Standard microeconomic theory suggests that the behaviour of mineral extraction and processing firms with respect to their demand for water can be modelled and a market demand for water subsequently derived. Such a model, although an abstraction of the real world, should be able to predict the responsiveness of quantity of water demanded to change in price, and, change in demand to a range of factors including: expectations about reliability of supply, changed commodity prices for mineral production, and change in water technology and storage at mine site. This paper demonstrates that the price of water is particularly responsive to changes in demand and that although price increases would result in some additional supplies, physical constraints on supply suggest that the industry will be paying considerably higher prices for water in the future. It is recommended that the mining industry undertakes quantification of possible price increases to position itself to minimise the impact on their operating costs as well as to make responsible capital investment decisions to facilitate future expansion or commissioning of new mines. Substantial investment is required to commission a new mining venture with expected rates of return subject to risk and uncertainty due to fluctuations in world commodity markets as well as reliability of secure supplies of inputs. If a reliable supply of water was subject to uncertainty and water was a critical input for production, then the initial mine design would typically consider a range of production decisions contingent on levels of uncertainty with respect to water supply. These states or sets of water supply, will affect production decisions and future water demand. Modelling production decisions contingent on different states of nature, termed the state-contingent approach, provides a number of insights about producer behaviour under uncertainty. This paper investigates the assumptions underlying the derivation of the market demand for water by the mineral resource industry and identifies the drivers of demand and the responsiveness of the industry to change in price and supply, particularly in relation to capital investment in water-use technologies. The usefulness of these models to the mining industry is considered by reference to the increasing demand for water by the industry in Queensland, in a climate of water shortages._x000D_
FORMAL CITATION:Robinson, J and Keddie, A, 2006. Modelling demand for water in the mineral extraction and processing industry - how useful is the theory? in Proceedings Water in Mining 2006, pp 127-130 (The Australasian Institute of Mining and Metallurgy: Melbourne).