7.5 Economic Modeling and Market Forecasting

The mineral industries have a continuing need for market forecasting and analysis for a variety of purposes, among which are organization and control of the sales effort, financial and corporate planning, and evaluation of the anticipated revenue from investment in proposed projects. For anything beyond the simplest extrapolation, some kind of economic reasoning or analysis is called for, which may or may not be incorporated into a formal or quantitative model. The principles described here apply to most of the commercially significant minerals and metals. The examples are drawn largely from the copper market, as it is the one with which I have the most practical experience. Practical forecasting is the process of analysis and synthesis from three categories of knowledge: facts and statistics, theory, and practical knowledge and informed opinion. Although many attempts have been made to build forecasts on only one of these three pillars, none has been successful as an operating procedure because of the lack of balance. There are no facts about the future-only about the present and the past. Facts can illuminate the future, but the future can be described only in terms of probability or more or less likely states of affairs-not as a continuous extension of the past and present. Likewise, theory, although useful as an organizing discipline and for providing a methodology of analysis, is inadequate for the complexities of reality. This is especially so when there is feedback between plans and forecasts to produce a new outcome and when there are significant elements of unpredictable free will, such as presidential jawboning or foreign policy considerations. Such elements are difficult to accommodate in neat theories, although they must certainly be reflected in the forecasts. Pure opinion frequently suffers from both a lack of-disciplined reasoning and the presence of biases or self-interest. While the future is unknown, it tends to cast its shadow before it; hence, forecasting is the art and science of positioning oneself so that the shadow becomes visible to the forecaster.