NJC H2 ECONS P1 QP

This document consists of 7 printed pages and 1 blank page. NATIONAL JUNIOR COLLEGE Economics Department [Turn Over © NJC 2017 ECONOMICS 9757/01 Paper 1 28 August 2017 2 hours 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name and subject class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use an HB pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, glue or correction fluid. DO NOT WRITE IN ANY OF THE MARGINS. Answer all questions. Start each question on a new piece of paper . Start parts (e) and (f) for Question 1 on a new piece of paper. Start parts (d) and (e) for Question 2 on a new piece of paper. Fill in the necessary information on the cover pages. At the end of the examination, fasten all your work securely with the cover pages given. The number of marks is given in brackets [ ] at the end of each question or part question. NATIONAL JUNIOR COLLEGE SH2 Preliminary Examinations for General Certificate of Education Advanced Level Higher 2

© NJC 2017 9757/01/A/S/17 2 Answer all questions. Question 1 Challenges and Outlook of the Copper Market Extract 1: Miners face challenge tapping copper opportunities Both Rio Tinto and BHP Billiton, two of the world’s top ten copper producers, believe the copper market is oversupplied now but will tighten from 20 18, with growing deficits. Demand for copper is expected to be steady, given that it has a wide ran ge of applications such as electrical wiring and pipes, and is forecast to be widely needed as China shifts towards more consumer-led growth. But the complexity and expense of mining projects m eans the larger miners may not be in a position to generate a quick acceleration of copper output. Rio took a step forward in December to build Resolution, a US copper mine expected to be one of the world’s largest. Rio owns 55% of the project, with BHP owning 45%. Yet obtaining all the permits for Resolution could easily take Rio another five to seven years. Because receiving approval for mines is so laboriou s, Rio and others have walked away from some projects, even if the copper resources involve d are substantial. Since 2013 Rio and Anglo American, another major mining company, have both given up on Pebble, a huge copper deposit in Alaska that is controversial for its potential effect on fisheries, for example. Another challenge for miners is the expense involve d in building mines. Glencore, another major copper miner, sold its Las Bambas project in 2014 t o MMG, a subsidiary of China's Minmetals, for about $7 billion. MMG said in October that the rema ining 25% of construction would cost between $2.7billion and $3.2 billion. BHP, which owns Olym pic Dam, an Australian mine, abandoned an expansion plan in 2012 because of the likely cost. Source: Adapted from: The Financial Times , James Wilson, 6 January 2015 Extract 2: The outlook for copper The price of copper has fallen steadily in recent y ears. The sharp slowdown in industrial activity in China is disastrous for copper producers, since China consumes 45% of their output. Its attempt to shift from an investment-led economy to a consumer- led one has raised fears of a structural decline in the amount of copper it will need. One recent disappointment has been the delay in the roll-out of electricity infrastructure in inland Chinese cities. Analysts at BHP say such infrastruc ture accounts for the biggest share of copper consumption in China. Yet a crackdown on corruption at state-run energy companies slowed the grid-laying projects during the first half of the y ear. What is more, China is increasingly using aluminium for its thick power-distribution cables, rather than copper – a cheaper option, even if aluminium is a poorer conductor and is more prone to corrosion. Yet the outlook for China is not all pessimistic. As incomes increase, the “intensity” of copper use is likely to grow. Nascent industries such as wind and solar power and electric vehicles, all of which are copper-intensive, may also boost future demand. Before then, supply must fall to balance the market . Some estimate that the industry will still churn out about 500,000 tonnes of excess copper this year . The oversupply will get worse: it takes several years to build a mine, so firms which had invested heavily in copper mines during the boom years now find their mines starting to come into operation. As a result big new increments of supply have hit the market in the past year or two, just a t the wrong time. Glencore, one of the five largest mining companies in the world, announced last month that it would close mines in the Democratic

© NJC 2017 9757/01/A/S/17 [Turn Over 3 Republic of Congo and Zambia, cutting supply by abo ut 400,000 tonnes over 18 months – some 2% of the world’s annual output. Besides Glencore, it is reported that other mines producing a further 170,000 tonnes a year have been idled so far this year. But only the most expensive supplies are being remo ved from the market. Many firms are instead slashing costs to keep production going. The indust ry’s fragmentation makes it unlikely that producers will agree to rein in output. Investment bank, Goldman Sachs, notes that the top five copper producers have about 35% of the market. Whil e some firms are trying to cut output to reduce costs and stem the price slide, other firms are expanding their output to increase market share. In some cases, it is cheaper over the long run to keep mines running at a loss for a while, to maintain security and retain staff, rather than to close them down. Within a few years, however, many analysts expect n atural constraints to put a floor under prices. The quality of ore in copper mines decreased during the boom. Water shortages make copper more expensive to extract. Mine depletion in Chile and Peru has driven companies towards new deposits laced with arsenic that require costly cle aning. And workers and environmentalists increasingly raise their voices against lousy pay and deteriorating environmental conditions. Higher costs make it less likely copper production will in crease, which should eventually help stabilise the market. Chinese demand may also be supplemented by growth in other emerging markets, such as India, which currently consumes just 2% of the world’s copper. Source: Adapted from: The Economist , 1 Oct 2015 Extract 3: Fed move adds to pressure on commodities Prices of most commodities fell after the US Federa l Reserve’s decision to raise interest rates compounded their long term woes. Low interest rates had helped stoke the commodities boom as companies tapped cheap money to vastly expand produ ction. Now commodities markets are suffering, with the interest rate hike adding to a multitude of industry-specific problems - a toxic combination of oversupply and weak demand from a slowing Chinese economy. The biggest immediate effect of the Federal Reserve ’s decision to raise interest rates came through the strengthening US dollar. That makes int ernationally traded commodities from oil to copper, which are priced in US dollars, more expens ive for holders of other currencies. But down the road, analysts foresee more pain from rising ra tes as companies struggle with increased financing costs and emerging market demand takes an other hit. Investors fear that the Fed's rate increase might further sap demand from once insatia ble emerging economies, such as India and China. Investors have already withdrawn a net $500 billion from emerging markets in 2015, the first annual outflow in decades, compounding falls in their currencies as capital leaves their shores and make commodities more expensive. Source: