A Price Forecasting Model of Iron Ore And

8/3/2019 A Price Forecasting Model of Iron Ore And

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Saurav Mittal

MIB


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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

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

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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A Price Forecasting Model of Iron Ore And