Iron ore spot price volatility and change in forward pricing mechanism

To examine the impact of the change in forward pricing mechanism on the volatility of iron ore spot prices, we model the iron ore daily price of Platts IODEX from October 7, 2008 to September 21, 2012. The identified iron ore spot price tends to be less volatile after the introduction of quarterly pricing mechanism. Our main approaches are as follows: (i) to decompose the spot price of Platts IODEX into two subsamples and relate the result of the structural break to the date of the switch in the iron ore forward pricing mechanism; (ii) to apply the EGARCH (1, 1) model to simultaneously capture the long memory and the asymmetric effect on the volatility of the iron ore spot price; and (iii) to delineate the news impact curve to further interpret the asymmetric effect.     

Chinese resource security policies and the restructuring of the Asia-Pacific iron ore market

This paper reviews the restructuring of the Asia-Pacific iron ore market in the wake of the rise of the Chinese steel industry. Prior to the 2000s, this market was characterised by two key features—high firm-level concentration on both the producer and consumer sides, and price determination through annually negotiated benchmark pricing between Australian mining and Japanese steel firms. However, owing to rapid growth in the Chinese steel industry and its emergence as the region's principal iron ore consumer, the Asia-Pacific iron ore market has been dramatically restructured during the last decade. This process has been accelerated since 2005 by Chinese governmental resource security policies, which have sought to address current record high iron ore prices through the use of foreign investment to sponsor new market entrants and the formation of an import cartel amongst the Chinese steel firms. This paper evaluates how these policies have driven restructuring in the Asia-Pacific iron ore market, through an analysis of the growth of China's steel industry, Chinese resource security policies aimed at lowering iron ore import costs, and their effects upon the regional market's ownership structure and price determination mechanisms. It argues that while Chinese investment and cartelisation policies have catalysed significant changes to the ownership and pricing structures of the Asia-Pacific iron ore market, they have carried only mixed benefits for the Chinese steel industry's resource security.     

An assessment of time series methods in metal price forecasting

The international price for metals is pivotal in the profitability equation for mining companies. If producer prices rise, assuming production levels and costs remain the same, profits are expected to increase. Accordingly, producers welcome any means by which price instability and unpredictability can be reduced. The paper analyses the ability of two user-friendly time series forecasting techniques to predict future lead and zinc prices. The conclusion is that price forecasting is difficult. It should, however, be acknowledged that whilst neither of the two models are definitive, they are useful for the mining company vis-à-vis its planning process. In particular, the results from the analysis in this paper suggest that ARIMA modelling provides marginally better forecast results than lagged forward price modelling. The methodologies employed in this paper have a broad based application to base metal forecasting by mining companies in general, that is, the applications are transferable.     

Estimating the volatility of mining projects considering price and operating cost uncertainties

In the real option pricing model of valuation and decision making, the estimation of future volatility is a key input parameter. For traded commodities or financial assets, past volatility is used as a proxy for predictions. But, for projects, this approach is not feasible because, in most cases, historical data of traded projects are not available. As an alternate solution, it is usually assumed that project volatility is equal to that of commodity price. In order to investigate this assumption, we estimate the project volatility considering that both commodity price and operating cost evolve as a geometric Brownian motion (GBM). Results of a hypothetical gold mining project indicate that project volatility is higher than that of commodity price and it only drops to price volatility under very unrealistic industry conditions, such as very high prices or very low production costs. In addition, we find that project volatility is independent of production capacity and taxation, but depends on increments in price and cost, as well as strongly on their degree of correlation.     

Mixed signals: market incentives, recycling, and the price spike of 1995

Environmental economics assumes that reliance on price signals, adjusted for externalities, normally leads to efficient solutions to environmental problems. We explore a limiting case, when market volatility created ‘mixed signals’: prices of waste paper and other recycled materials were suddenly extremely high in 1994–1995, then plummeted back to traditional low levels in 1996. These rapid reversals resulted in substantial economic and political costs. A review of academic and business literature suggests six possible explanations for abrupt price spikes. An econometric analysis of the prices of wood pulp and waste paper shows that factor which explained price changes in 1983–1993 contribute very little to understanding the subsequent price spike. From the econometric analysis and from other sources, we conclude that speculation must have played a major role in the price spike, perhaps in combination with modest effects from changes in government policy and in export demand. If speculatively driven price spikes can disrupt an environmentally important industry such as recycling, what is the appropriate role for public policy? When price volatility is sufficiently disruptive, then measures to control or stabilize prices, rather than interfering with the market, might help to make it more efficient.     

An overview of global gold market and gold price forecasting

The global gold market has recently attracted a lot of attention and the price of gold is relatively higher than its historical trend. For mining companies to mitigate risk and uncertainty in gold price fluctuations, make hedging, future investment and evaluation decisions, depend on forecasting future price trends. The first section of this paper reviews the world gold market and the historical trend of gold prices from January 1968 to December 2008. This is followed by an investigation into the relationship between gold price and other key influencing variables, such as oil price and global inflation over the last 40 years. The second section applies a modified econometric version of the long-term trend reverting jump and dip diffusion model for forecasting natural-resource commodity prices. This method addresses the deficiencies of previous models, such as jumps and dips as parameters and unit root test for long-term trends. The model proposes that historical data of mineral commodities have three terms to demonstrate fluctuation of prices: a long-term trend reversion component, a diffusion component and a jump or dip component. The model calculates each term individually to estimate future prices of mineral commodities. The study validates the model and estimates the gold price for the next 10 years, based on monthly historical data of nominal gold price.     

Influence of production costs and inventories on mineral prices

The purpose of this article is to broaden understanding of the factors which exert major influences on prices for industrial metals beyond the widely recognized tendency for prices and inventories to move in opposite directions. Specifically, the relationship between inventory levels and price volatility is examined. In addition, the relationship between prices and production costs is also examined. A few thoughts are expressed on the relationship between prices and industry structure. The paper includes a qualitative discussion about why a link should exist between prices and production costs, a graph illustrating the relationship between prices and inventories, and econometric equations quantifying the relationship between prices, production costs and inventories.     

From exogenous to endogenous development in Scottish forestry: the feasibility of small-scale wood energy enterprise

This paper presents a change in the Scottish forestry policy from the exogenous to the endogenous development approach, and feasibility of heat entrepreneurship based on locally produced woodfuels in the Highlands of Scotland. The cost structure and heat pricing in the case of an 800 kW solid fuel boiler is presented, and the profitability of local heat entrepreneurship is analysed with scenarios of different investment costs and fuel prices. The results indicate that a district heating (DH) system, using locally produced woodchips, could produce heat at a lower price than single-house heating systems using light fuel oil. The profitability of replacing existing heating units by investing in a new district heating (DH) scheme is very dependent on the available investment support, price level of woodchips and substituted light fuel oil, and the amount of sold energy. In the case of an 800 kW DH scheme, and woodchip prices of 14 and 22 €/MWh, investments should remain under break-even points of 280 and 420 €/kW of heating power (230,000–335,000€).     

Duration and characteristics of metal price cycles

This paper addresses the fluctuations in real metal prices: are they simply random variations or do they display some degree of cyclicality? This study identifies peaks and troughs in the inflation adjusted prices for 14 metals, using monthly average data from January 1947 through December 2007. Duration dependence testing, which is performed on the expansions, contractions, and full cycles, finds many cases in which the duration of these phases are not purely random and have some degree of cyclicality. Additional characterization show that contractions generally persist longer than expansions (in contrast to macroeconomic cycles) that long-term real prices have been trendless, and that the amplitude of price changes over the phases has little regularity. For those performing this type of analysis, the appendices explain the procedures for dating turning points and assessing duration dependence.     

The impact of commodity price risk management on the profits of a company

It is well recognized that for the producing companies hedging the commodity price using financial products like forwards or futures has become an important part of the company's production process. But apart from the direct impacts of hedging on the production and hedging costs the use of financial products affects the financing of the company: hedging the volatile commodity prices leads to a reduction of the risk premium the company has to pay for its debt capital, since hedging contributes to more confidence of the investors in the redemption of the debt. In this paper we therefore analyze this dependency of hedging and financing and derive optimal hedging extents for companies in different market situations based on a long-term model. By hedging the commodity price, companies can realize a surplus in profits. Thereby, the optimal hedging extent for a monopolist is often up to 100%, whereas for companies in a polypolistic market the optimum is always less than 100%. These results are illustrated by examples for a producing company.     

Seaborne iron ore trade in the 1990s

This paper discusses how world steel production and seaborne iron ore trade have grown since 1950. The role of steel production forecasts in determining investment in the iron ore industry is examined. Forecasts for world steel production and the demand and supply of seaborne iron ore in the 1990s are presented. It is predicted that world steel production will increase by 64 million tons between 1991 and 2000. This increase will be located principally in the developing countries and China. The corresponding increase in seaborne iron ore trade will be approximately 55 million tons. Expansion projects will be located mainly in Australia and Brazil, but no greenfield iron ore projects will be undertaken. By the end of the decade, the demand for seaborne iron ore will be equal to its supply.     

Long-term trends in the Real real prices of primary commodities: Inflation bias and the Prebisch-Singer hypothesis

Following the Boskin et al., (1996) report, it became widely recognized that price indexes in the U.S. and elsewhere overstate inflation. Svedberg and Tilton (2006) highlighted that this inflation bias may have important implications for estimated long-term trends in nonrenewable resource prices. ST construct an inflation-bias corrected CPI (and PPI) for the U.S. and use their corrected deflator(s) to define a so-called ‘real real’ price of copper. Their ‘real real’ price of copper is then used to re-estimate long-term trends in real copper prices. This paper proposes a quick method for obtaining inflation-bias-corrected estimates of long-run trends in real primary commodity prices directly from estimates in the published literature. Our approach obviates the need re-do existing empirical studies using a corrected or ‘real real’ price of nonrenewable resources. The two approaches are mathematically equivalent.     

Evaluating coal bed methane investment in China based on a real options model

In this paper, a real options based binominal lattices model for the investment of coal bed methane (CBM) is conducted. CBM prices and market demand are incorporated into the model as the predominant uncertain factors and it is solved by using the bidimensional binominal lattices approach. Then the model is employed to evaluate the investment in CBM projects in China, and the effect of related policies is analyzed. The empirical results demonstrate that the model can be used to offer a better explanation of why the CBM industry has developed slowly in China from an investment perspective. It is found that the current policy environment is not positive enough to attract investment in the CBM industry. Among various factors, CBM prices yield the most significant effect on stimulating investment in CBM development. Increasing the price subsidy is also an effective policy to stimulate investment and promote the development of the CBM industry in China.     

VALUING IRRIGATION WATER IN PUNJAB PROVINCE,PAKISTAN: A LINEAR PROGRAMMING APPROACH1

ABSTRACT: Linear programming models of a representative farm in a district of Pakistan's Punjab Province are formulated for the purpose of estimating the value of irrigation water. The models provide for choices among several irrigation levels for each potential crop. Solutions of the model for several water supply situations provide the basis for approximating the total, average, and marginal values of irrigation water. Prices for important crops in Pakistan are controlled at levels below their levels elsewhere in the world, so models are specified for both financial (domestic price) and economic (world price) scenarios. The value of water to society (its economic value) is high relative to the costs of some generally available water-augmenting investments, while financial values, which measure water management and allocation incentives faced by farmers, are less than the corresponding economic values. At current water supply levels, incremental returns to added water estimated from the economic model would justify investments in water-saving or water-augmenting technologies, while such a decision would be barely attractive assuming financial prices. While present government commodity price policies may serve to protect low-income and non-farm members of the population, they also inhibit farmer investments to increase the productivity of scarce irrigation water.     

Canadian manufacturing: The impacts of natural resource price increases on input demands and costs

The separate effects of 50% increases in the prices of energy, renewable and nonrenewable natural resource inputs on factor demands and production costs are simulated for Canadian total manufacturing and six two-digit industries. Both renewable and nonrenewable natural resource price increases have a substantially greater effect upon the demands for other factors and upon production costs than a parallel energy price increase. These results are important from a policy perspective and justify the further disaggregation of inputs in this and in other models of input demand.     

Mitigation paths for Chinese iron and steel industry to tackle global climate change

Based on a recognition of the essence of climate change and the pressure on China to reduce its greenhouse gas (GHG) emissions, this paper interprets the important role that the Chinese iron and steel industry may play in managing emissions. Through an investigation of the key sources of GHG emissions in the Chinese iron and steel industry, a comparison of the current Chinese and international situations, and a survey of the technology and methods available for reducing GHG emissions, and their application in China, the authors analyze the major issues currently faced by the Chinese iron and steel industry, and propose the following four approaches through which the industry might reduce its GHG emissions: (1) encouragement of clean development mechanism (CDM) projects, mainly involving secondary energy reuse, to provide capital and technology for GHG reduction activities in China; (2) stimulation of the social responsibility-based voluntary carbon market (VCM) to increase the long-term benefits for the Chinese iron and steel industry from emission reductions; (3) undertaking of strict energy auditing to help enterprises establish appropriate emission reduction targets and formulate reasonable plans; (4) promotion of emission reduction-oriented investment within the industry to obtain profits from project operation, while at the same time gaining extra compensation for emission reductions. More specifically, the design of each of these approaches should take into consideration the related economic factors and incentive mechanisms.     

The effect of the price of gold on its production: a time-series analysis

Production of gold in Australia has grown strongly in recent years. Australia is ranked the world's third largest gold producer, only South Africa and the US produce more than Australia. Most of the Australian gold production comes from one of its states, Western Australia. In this paper, we use recent developments in econometric time series analysis to present an analysis of gold production and prices during the period 1948–1994. The results show that if the price of gold (relative to costs) increases by 10% and the price (in levels) remain the same for the next 5 years, then in the first year gold production will rise by 0.3%; in the second year by 2.2%; in the third year by 7.4%; in the fourth year by 8.9% and in the fifth year by 10.7%.     

Price prospects in Western Europe for internationally traded fossil fuels until 2000

A methodology for the long-term assessment of prices is designed and applied to the international markets for coal, oil and natural gas and likely price developments between 1990 and 2000 are explored. The coal market will remain competitive, and the long-term price will be determined by the total cost of marginal supply. The oil price will be set, even in the long term, substantially above the competitive level, by those who control the exceptional Middle East resource base. The traditional link between gas and oil prices will erode in the 1990s, and gas will be independently and competively priced by the turn of the century. Resource constraints are not expected to push prices upwards within the time horizon of the study. The relative price of gas will fall over the forecast period, and its market share will increase as a consequence.     

Measurement of market power for the environmentally regulated Korean iron and steel manufacturing industry

For industries in which where market prices of certain inputs are not available, measuring the degree of market power by using the markup over the marginal market cost may be inappropriate. With regard to the Korean iron and steel manufacturing industry, which is subject to environmental regulations, the calculation of the price of abatement capital is hindered by a lack of relevant data. To increase the reliability of market power markups, this paper estimates the restricted cost function in which abatement capital is assumed to be quasi-fixed at an optimal level and the supply relation. The degree of market power for the industry, measured as the ratio of the estimated market power markup to the supply price, was estimated to be 0.54 on average between 1982 and 2001. The results indicate that ignoring environmental regulations can overstate the degree of market power by approximately 12%.     

Iron Ore Industry Emissions as a Potential Ecological Risk Factor for Tropical Coastal Vegetation

In the coastal zone of the Espírito Santo state, Brazil, fragments of restinga, which form a natural ecosystem, share their space with an increasing number of iron ore industries. The iron ore dust and SO(2) originating from the industry processing activities can interfere with the vegetation of the adjacent ecosystems at various levels. This study was undertaken in order to evaluate the effects of industry emissions on representative members of the restinga flora, by measuring physiological and phenological parameters. Foliar samples of Ipomoea pes caprae, Canavalia rosea, Sophora tomentosa, and Schinus terebinthifolius were collected at three increasing distances from an ore industry (1.0, 5.0, and 15.0 km), and were assessed for their dust deposition, chlorophyll, and Fe content. Phenological monitoring was focused on the formation of shoots, flowers, and fruits and was also performed throughout the course of a year. The results showed that the edaphic characteristics and the mineral constitutions of the plants were affected by industry emissions. In addition, the chlorophyll content of the four species increased with proximity to the industry. Phenological data revealed that the reproductive effort, as measured by fruit production, was affected by emissions and S. tomentosa was the most affected species. The use of an integrative approach that combines biochemical and ecological data indicates that the restinga flora is under stress due to industry emissions, which on a long-term basis may put the ecosystem at risk.