utilisation of Rusternberg Mines'
mineral assets -- leading to lower costs in extraction and in management.
However, the merging companies said that planned retrenchments after the merger would be
justified as it could be attributed to the transition to a safer productive mining method, changed
working timetables and the reduction of high operating costs (labour costs constitute more than 60%
of the pre-merger total cost of Rusternberg Mines).
Source: www.saflii.org, 2003
Extract 3 Platinum producers
While demand for platinum is continuously increasing, supply is extremely limited. Sources of
platinum production are quite scarce. In fact, more than 90% of world platinum production is
concentrated in just two areas in South Africa and Russia. Additionally, there are not more than ten
significant platinum mining companies in the world.
The Bushveld Complex in South Africa is the main producer area, with the company AMPLATS as
the industry leader. The other significant area is the Norilsk region in Russia. Platinum is also mined
in smaller deposits in United States, Canada and Zimbabwe. According to some estimates, if
platinum mining were to stop today, existing above ground reserves would last about one year.
However, in order to respond to increasing demand, most mining companies are developing
expansion plans; for example, mining companies in South Africa and North America are developing
expansion plans which will lead to future increases in platinum production.
Platinum mining industry is capital intensive. Companies need large amounts of money to build
production facilities and long-term survival requires heavy expenditures in order to finance
exploration and production. Main producers in the platinum industry are big corporations with a
large degree of vertical concentration. Since platinum is both a precious metal and an industrial
metal, these companies have different divisions which deal with refining, assaying, fabricating,
trading, researching in new applications or even with investment activities.
New platinum mine developments and exploration outside the Russian Federation, particularly in
North America, are taking place as a result of the platinum market boom. Moreover, at the current
prices it is highly profitable to find and mine platinum.
Source: www.unctad.org,2007




HCI Preliminary Exam 2010 9732/01/S/10


5
Questions

a (i) Compare the trends of the prices of platinum and palladium between 2000 and
2007.
[1]

(ii) With the aid of Tables 1 and 2, and the use of diagrams, account for the above
trends observed between 2003 and 2007.
[6]
(iii) Discuss how the buyers and sellers will respond to the trend of platinum prices. [6]
b Account for the market structure of the world platinum market with given data. [5]
c To what extent is the merger of the two platinum mines in Extract 2 beneficial to
society?
[12]

[Total: 30]



























[Turn over



HCI Preliminary Exam 2010 9732/01/S/10


11

Suggested answer Q1
a (i) Compare the trends of the prices of platinum and palladium between
2000 and 2007.
[1]

Suggested Answer:
Palladium falling trend while platinum rising trend

(ii) With the aid of Tables 1 and 2, and the use of diagrams, account for the
above trends observed between 2003 and 2007.
[6]
Suggested Answer:
Platinum DD>SS in some years rise in DD (13.3%) may exceed rise in
SS (12.5%) insignificant surplus from 2004 to 2006 and there is shortage
in some years exert upward pressure on price.
Palladium overall, rise in DD (31%) is faster than the rise in SS (22%)
upward pressure on price however surplus causes a less than significant
rise in price

















Price of platinum rises due to the smaller surplus and
prevailing shortages in some years
Q0 Q1

Price of platinum


P1

P0

S0
S1
Quantity of platinum
D0
D1

HCI Preliminary Exam 2010 9732/01/S/10


12











Platinum (max 3 m)
1m Correct diagram
1 m Rise in DD > Rise in
SS
1 m low surplus and
shortages
upward pressure on P

Palladium (max 3 m)
1m Correct diagram
1 m Rise in DD > Rise in SS
1 m always surplus, bigger than platinum
upward pressure on P to a smaller extent

Version 1
Price movement wrong (i.e. price fall)
Reason: Rise in SS> rise in DD
diagram consistent with reason above
(does not matter if st mentions surplus or
not) Cap at 1 m

Version 2
Price movement wrong (i.e. stable price)
Reason: Rise in DD=rise in SS (or in
tandem)
diagram consistent with reason above
(does not matter if st mentions surplus or
not) Cap at 1 m

Version 3
Price movement correct (i.e. price rises)
Wrong reason: rise in SS> rise in DD or
rise in DD = rise in SS
Will get ZERO m. Wrong logic.
Mention of Surplus in this instance will not
be given credit.

Common mistakes:
Error Possible cause
Rise in DD without any change in
SS or
Rise in SS without any change in
DD
Failure to read the Tables 1 and 2
Q0 Q1


P1
P0

S0 S1
Price of palladium rises less significantly due to the
larger surpluses
Quantity of palladium
D0
D1

HCI Preliminary Exam 2010 9732/01/S/10


13
Static analysis e.g. Qd>Qs or
Qs>Qd shortage or surplus
Failure to distinguish change in
DD/SS from movement along
DD/SS
Failure to use dynamic analysis
which shows changes of DD/SS
over time shown in Tables 1 and 2
Shortage of supply or surplus of
supply
Wrong expression/ inability to
understand the concept of shortage
and surplus both are relative
concepts
Shortage is Qd>Qs
Surplus is Qd<Qs
Shortage means SS shifts left
Surplus means SS shifts right

Inability to understand the concept
of shortage/surplus

Price of palladium remains stable or
falls
Failure to refer the Chart which
shows Price of palladium rising
Rise in SS > Rise in DD hence,
P rises
Illogical conclusion because rise in
SS>rise in DD should cause P to
fall

HCI Preliminary Exam 2010 9732/01/S/10


14

a (iii) Discuss how the buyers and sellers will respond to the above trend of platinum prices. [6]























The platinum prices are rising. Both SS and DD rise. When SS shifts, the degree of
responsiveness in Qd by buyers depends on the PED. When DD shifts, the degree of
responsiveness in Qs by sellers depends on PES. Given that platinum and palladium are
substitutes, the XED is also relevant.
Price-inelastic DD of platinum: evidence is from Extract 1: "The amount of platinum or
palladium used in each product is small implying that the firms that manufacture them
and the consumers that buy them are relatively insensitive to significant increases in the
price of platinum." The consumers will not reduce Qd by a great extent even though
price has risen.
Buyers will be forced to look for cheaper substitute, palladium which has a price one-third
that of the platinum (See Table 1). The XED of both is positive and may be greater than
one, as palladium can be used in the same products that platinum is part of. DD for
palladium will shift to the right.
In the short-run, sellers of platinum will increase quantity supplied but PES is likely to be
less than one as its not possible to physically increase the number of mines overnight.
In the long-run, however, this will encourage for example, mining companies in South
Africa and North America to embark on expansion plans which will lead to future
increases in platinum production. New platinum mine developments and exploration
outside the Russian Federation, particularly in North America, are taking place as a
result of the platinum market boom. Moreover, at the current prices it is highly
profitable to find and mine platinum. SS is more price-elastic in the LR. See Extract 3.
Buyers (max 3 m) Sellers (max 3 m)
1m PED
1m XED
1m evidence of either PED or XED
1m PES < 1 or/and higher PES over time
1m SR vs LR
1m evidence of corresponding concepts
identified

Note: Evidence of Ltd SS and expansion
plans are both cited but no link to
elasticity in SR and LR cap at 1 m in
total
Case-study skills
Mere lifting of evidence without any link to economic concepts (0 m)
Evidence given with some economic analysis but Not explicitly linked to
elasticity concepts (cap at 1 m for buyer and 1 m for seller)

No case-study skills (0 m)
Sellers raise price as PED < 1 to increase TR no evidence
Sellers withhold SS to increase stockpile to take advt of future rise in
price no evidence
Buyers buy more platinum now to avoid paying higher price in future
no evidence
Merger is suggested to lower cost of production to compensate for the
rising price of platinum not acceptable no evidence that it is a
response to rising P.

b Account for the market structure of the world platinum market with given data. [5]

HCI Preliminary Exam 2010 9732/01/S/10


15

Suggested Answer:
Market structure is likely to be oligopoly with high BTE See Extract 3 "not more
than 10 significant platinum mining companies in the world" and see Table 3 market
concentration ratio of top 3 firms = 69%. (1m)
Sources of BTE ( 2m for any of 2 types of BTE)
i) "capital-intensive" see Extract 3 "large investment" and "heavy expenditures"
ii) substantial economies of scale: see Extract 3 :"Since platinum is both a precious
metal and an industrial metal, these companies have different divisions which
deal with refining, assaying, fabricating, trading, researching in new applications
or even with investment activities."
iii) access to essential input (i.e. mines) "state-owned trading monopoly in
Russia" and Extract 2 "mineral right to two mines in South Africa."
iv) mergers and acquisitions of mines in Extract 2

c. To what extent is the merger of the two platinum mines in Extract 2 beneficial to
society?
[12]

Suggested Answer:
Agree with merger/joint-venture
Cost advantages
Substantial EOS lower prices consumers will benefit if lower costs
passed on to them. See Extract 2" It is more economical to upgrade
existing Eastern Mines infrastructure than erecting an entirely new plant,
and also, Eastern Mines has the experience to mange this project.
Generally, the acquisition would permit better utilisation of Rusternberg
Mines' mineral assets -- leading to lower costs in extraction and in
management."
Another example of technical EOS:: see Extract 3 :"Since platinum is
both a precious metal and an industrial metal, these companies have
different divisions which deal with refining, assaying, fabricating, trading,
researching in new applications or even with investment activities."
Infrastructure investment is too substantial for one company to bear See
Extract 3 "Platinum mining industry is capital intensive. Companies need
large amounts of money to build production facilities and long-term
survival requires heavy expenditures in order to finance exploration and
production."
External EOS -- other firms will benefit
Revenue advantages
Ability of firms to engage in R and D and hence Increase export revenue
for South Africa and Russia contribute to GDP growth and BOP surplus


HCI Preliminary Exam 2010 9732/01/S/10


16
of both countries
Other advantages
Dynamic efficiency R and D lower costs to consumers
Disagree with merger
Reduce competition and increase monopoly power of firms allocative
inefficiency worsens
Leads to rationalization -- > retrenchment of workers see Extract 2
"planned retrenchments" after merger
Possible diseconomies of scale may set in.
Platinum is a non-renewable resource which will be rapidly depleted due to
excessive mining
Effect on other firms predatory pricing may drive them out

Descriptors
Level 3 8 - 10 Convincing 2-sided argument with theoretical framework and thorough citation of
evidence from case
Level 2 5 -7
Two-sided argument with theoretical framework and some applications

Note: Max of 7 m framework very strong but with limited evidence
Level 1 1 - 4 One-sided or two-sided argument with no application or no theoretical framework

E2 Good conclusion with justification
E1 Conclusion with minimal justification