Saurav Mittal MIB

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Iron ores are rocks and minerals from which metallic iron can be economically extracted. 98% Iron Ore is used to manufacture Steel. Prices of Iron Ore have been very volatile China is the highest producer of Iron Ore. Most of Chinas Iron Ore is domestically consumed China is the largest Importer of Iron Ore, thus making it the highest Consumer of Iron Ore. Chinas consumption of Iron Ore has a huge effect on the Prices of Iron Ore.

India and Australia have the highest Iron Ore Reserves(Content Of Iron) Australia & Brazil dominate the Iron Ore Exports The world's largest producer of iron ore is the Brazilian mining corporation Vale, followed by Anglo-Australian companies BHP Billiton and Rio Tinto Group

April 2010 marked the end of the 40-year global benchmarking system for the sale of iron ore under an annual contract The first contract price negotiated with major iron-ore suppliers and buyers for the year would be used by all future contracts between steel mills and suppliers in the same year. .   Initially Iron Ore Prices were set on Contractual Basis.

If Spot Prices rise then the prices of the next quarter is likely to rise.   . leading suppliers to consider changing the system to shorter contracts based more closely on market prices.5%. Prices peaked in mid February just short of $200 a tonne and have since slipped 2.  The quarterly contracts which last year replaced the 40-year-old benchmark system of annual negotiations are linked to the spot market. Increasing steel production in China has driven up demand for iron ore.

.Iron ore prices have been rising steadily since the middle of 2010 and have passed the level reached in April 2010 which caused last year's steel price rise.

      Demand of Steel Production of Pig Iron Legal Regulations Chinese Demand Price V/S Inflation Resource & Reserve Analysis .

00% 0.000 400.00% -5.00% 15.00% 10.000 0 1993 2009 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 World Steel Production YOY Growth The latest World Steel Association's short term forecast for world steel use anticipates a rise in steel use by 10.000 20.000 600.000. The Steel Industry over the past 20 years has grown by an average of 5%.400.00% -10.7 % in 2011.00% 5.00% 1.000 200.00% -15.000 1. 2010 .000 800.000 1.World Steel Scenario 1.200.600.



8 The price again rose Increased by 15% Post 2010 The price reached record level of 200 Expected to increase by 10% Future Prices Expected to increase by 5% .Year Price Trend Observed The Price was relatively stable. 2009 80 The market corrected due to excess iron ore Decreased by further 8% 2010 145. World Iron Ore World Steel Output Scenario Scenario Production was almost equal to consumption Production was almost equal to consumption Production exceeded consumption Production exceeded consumption Production exceeded consumption Production will exceed consumption Production will exceed consumption Increasing at an average of 8%. 2008 156 The price rose further Decreased by 2% Chinas steel output rose by a meagre 5% China increased its imports by 41% and raised its world import share to 70% from 58% in 2008 Chinas stocking created pressure on the world market. Chinas stocking is still creating pressure.0 Increased by 10% YOY China was not stocking. Chinas Behaviour Chinas was not stocking and Chinas average share in World import was 27%. Countries did not see the need to stock The price suddenly rose. 2000-2006 60 2007 123.

 As per the analysis three major factors affect the price of Iron Ore ◦ Depleting Reserves( Supply Constraints) ◦ Chinas Imports ( Demand Constraints) ◦ Inflation .

3. which means there is a variation of plus minus $9 in the price.04% of the variation in Price. The Standard Error was 9. .The R Square came out to be 99.04. which means these factors explain 99.

19 Inflation + .146 Years of adjusted reserves... .  Y (Price of Iron Ore) = Mining Cost + 7.19 China Imports .19 China Imports . Hence.19 Inflation + .146 Years of adjusted reserves. Constant should be the mining cost Of Iron Ore.Y (Price of Iron Ore) = 7.


..19 China Imports . The coefficient . The respective coefficient of the factors explains the effect it will have on the Price of Iron Ore with one unit change in the factor. The model explains 99% of the variation in Price.  Y (Price of Iron Ore) =Mining Cost + 7.146 Years of adjusted reserves.19 of China imports means that the Price of Iron Ore will increase by $.19 Inflation + .19/ton if China imports increase by 1 million tonne.

    The World Inflation data was taken from The World Bank Database. For example If China increased its imports in the year 2008 then its effect would be seen on the prices of 2009. . The lag effect means that the Chinese import created a pressure on international prices. This was done keeping in mind that if all the other factors are zero then the Price of Iron Ore should be the mining cost of Iron Ore. The Years of Reserves was adjusted to 62% Fe Content. The constant was deliberately taken to be zero and later the constant was assumed to be the mining cost. Geological Survey. The reserves data was taken from U. It was observed that the Chinese imports had a lag effect on the Prices on Iron Ore.S. Mineral Commodity Summaries Chinas imports have been taken from the Steel Statistical Yearbook 2010.

.     The model has been derived using the past price trends. The weighted effect of factors may change in the course of time. Though great care of the accuracy of data has been taken. hence the day to day effect can vary. The annual effect of the factors on the Price of Iron Ore has been considered. Effect of Abnormal circumstances has been ignored. the data used might vary depending on sources.

with coal mined commercially in over 50 countries and used in over 70. .   Coal is a combustible black or brownishblack sedimentary rock normally occurring in rock strata in layers or veins called coal beds or coal seams. Coal is a global industry. Coal is used for the generation of 41% of the total world electricity generation and this proportion shall continue over the next 30 year.

  China is the largest produce and consumer of coal Australia is the largest exporter of Coal.6% a year. Over the last twenty years: ◦ seaborne trade in steam coal has increased on average by about 7% each year ◦ Seaborne coking coal trade has increased by 1. .

Coal Peat Lignite Coal/Brown Coal (17%) Sub-Bituminous(30%) Hard Coal/ Bituminous Coal (52%) Anthracite Coal(1%) Primarily used in power generation Used in Power Generation and Cement Manufacture Metallurgical/Coking Coal Thermal /Steam Coal Industrial and Domestic Uses Used in Steel Production Used in Power Generation .

paper manufacturers. Chemicals Other Uses Refined Coal .Type Of Coal Steam Coal/Thermal Coal Coking Coal/Metallurgical Coal Specific Uses Power Generation Steel Production Alumina refineries. chemical & Pharmaceutical Industries.


Coal futures are also traded on Chicago Mercantile Exchange. which offers European and South African coal contracts. . runs the world’s most liquid coal derivative market. which has acquired NYMEX. Intercontinental Exchange (ICE).


975.5% of the variation in Price.The R square came out to be . which means that the analysis explains 97. .

   Y (Price of Thermal Coal) = 1.14 Price of Crude + Coal Mining Cost .14 Price of Crude The constant in the equation was deliberately taken to be zero. Y (Price of Thermal Coal) = 1. The Constant will be the mining cost.


14% ash.   The Price of Crude was taken from IMF website and the description is Crude Oil (Petroleum). Dated Brent. simple average of three spot prices. less than 1% sulphur. West Texas Intermediate. The Price of Coal was taken as Coal. and the Dubai Fateh. 12000-btu/pound. FOB Newcastle/Port Kembla. US$ per Barrel. An important factor the cost of transportation has been ignored as the actual prices of coal was excluding the freight. . US$ per metric ton. Australian Thermal Coal.

hence the day to day effect can vary. the data used might vary depending on sources. The annual effect of the factors on the Price of Iron Ore has been considered. Though great care of the accuracy of data has been taken. Effect of Abnormal circumstances has been ignored. .     The model has been derived using the past price trends. The weighted effect of factors may change in the course of time.


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