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Difficulties in the forecasting of iron ore price: a review

Bazhanov, Andrei (2018): Difficulties in the forecasting of iron ore price: a review.

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Abstract

The interest in the analysis of the iron ore market significantly increased after a sharp spike in the iron ore price in 2008-2010 and consecutive decline. Understanding of the reasons for these shifts are crucial for further development of the industry because a high price motivates investments in developing new mines but a long lead time for new projects and high price volatility make these investments very risky. The analysis of the studies of the iron ore market shows that the short-run behavior of iron ore price is highly dependent on oil price and variations in supply and demand, and is very difficult to predict. There are strong chances that the iron ore price will remain highly volatile with a low average in the long-run. The dependence on the price of oil and the corresponding volatility can be reduced by a gradual shift of iron ore sellers to non-fossil-fuel transport. This shift can be facilitated by the public policy regulations, offered in Ali et al. (2017) if this approach dominates the "modestly optimistic perspective" offered in Tilton et al. (2018), which relies mostly on market forces in the intergenerational distribution of nonrenewable resources. However, this approach also allows for a more stable iron ore price in the case of cartelization of iron ore sellers. Using the arguments of Jones (1986), fortified by an incentive compatibility mechanism, the current situation in the iron ore market is quite favorable for coordinated actions of iron ore sellers.

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