Difficulties in the forecasting of iron ore price: a review

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

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. If the latter approach dominates, it also allows for a more stable iron ore price, for example, 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: iron ore; price forecast; government policies; cartelization
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q31 - Demand and Supply ; Prices; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q38 - Government Policy

References

Ali S.H., Giurco D., Arndt N., Nickless E., Brown G., Demetriades A., Durrheim R., Enriquez M.A., Kinnaird J., Littleboy A., Meinert L.D., Oberhänsli R., Salem J., Schodde R., Schneider G., Vidal O., Yakovleva N. (2017) Mineral Supply for Sustainable Development Requires Resource Governance. Nature, 543, 367–372.

Bazhanov A.V. (2015) Inefficiency and Sustainability. Resources Policy, 45, 210–216.

Bazhanov A.V. (2008) Sustainable Growth in a Resource-Based Economy: the Extraction-Saving Relationship. MPRA Paper No. 23299.

Berry G., Cooper S. (2011) Metal Magnifier: Suspicious Mind. Barclays Capital Equity Research, 24 Aug., 1-65.

Brooks L. (2011) Long-term Outlook for Iron Ore. In: CRU Presentation for EU Iron ore Conference, 10 Oct.

Bussitil M. (2011) West Africa: The New Iron Ore Province. J.P.Morgan Australia Equity Research, 09 Dec., 1–85.

Cashin P., McDermott C., Scott A. (1999) Booms and Slumps in World Commodity Prices. IMF Working Paper WP/99/155, International Monetary Fund.

Chimni B. (1987) International Commodity Agreements: a Legal Study. London; New York: Croom Helm.

Dasgupta P., Heal G. (1974) The Optimal Depletion of Exhaustible Resources. The Review of Economic Studies, 41, 3–28.

Dasgupta P., Heal G. (1979) Economic Theory and Exhaustible Resources. Cambridge: Cambridge University Press.

De Angele R.R. (2011) Iron Ore: Fundamentals in Favour of Suppliers, Raising Price Forecasts across the Curve. J.P. Morgan Latin America Equity Research, 1–13.

Desta M. (2010) OPEC Production Management Practices under WTO Law and the Antitrust Law of Non-OPEC Countries, Journal of Energy & Natural Resources Law, 28(4), 439–463.

Gaudet G. (2007) Natural Resource Economics under the Rule of Hotelling. Canadian Journal of Economics, 40(4), 1033–1059.

Hamilton J. (2009) Causes and Consequences of the Oil Shock of 2007-08. Brookings Papers on Economic Activity, Economic Studies Program. Brookings Institution, 40(1), 215–283.

Hardin G. (1968) The Tragedy of the Commons. Science, 162(13), 1243–1248.

Hart R., Spiro D. (2011) The Elephant in Hotelling’s Room. Energy Policy, 39, 7834–7838.

Hotelling H. (1931) The Economics of Exhaustible Resources, Journal of Political Economy, 39, 137–175.

Humphreys, M., Sachs, J., Stiglitz, J. (Eds.) (2007) Escaping the Resource Curse. Columbia University Press.

Jones A. (1986) Prospects for an Iron Ore Cartel. Resources Policy, 12, 103–115.

Kilian L. (2009) Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review, 99(3), 1053–1069.

Krautkraemer J. (1998) Nonrenewable Resource Scarcity. Journal of Economic Literature, 36(4), 2065–2107.

Malanichev A. (2015) Contemplation of Global Steel Industry Future Using Scenario Approach. Mineral Economics, 28, 53–63.

Manthy R. (1978) Natural Resource Commodities – A Century of Statistics. Johns Hopkins Univ. Press, Baltimore.

Newbery D., Stiglitz J. (1981) The Theory of Commodity Price Stabilization: a Study in the Economics of Risk. Oxford: Clarendon Press; New York: Oxford University Press.

Potter N., Christy F.T. (1962) Trends in Natural Resource Commodities: Statistics of Prices, Output, Consumption, Foreign Trade, and Employment in the U.S., 1870-1973. Johns Hopkins Univ. Press, Baltimore.

Pustov A. et al. (2013) Long-Term Iron Ore Price Modeling: Marginal Costs vs. Incentive Price. Resources Policy, 38, 558–567.

Radetzki, M., Wårell, L. (2017) A Handbook of Primary Commodities in the Global Economy. Second ed. Cambridge University Press, Cambridge, UK.

Ramsey F. (1928) A Mathematical Theory of Saving. The Economic Journal, 38(152), 543–559.

Sen B., Ercan T., Tatari O. (2017) Does a battery-electric truck make a difference? – Life cycle emissions, costs, and externality analysis of alternative fuel-powered Class 8 heavy-duty trucks in the United States. Journal of Cleaner Production, 141, 110–121.

Slade M. (1982) Trends in Natural-Resource Commodity Prices: An Analysis of the Time Domain. Journal of Environmental Economics and Management, 9, 122–137.

Smith J. (2009) World Oil: Market or Mayhem? Journal of Economic Perspectives, 23(3), 145–164.

Solow R. (1974) The Economics of Resources or the Resources of Economics. The American Economic Review, 64(2), 1–14.

Tilton J.E., Crowson P.C.F., DeYoung J.H., Eggert R.G., Ericsson M., Guzmán J.I., Humphreys D., Lagos G., Maxwell P., Radetzki M., Singer D.A., Wellmer F.W. (2018) Public policy and future mineral supplies. Resources Policy, 57, 55–60.

Tonks A., Blanch F. (2011) Iron Ore: Prices Up, Volume Down. Merrill Lynch Bulk Strategist 07, Jun., 3–6.

Wårell L. (2014) The Effect of a Change in Pricing Regime on Iron Ore Prices. Resources Policy, 41, 16–22.

Wårell L. (2018) An Analysis of Iron Ore Prices During the Latest Commodity Boom. Mineral Economics, 31, 203–216.

WCED (1987) Our Common Future. London: Oxford University Press.

Worstall T. (2016) Now OPEC Faces the Problem of All Economic Cartels: Enforcement. Forbes / Opinion/ Economy. https://www.forbes.com/sites/timworstall/2016/12/01/now-opec-faces-the-problem-of-all-economic-cartels-enforcement/#4c0c4f648bee (Accessed 12 July 2018).

Wu J., Yang J., Ma L., Li Z., Shen X. (2016) A system analysis of the development strategy of iron ore in China. Resources Policy, 48, 32–40.

Yergin, D. (1991) The Prize: The Epic Quest for Oil, Money, and Power. Simon & Schuster.

Zhang W., Lawell C. (2017) Market Power in Nonrenewable Resource Markets: An Empirical Dynamic Model. Land Economics, 93, 74–86.