GLOBAL IRON ORE INDUSTRY

1. ABSTRACT METHODS & DATA RESULTS – OLS, 2SLS, 3SLS This paper utilizes instrumental variables and joint estimation to construct efficiently identified estimates of supply and demand equations for the world iron ore market under the assumption of perfect competition With annual data spanning 1960-2010, I found an upward sloping supply curve and a downward sloping demand curve. Both of the supply and demand curves are efficiently identified using a 3SLS model. The instruments chosen are strong and credible. Point estimation of the long-run price elasticities of supply and demand are 0.45 and -0.24 respectively, indicating inelastic supply and demand market dynamics Back-tests and forecasts were done with Monte Carlo simulations. The results indicate that 1) the predicted prices are consistent with the historical prices, 2) world GDP growth rate is the determining factor in the forecasting of iron ore prices Supply and Demand Structural Equations Demand: ln (QtD) = β0 + β1 ln(Pt)+ β2 ln (Pt-1) +β3 ln (Scrap Pricet) + β4 Demand Shockt + β5 ln (GDPt) + μ Supply: ln (QtS ) = γ0 + γ1 ln (Pt) + γ2 ln (Pt-1) + γ3 ln (Interest Ratet) + γ4 Timet + γ5 Supply Shockt + ν Market Clearing: QtD = QtS Instruments Selection Identifying Supply and Demand Elasticities of Iron OreAuthor: Zhirui Zhu, Faculty Advisor: Professor Gale A Boyd Fig 3 World iron ore price and production, U.S. scrap price, world GDP, China iron ore imports and U.S. real interest rate plots (1962 – 20010) GLOBAL IRON ORE INDUSTRY The current iron ore trade market is dominated by the Big Three - Vale, Rio Tinto and BHP Billiton. Three companies control about 70% of the seaborne market in 2010 In 1970’s, European steelmakers determined the market demand with the Japanese buyers taking over in the 80’s and 90’s. In the 2000’s, Chinese steelmakers started to play a dominant role in the buyer’s market Since post-World War II, iron ore prices had been decided behind closed doors in negotiations between mining companies and steelmakers In 2004, Chinese steelmakers obtained the right to negotiate the ironstone benchmark price for the first time. However the benchmark price was mainly settled between the Big Three and the Japanese steelmakers. Meanwhile, the global ore import price from 2004 to 2008 had increased 18%, 71%, 20%, 9% and 96% respectively The iron ore annual pricing system officially ended in 2010 and moved to a spot market system RESULTS - BACK TESTING (1962-2010) Fig 4 Iron ore price and predicted prices, quantities and predicted quantities (1962-2010) RESULTS – FORECASTS (2011-2020) Fig 1 Iron Ore Pricing Diagram Fig 2 Iron Ore Imports by Country CONCLUSTION Covariates Sensitivity Tests Fig 5 Covariates sensitivity tests (1962-2010) 3SLS yields efficient and consistent coefficient estimators The annual model indicates that the long-run iron ore supply curve appears to be upward sloping while the long-run demand curve for iron ore appears to be downward sloping The simulation results indicate that the annual model captures most of the historical price fluctuations