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8/3/2019 A Price Forecasting Model of Iron Ore And
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Saurav Mittal
MIB
8/3/2019 A Price Forecasting Model of Iron Ore And
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Iron ores are rocks and minerals from whichmetallic 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.
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India and Australia have the highest Iron OreReserves(Content Of Iron)
Australia & Brazil dominate the Iron OreExports
The world's largest producer of iron ore is theBrazilian mining corporation Vale, followed byAnglo-Australian companies BHP Billiton and
Rio Tinto Group
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Initially Iron Ore Prices were set onContractual Basis.
April 2010 marked the end of the 40-yearglobal benchmarking system for the sale ofiron ore under an annual contract
The first contract price negotiated with majoriron-ore suppliers and buyers for the year
would be used by all future contracts betweensteel mills and suppliers in the same year.
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The quarterly contracts which last year replacedthe 40-year-old benchmark system of annualnegotiations are linked to the spot market.
If Spot Prices rise then the prices of the nextquarter is likely to rise.
Prices peaked in mid February just short of $200a tonne and have since slipped 2.5%.
Increasing steel production in China has drivenup demand for iron ore, leading suppliers toconsider changing the system to shortercontracts based more closely on market prices.
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Iron ore prices have been rising steadily since themiddle of 2010 and have passed the level reachedin April 2010 which caused last year's steel pricerise.
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Demand of Steel Production of Pig Iron Legal Regulations Chinese Demand Price V/S Inflation Resource & Reserve Analysis
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-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
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1999
2000
2001
2002
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2008
2009
2010
World Steel Scenario
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 10.7 % in 2011. The Steel Industry over the
past 20 years has grown by an average of 5%.
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Year Price Trend Observed World Iron OreScenario
World Steel Output
Scenario Chinas Behaviour
2000-2006 60The Price was
relatively stable.
Countries did not see
the need to stock
Production was
almost equal to
consumptionIncreasing at an
average of 8%.Chinas was not stocking and
Chinas average share in
World import was 27%.
2007 123.0 The price suddenlyrose.
Production was
almost equal to
consumptionIncreased by 10%
YOY China was not stocking.
2008 156 The price rose furtherProduction
exceeded
consumptionDecreased by 2% Chinas steel output rose by a
meagre 5%
2009 80 The market correcteddue to excess iron ore
Production
exceeded
consumptionDecreased by further
8%China increased its imports
by 41% and raised its world
import share to 70% from
58% in 20082010 145.8 The price again rose
Production
exceeded
consumptionIncreased by 15% Chinas stocking created
pressure on the world market.Post 2010 The price reached
record level of 200Production will
exceed
consumptionExpected to increase
by 10%Chinas stocking is still
creating pressure.Future
Prices
Production will
exceed
consumptionExpected to increase
by 5%
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As per the analysis three major factors affectthe price of Iron Ore Depleting Reserves( Supply Constraints)
Chinas Imports ( Demand Constraints)
Inflation
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The R Square came out to be 99.04, which means these factors explain 99.04%
of the variation in Price. The Standard Error was 9.3, which means there is a
variation of plus minus $9 in the price.
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Y (Price of Iron Ore) = 7.19 Inflation + .19China Imports - .146 Years of adjustedreserves.Constant should be the mining cost
Of Iron Ore. Hence,
Y (Price of Iron Ore) = Mining Cost + 7.19Inflation + .19 China Imports - .146 Years ofadjusted reserves.
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Y (Price of Iron Ore) =Mining Cost + 7.19Inflation + .19 China Imports - .146 Years ofadjusted reserves. The model explains 99% of the variation in
Price. The respective coefficient of the factorsexplains the effect it will have on the Price ofIron Ore with one unitchange in the factor.The coefficient .19 of China imports means
that the Price of Iron Ore will increase by$.19/ton if China imports increase by 1million tonne.
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The World Inflation data was taken from The World Bank Database. The constant was deliberately taken to be zero and later the constant
was assumed to be the mining cost. This was done keeping in mind thatif all the other factors are zero then the Price of Iron Ore should be themining cost of Iron Ore.
The Years of Reserves was adjusted to 62% Fe Content. The reserves
data was taken from U.S. Geological Survey, Mineral CommoditySummaries
Chinas imports have been taken from the Steel Statistical Yearbook2010. It was observed that the Chinese imports had a lag effect on thePrices on Iron Ore. The lag effect means that the Chinese import createda pressure on international prices. For example If China increased its
imports in the year 2008 then its effect would be seen on the prices of2009.
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The model has been derived using the past pricetrends.
The weighted effect of factors may change in thecourse of time.
Though great care of the accuracy of data hasbeen taken, the data used might vary dependingon sources.
The annual effect of the factors on the Price ofIron Ore has been considered; hence the day to
day effect can vary. Effect of Abnormal circumstances has been
ignored.
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Coal is a combustible black or brownish-black sedimentary rock normally occurringin rock strata in layers or veins called coalbeds or coal seams.
Coal is a global industry, with coal minedcommercially in over 50 countries and usedin over 70.
Coal is used for the generation of 41% of the
total world electricity generation and thisproportion shall continue over the next 30year.
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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 1.6% a
year. China is the largest produce and consumer
of coal
Australia is the largest exporter of Coal.
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Coal
PeatLignite Coal/Brown
Coal (17%)
Primarily used in
power generation
Sub-Bituminous(30%)
Used in Power
Generation and
Cement Manufacture
Hard Coal/
Bituminous Coal(52%)
Metallurgical/Coking
Coal
Used in Steel
Production
Thermal /Steam Coal
Used in Power
Generation
Anthracite Coal(1%)
Industrial and
Domestic Uses
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Type Of Coal Specific UsesSteam Coal/Thermal Coal Power Generation
Coking Coal/Metallurgical Coal Steel ProductionOther Uses Alumina refineries, paper manufacturers,
chemical & Pharmaceutical Industries.Refined Coal Chemicals
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IntercontinentalExchange (ICE),which offersEuropean and SouthAfrican coal
contracts, runs theworlds most liquidcoal derivativemarket. Coal futuresare also traded on
Chicago MercantileExchange, which hasacquired NYMEX.
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FLUCTUATION IN OIL PRICES
TRANSPORTATION COSTS
A DEMAND AND SUPPLY VARIATION OF
INDUSTRIES WHICH USE COAL IN ITS
PRODUCTION PROCESS
GOVERNMENT REGULATIONS
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Y (Price of Thermal Coal) = 1.14 Price ofCrude The constant in the equation was deliberately
taken to be zero. The Constant will be themining cost.
Y (Price of Thermal Coal) = 1.14 Price ofCrude + Coal Mining Cost
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The Price of Crude was taken from IMF websiteand the description is Crude Oil (Petroleum),simple average of three spot prices; Dated Brent,West Texas Intermediate, and the Dubai Fateh,US$ per Barrel.
An important factor the cost of transportationhas been ignored as the actual prices of coal wasexcluding the freight.
The Price of Coal was taken as Coal, Australian
Thermal Coal, 12000-btu/pound, less than 1%sulphur, 14% ash, FOB Newcastle/Port Kembla,US$ per metric ton.
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The model has been derived using the past pricetrends.
The weighted effect of factors may change in thecourse of time.
Though great care of the accuracy of data hasbeen taken, the data used might vary dependingon sources.
The annual effect of the factors on the Price ofIron Ore has been considered; hence the day to
day effect can vary. Effect of Abnormal circumstances has been
ignored.
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