An EconometricModel of the Iron Ore Industry TheophilosPnovolos World Bank Staff Comrnodity IVorking Papers WORLD BANK STAFF COMMODITY WORKING PAPERS Number 19 AnEconometricModel ofthe Iron Ore Industry Theophilos Priovolos The World Bank Washington, D.C. The Intcrn.~tionalHank for Keion\truct I<):\ and C)e\.t.lr)p!~~c.:~t r ;!t .'.,'./::' 3 -;\i IP18I-lStrctt S11' Llhsh~nl;tnn,T) C 20-133 L'S .4 r i l l rrst:!s rcsc.r~*c.il \lar\uf,~cturt.dIn the Un1tc.dSt'j!cs of :'in>t~r~ca F~r\t~rr!ltrnk;i'ctliber I i P - C c ~ r ~ ! r ~ ~ ,\l'ork.~ngP3pt,r\ .xC:jot !c>rr~~i~~ik3!~c.~tt~~ns ~ , ! ~ : ! ~ . ~ ! c d :he lj'orld Bank, .~ndarc clrc.~~I,~tc*jto c.r>cour.igcbLi~\cus\~orian,i ~\)rnnlcntanLito conlmunicate the resui~sof thc Bank'%\\.orL q u ~ c kt;o~the d e c-lopn~entc.on~rnunrty.cttat~onand the use of these ~ pJpt2'S 41cxli,i take . \ C C O U ~ ~ a! !hr.rr Frc)\ 151c)naIcharacter. 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The complete backlist r\ of publ~cat~onsshorvn in the annual Ir-fcr of Rtblicnho~rr,which is of value principally IS to libraries and tnst~tutional~urchasersThe latest edition of each is available free of charge from the Publ*:,.~ons Sales un~t.The World Bank. 1818 H Street, N.W., Ll'ashington. D C. 20433. LS A , or from Publications, The World Bank. 66. avenue d'lena, 75 116 Pans, France Theoph~losPriovolos is an economist in the International Commodity Markets Division of thc Iz'orld Bank's International Economics Department. Library of CongressCataloging-in-PublicationData Prlovolos. Theophllos. An econonetric model of the iron ore industry / Theophllos Priovolos. p. cm. -- (World Bank staff comaodity norklng papers, ISSN 0253- 3537 ; no. 19) Btbllography: p. ISBN 0-8213-0970-6 1 . Iron Industry and trade-- Econometric models. 2. Iron ores- -Prices--Ecoroaetrlc models. I. Internatlonal Bank for R e c o n s t r u c t f o n and Development. 11. T ~ t l e . 111. Serles: World Bank staff commodity working paper ; no. 19. HD9510.5.P75 1987 338.2'73--dc19 87-29542 CI? ABSTRACT T h i s p a p e r p r e s e n t s a model of t h e world i r o n o r e i n d u s t r y t h a t u s e s game t h e o r y p r i n c i p l e s t o d e t e r m i n e i r o n o r e p r i c e s . The boundaries o f t h e r a n g e of p r i c e n e g o t i a t i o n s a r e s p e c i f i e d through b i i ~ t e r a lo l i g o p o l i s t i c t h e a r y end a r e f u r t h e r c o n s t r a i n e d s o t h a t t h e n e g o t i a t i n s p a r t i e s a r e n o t put o u t of b u s i n e s s . The v a l i d a t i o n of t h e model ~ r r d i c a r e s t h a t it is s u i t a b l e f o r p o l i c y a n a l y s i s a s w e l l . M u l t i p l i e r a n a l y s i s i s used t o t r a c e t h e c h a n n e l s of t r a n s m i s s i o n o f exogenous shccks i n t h e i r o n o r e markets. The s i m u l a t i o n s show t h a t a n i n c r e a s e i n B r a z i l i a n i r o n o r e c a p a c i t y w i l l r e d u c e i r o n o r e p r i c e s and l e a d t o a r e d i s t r i b u t i o n of market s h a r e s among t h e producers. I n c r e a s e s i n EEC crude s t e e l production and exogenous i n c r e a e e a i n s c r a p p r i c e s o r i n t h e i n f l a t i o n index w i l l tend t o i n c r e a s e i r o n o r e p r i c e s . The s i m u l a t i o n s a l s o i n d i c a t e t h a t d e p r e c i a t i o n of t h e U.S. d o l l a r r e l a t i v e t o European and J a p a n e s e c u r r e n c i s s w i l l have a n e g a t i v e e f f e c t on i r o n o r e p r i c e s i n t h e f i r s t e i g h t y e a r s and a p o s i t i v e e f f e c t i n t h e n e x t too. But t h e o v e r a l l e f f e c t of t h e U.S. d o l l a r d e p r e c i a t i o n is found t o be v e r y s m e l l o v e r a t e n - y e a r p e r i o d . I acknowledge my great i n t e l l e c t u a l debt t o Ron Duncan and my Commodities D i v i s i o n c o l l e a g u e s f o r t h e i r c r i t i c a l l y important c o n t r i b u t i o n s t o t h e paper. I note p a r t i c u l a r l y t h e support of I'. Akiyma, B . J . Choe, X. Gbetibouo, C. G i l b e r t , ti. Imran, D. H i t c h e l l , F. Najmabadi, and J. Strongmen, a s w e l l a s two anonyinous reviewers. The persons, however, who a s s i s t e d me t h e most i n p u t t i n g t o g e t h e r t h i s model a r e T. Dunietz and H. Buchinsky. Also, I acknowledge with many thanks t h e g r e a t support of J. Raulin who proofread, typed and e d i t e d f o r s t y l e t h i s manuscript. Any e r r o r s t h a t remain may suggest t h a t I have not f u l l y taken advantage of t h e suggestions made by t h e people l i s t e d above and t h e r e s p o n s i b i l i t y f o r t h a t remains f u l l y mine. TABLE OF cowmTs ABSTRACT .......................................................... ... 1 1 1 I. INTRODUCTION ...................................................1 11, THE IRON ORE INDUSTRY ..........................................3 ..............m....................6 ./ 11.1 Background and Definitions.. 3 11.2 Production and Apparent Consumption of I r o n Ore 11.3 I n t e r n a t i o n a l Trade ....................................11 a 11.4 P r i c e S t r u c t u r e.................m..................... 11.5 Government Role .......................................1622 .........24 111.1 An Overview of t h e Hain Features of t h e Model ........................................31 111.2 Model Linkagee ..................................3843 I V . 1 I r o n Ore Production ....em.........m................... ..................................*46 IV.2 Apparent Consumption IV.3 Exports and Imports IV.4 P r i c e s ................................................47 HODEL VALIDATION LW XULTIPLIER ANALYSIS ......................56 ......................................56 V 1 . Hodel V a l i d a t i o n ...................................58 .....59 V.2 M u l t i p l i e r Analysis V.3 Sustained I n c r e a s e i n B r a z i l i a n I r o n Ore Capacity V.4 Sustained I n c r e a s e i n EEC-7 Crude S t e e l Production ....61 V.5 Sustained I n c r e a s e i n Scrap P r i c e s ....................63 V .6 Sustained I n c r e a s e i n t h e XUV D e f l a t o r .............,.. 65 V 7 . Sustained Depreciation of t h e US D o l l a r vi c-a-vi s t h e European Currencies and t h e Japanese Yen ..........65 ANNEX I Index of V a r i a b l e s .......................................7 1 ANNEX I1 L i s t of Equations ........................................73 Table 1, world Iron Ore Capacity - 1983 and 1984 . . a . . . . . . . . . ~ . ~ . . . ~ e . . o o . . 5 2 . I r o n Ore Production... . . . . . . . . . . . . ~ ~ ~ . ~ ~ . . . . . ~ . ~ . . . . . ~ . . . . . . . . . . . 7 3. S i n t e r Pines Production Cost5 f o r S e l e c t e d World I r o n Ore S u r f a c e Hines and &posits..,.. . . . . . . . . . . . . . . . . . . . . . . b . . . . . . e . e e . 9 4. Operating, R a i l and Ocean Freight Costs f o r S i n t e r Finer and P e l l e t s . ..............~..e.e...~.....e.....e.~..........e...~O 5 I r o n Ore Apparent Consmption.. .................................12 6. I r o n Ore Export~................~.............~.........~..~~...l4 7 , Uorld Trade of I r o n Ore by Area of O r i g i n , 1984.................20 8. The S t r u c t u r e of t h e I r o n Ore ~0del...............~..~~....~....33 9. E l a s t i c i t i e s of I r o n Ore Supply ...............e.e........e...0..41 10. E l a s t i c i t i e s of Iron Ore Apparent Consuarption. ........e.ee......45 11. Error S t a t i s t i c s f o r Major Variables: H i s t o r i c a l Simulation (197'-84)...........e...e...C....e......e......e..e..57 12. Dynamic M u l t i p l i e r Analysis: A Sustained I n c r e a s e i n B r a z i l i a n I r o n Ore Capacity ~ ~ ~ ~ ~ e e ~ . ~ e ~ . ~ ~ e ~ ~ ~ e 13. Dynamic M u l t i p l i e r Analysis: A Sustained I n c r e a s e i n EEC-7 Crude S t e e l Produ~tion......................~~.~............~...62 14. Dynamic M u l t i p l i e r Analysis: A Sustained I n c r e a s e i n Scrap Prices.. ..............e.........e...............e...............6 4 15. Dynamic M u l t i p l i e r Analysis: .........................................66 A Sustained I n c r e a s e i n t h e WUV I)eflat~r...~........... 16. Dynamic U u l t i p l i e r Analysis: A Sustained 33.3% Depreciation of t h e U.S. D o l l a r vis- a- vis all European Currencies and Yen....67 F i g u r e 1. Flowchart f o r I r o n Ore ~odel....................e..eee.e........32 I. - ImoWCTION Previous e f f o r t s t o model :he i r o n o r e i n d u s t r y were not independent of e f f o r t s t o m d e l t h e s t e e l industry. A review of t h e s e e a r l i e r i r o n o r e and s t e e l s t u d i e s shows t h a t t h e y focused on e s t i m a t i n g t h e demand f o r i r o n o r e . l / I n most c a s e s i r o n o r e p r i c e s were determined exogenously. In a d d i t i o n , e f f e c t i v e c a p a c i t y , production, e x p o r t s , imports and apparent consumption of i r o n o r e by country were not e x p l i c i t l y s p e c i f i e d ; t h e i r i n t e r r e l a t i o n s h i p s were a l s o not modeled. Furthermore, s i m p l i f y i n g g e n e r a l i z a t i o n s regarding t h e c o m p e t i t i v e n e s s of t h e i n d u a t r y were u s u a l l y made. Chapter 11 d e s c r i b e s some o f t h e unique c h a r a c t e r i s t i c s of t h e i r o n o r e i n d u s t r y . I t was o u r o b j e c t i v e t o b u i l d a model t h a t r e f l e c t s most of t h e s e c h a r a c t e r i s t i c s ; a amdel t h a t simultaneously e s t i m a t e s an4 s p e c i f i e s p r i c e s a s w e l l a s volumes and t h a t answers a number of p e r t i n e n t p o l i c y q u e s t i o n s r e g a r d i n g t h e s t a t e of t h e i n d u s t r y today. Examples include: t h e impact of i n c r e a s e s i n i r o n o r e c a p a c i t y i n Brazil on p r i c e s ; t h e impact of changes i n t h e US d o l l a r exchange r a t e vis- a- vis o t h e r c u r r e n c i e s on production, consumption and p r i c e s of i r o n ore; t h e impact of changes i n p r i c e s of u n i t f a c t o r c o s t s on t h e iron o r e production process o r t h e impact of changes i n p r i c e s of s u b s t i t u t e s t o i r o n o r e (such a s s c r a p ) on production, consumption and i r o n o r e p r i c e s e t c . Chapter I11 presents t h e s t r u c t u r e of t h e model. The r e l a t i v e b a r g a i n i n g pover of n e g o t i a t i n g p a r t i e s i s quantified and game theory p r i n c i p l e s a r e used t o model t h e determination of i r o n o r e p r i c e s . Chapter I V - 11 For a review of these models see H. Hashimoto, "A World I r o n and S t e e l Economy Xodel: t h e WISE ~ o d e l "i n World Bank c&dity Models, World Bank S t a f f Comrrodity Working Paper No. 6, June 1981, Washington, D.C. analyzes the specification of most behavioral equations of the model. Chapter V discusses the validation of the model and shows hov well the dynamic simulation path replicates the historical data. In addition, multiplier analysis is used to answer policy questions and to d e t ~ i lthe impact on the iron ore industry of exogenous shocks. 11.1 Background and Definitions I r o n (Fe) i s one of t h e most abundant and most widely d i s t r i b u t e d elements i n t h e world and probably c m g t i t u t e s upwards of 5% of t h e e a r t h ' s weight. I t i s estimated t h a t world resources of i r o n o r e exceed 800 b i l l i o n t o n s of crude o r e , c o n t a i n i n g more than 250 b i l l i o n t o n s of iron. The iron- b e a r i n g minzrals a r e by f a r mostly i r o n s i l i c a t e s . Rarely a r e t h e r e considered "iron ore" because "ore" i n f e r s an iron- bearing substance t h a t is an econo- m i c a l l y v i a b l e m a t e r i a l . The d e r i g n a t i o n "ore" i s dependent on many f a c t o r s such a s l o c a t ion, knowledge of i t s cornposit ion and e x t e n t , technology and * .*' a c c e s s i b i l i t y . The r r c j ~ r forms of i r o n vorltdvide, a s c l a s s i f i e d by t h e i r chemical composition, a r e a s follows: ( a ) Magnetite (Fe304) which i n its pure form c o n t a i n s 72% i r o n ; ( b ) Hematite (Fe203) which when pure c o n t a i n s about 70% i r o n ( h e m a t i t e i s :\e most comnon o r e of i r o n ) ; ( c ) T a c o n i t e c o n t a i n i n g 15-35% i r o n ; ( d ) Limonite, r e f e r r e d t o a s brown hematite, is a hydrous f e r r i c oxide; ( e l S i d e r i t e (PeC03) conraining about 48% iron; ( f ) P y r i t e (FeS*) c o n t a i n i n g 47% i r o n ; and ( g ) P y r r h o t i t e which c o n t a i n s 60% i r o n , I r o n o r e is t h e source of primary i r o n f o r t h e world's s t e e l indus- t r y . I n o r d e r t o produce m e t a l l i c i r o n f o r s t e e l making, it i c necessary t o mine s u i t a b l e iron- bearing minere. - and t r e a t them through a s e r i e ~of pro- c e s s e s . The final process is some form of chemical " reduction" d u r i n g which a "reducing agentu combines with unwanted chemical elements i n the mineral and r e l e a s e s the iron a s a metal. More than 90X of the world's present new supply of metal1 i c i r o n i s produced each year as pig iron, from iron o r e s t h a t a r e smelted i n b l a s t farnaces. Pig iron i s defined as r high- carbon iron made by reduction of iron ore in the blast furnace. i r c n ore as n i n e d in i t s natural s t a t e i s called crude ore. Crude o r e may be r , ~ r c h a n t e b l ewithout processing o r uich minimal processing such a s crushing and screening, in which case i t i s called direct- shipping ore. The f i n a l ore product of a ntining operation, vbether direct- shipping ore o r the product of extensive processing, i s c a l l e d usable ore o r marketable ore. Usable ore includes lump ore, f i n e s , concentrates and agglomerateo. Lump o r e c o n s i s t s of p a r t i c l e s one- quarter inch o r larger. Fines a r e p a r t i c l e s l e s s than one- quarter inch ;n diameter; s i n t e r feed c o n s i s t s mostly of f i c e s l a r g e r than 100 mesh, vh:!e f i n e s smaller than 100 mesh may be classed a s p e l l e t feed. The product:; a f jeneficiation plants a r e called concentrates and a r e c l a s s i f i e d a s coarse (p:us one- quarter inch) o r f i n e (minus one- quarter inch) as indicated above. Fine concentrates o r natural ores a r e agglomerated t o f a c i l i t a t e transportation and smelting; these products a r e called p e l l e t s , s i n t e r , briquets, etc., depending on the agglomerating pror. -s used. 11 According t o the US Bureau of nines' s t a t i s t i c s , vorid i r o n o r e nominal capacity i s estimated t o be close t o 639.6 million metric tons i n i r o n content i n 1984. 11 Of t h i s capacity 171 and 19%a r e considered t o be i n North America and South America, respectively, 32% and 8% a r e considered t o be i n -11 See Bureau of Nines, U.S. Department of t h e I n t e r i o r , "1ron Ore," preprint from B u l l e t i n 675, 1985 edition, Washington, D.C. -21 See Table 1. T a b l e 1: WORLD IRON ORE CAPACITY - 1983 AND 1984 EFFECTIVE CAPACITY /A --------------------m 1983 1984 ---------( m i l l i o n metric t o n s i r o n content)--------- NORTH AMERICA CANADA UNITED STATES SOUTH A!!ER ICA BRAZI L VENEZUELA EUROPE /B FRANCE SWEDEN USSR AFRICA LI BERIA 13.6 SOUTH AFRICA, REP. OF 22.7 ASIA INDIA 30.8 31.7 27.4 27.5 CHINA & OTHER 45 .4 45.4 42.3 /C 43.1 /C WORLD TOTAL 641 -4 639.6 544.5 543.1 /A EFFECTIVE CAE'ACITY I S CALCULATED USIlIC PEAK PRODUCTION RATES. THE EFFEC- TIVE CAPACITY FICLJRES COULD BE INCBEASED SUBSTANTIALLY IF MARKET CONDITIONS WARRANTED. /B INCLUDES CPEs. /C CHINA ONLY. SOURCES: NOMINAL CAPACITY FIGURES: BUBeAU OF *TNi?S, US DEPARTMENT OF INTERIOR; EFFECTIVE CAPACITY FIGURES: LIXpbL3 c;V, INTERNATIONAL ECONOHICS DEPARTXWT. Europe (incl\i:r:t: -Ye C P E s ) and A f r i c a , r e s p e c t i v e l y , and 12% and 13% a r e c o n s i d e r e d t o be - A Asia and Oceania, r e s p e c t i v e l y . A t p r e s e n t , t h e USSR, B r a z i l and A u s t r a l i a account f o r 53% of world nominal c a p a c i t y o r 51% of world e f f e c t i v e c a p a c i t y . The I n t e r n a t i o n a l Iron Ore and S t e e l r n s t i t u t e (IISI) and t h e World Bank i! p r o j e c t t h a t i n t h e next 15 y e a r s , world i r o n o r e c a p a c i t y will expand by aboat 37 m i l l i o n tons i n Fe content. Brazil, China, A ~ s t r a l i a , Canada and I n d i a a r e expected t o i n c r e a s e t h e i r i r o n o r e c a p a c i t y by about 53 m i l l i o n tons. Other producing c o u n t r i e s i n A f r i c a , Europe and North America a r e expected, however, t o have t h e i r c a p a c i t y c u t a s t h e i r high- quality, l o r c o s t r e s e r v e s are depleted. 11.2 production and Apparent C o n r u p t i o n of I r o n Ore Ninety- five percent of a l l i r o n o r e production is consumed by t h e w o r l d ' s steel- making i n d u s t r y . Annual world i r o n o r e production ( i n a c t u a l weight! u s u a l l y exceeds 800 m i l l i o n tons of which about 90% is produced by 12 c o u n t r i e s . Uorld i r o n o r e production i n Fe content was 515 m i l l i o n t o n s i n 1985 ( s e e Table 2). The USSR, the United States, France and Sweden were t h e major i r o n o r e producers i n 1960. The combined production of B r a z i l and A u s t r a l i a accounted f o r only 2.52 of world production i n 1960. Twenty- five y e a r s l a t e r , B r a z i l and A u s t r a l i a accounted f o r c l o s e t o 25% of world productior.. The United S t a t e s , Prance and Sweden have, however, seen t h e i r combined s h a r e of world production f a l l Zrom 42.5% i n 1960 t o 9.9% i n 1985. D i f f e r e n c e s i n production c o s t accounted f o r t h e s e changes i n t h e geographical -11 See Report 814186, P r i c e Prospects f o r Hajor Primary Commodities, The World Bank, I n t e r n a t i o n a l Ec~nomicsDepartment, October 1986. ---------------------------------------------------------------------------------------------------------------------------------------------- .................................. LEVEL (r PROWCTlON ............................... G?WW RATE ------------------------- SHARE OF TOTAL FEFiROUS CONTENT ----------------- COUNTRY 1960 1970 1980 1985 1960-85 /A 1960-69 /A 1970-79 /A 1960 1970 1980 1985 1960 1980 ---------*------------------------------------------------------------------------------------------------------------------------------------ -----------------------------------------------g---------------------------------- CANAOA UNlTED STATES FRANCE S E E N AUSTRAL lA L I E R I A MAURITANIA INDIA BRAZIL CHILE V E N Z NLA PERU SOUTH AFRICA USSR W l N A WORLD 251.91 425.10 540.53 515.72 3.2 5.7 1.9 100.00 100.00 IOOe00 100.00 46-55 58-15 /A ESTIMATED ON 1HE BASIS OF LEAST SQUARES T E N D FITTING. /B 1961-1985. /C 1961-1969. /D I N 1961. /E I N 1978. SOUR(TS: UNCTAD, 1p85 Y f w OF I-lTY STAT, 1986, JULY, GEEEVA, AN> WORLD BAH( ESTIMATES. l o c a t i o n of i r o n o r e mines d u r i n g t h e 1960-85 period. Table 3 shows t h a t i n 1381, o p e r a t i n g c o s t s w e r e s u b s t a n t i a l l y lower i n B r a z i l and A u s t r a l i a t h a n , f o r example, i n L i b e r i a o r t h e United S t a t e s . The World Bank e s t i m a t e s t h a t i n terms of investment c o s t s p e r annual t o n of new c a p a c i t y ( g r o s s o r a c t u a l w e i g h t ) expansion p r o j e c t s can be c o s t e d a s low ab u ~ $ Z O / t o n , whereas r e p l a c e - ment p r o j e c t s have c a p i t a l c o s t s of USS25-75/ton and g r e e n f i e l d p r o j e c t s ~ ~ $ 1 0 0 / t oand above. The l e v e l of i n t e r e s t r a t e s can t h u s g r e a t l y a f f e c t t h e n p r o f i t a b i l i t y of o p e r a t i o n s i n t h e i r o n o r e i n d u s t r y . T o t a l c o s t s v a r y s u b s t a n t i a l l y among c o u n t r i e s . B r a z i l and A u s t r a l i a a r e t h e lowest c o s t producers of s i n t e r f i n e s and p e l l e t s . P e l l e t p l a n t s a r e more c o s t l y t o o p e r a t e t h a n p l a n t s producing s i n t e r f i n e r . P e l l e t i z i n g i e a n e n e r g y - i n t e n s i v e o p e r a t i o n v h i c h is d i r e c t l y r e l a t e d t o t h e t y p e o f o r e b e i n g p r o c e s s e d . The amount of f u e l used h e n t h e o r e is of t h e h e m a t i t e t y p e is 28 l i t e r s l t o n ; when t h e o r e is of t h e m a g n e t i t e t y p e it i r 15 l i t e r s / t o n . T a b l e 4 p r o v i d e s d e t a i l s on r a i 1 and ocean f r e i g h t t r a n s p o r t a t i o n c o s t s . These c o s t s vary enormously between mines and c o u n t r i e s . I n a n t i c i p a t i o n o f h i g h e r i r o n o r e demand and t h e s e a r c h f o r new r e s o u r c e s of high- grade o r e , t h e w o r l d ' s o r e r e s o u r c e s were augmented c o n s i d e r a b l y i n t h e 1960-85 period. Furthermore, t h e development of improved benef i c i a t i n g methods made numeroue l o r g r a d e d e p o s i t s e c o n o m i c a l l y v i a b l e i n s p i t e o f a n abundance o f h i g h e r q u a l i t y o r e . C o n c u r r e n t l y w i t h t h e s e developments two o t h e r important developments p r o f o u n d l y i n f l u e n c e d a t e e l production and demand f o r i r o n o r e . Foremost was t h e r a p i d development of computerized c o n t i n u o u s c a s t i n g t e c h n i q u e s and e l e c t r i c a r c f u r n a c e s ( t h a t may u s e 100% s c r e p ) ; t h e s e t e c h n i q u e s i n c r e a s e t h e o u t p u t o f f i n i s h e d steel from a s p e c i f i c amount of raw steel. The n e t e f f e c t is t h a t less i r o n o r e is now required f o r t h e production Table 3: SIHrER F l a S PRtDJCT ION COSTS FOR SELECTED W L D IR3H WE S W A E MINES lvJD OEPOSITS /A _______________-------------------------------------------------------------------------------------------- ----------- RATING COSTS------------- No. @ -----------1984 A W A L W US$/LT ORE------------- WTRY ~ R T I E S CAPACITY GUS WINE RAI L BEMEF ICI ATION (WT) ( K T ________________-----------------------------------------------------------------------~------------ .------ AFRICA PR000(rRS /B 7 2.2-24.6 63-65 1,lG-3.40 0.25-1 5.76 /C 0.60-2.30 MMVtCWCERS 1'0 12 4 5 - 2 5 56-67 1 -80-3.20 0 .90-3 -00 AUSTRAL lA PROOUCERS HOrPROOUCERS OTHER SOUTH M R l C A PROaKTRS n; ruMTmuxfiS /H UNITED STATES LAKE SG~RIUR HCUKEKS / I 9 8.261.7 63-66 2.00-4.50 0.25-4.80 3.25-5.00 L A C SUPERlORNONPRDOUCZRS /J 12 2.2-28.7 62-65 2.50-4.50 3.50-9.00 O M R NOWWaKERS /K 20 0.7-8.9 42-69 3.50-15.50 2.00-6.75 NAp = NOT APPLICABLE, Y = WIT)+1ELD. LT = LONG TW (EQUAL 1,016 e T R I C TON). PROOWERS INCLtJO W K H T L Y PROOOCING MINES; MWRXWERS INCLUE PAST FWWXftS, E W L M D W EVELOPING EPOSITS. AFRICAN PROOO(=ERS INCLUE ALGERIA, LIBERIA, MALRITANIA, REPUBLIC Of SOUTH AFRICA AN0 SlEWU LEONE. SOUTH AFRICA. AFRICAN -RS INCLUT ALGERIA, -WON, GABON, LIBYA, IVORY COAST, LIBERIA, (XIIIEA AND MAURITANIA, . EURDeEAN PROaKTRS IWME NORYAY, SPAIN AH) SUDEN. =DEN OTHER SOUTH M R l C A N fWMXf6 INCLUE WILE, PERU AM2 VENZUELA. O M R SOUTH N E R I C M -RS INClUOE E N E M L A . LAKE SWERIOR PFZOOOCEB IHCLUl MIHES IN TI MSABI AH) W?@JETrE RANGES. LAKE SUPERIOR NO)(PFMOUCERS IWCLUOE MINES AM3 MPOSITS IN M WSABI, -TI, AM) GOGEBIC RANGES. O n f R MWRUNEFLS INCLWE CALIFOfNIA, MISSOURI, WONTANA, NEVADA, NEW JERSEY, NEW Y W , TEXAS, UTAH AH) YTOMING* W:THEUSBUREAUOf WIHES, 1987, If04OfE AVAlUBlLlTY -W W T ECONOLI'I CWdlRIES: A MINERALS AVAILABILITY APPRAISAL, BY J,L, BOLIS AM J.A. BEKKALA, WAWIW;TW, W. -Table 4: - OPEUTINC, RAIL AND OCEAN FREICHT COSTS FOR SIHTER FINES AND PELLETS _ _ _ _ _ _ _ _ _ _ _--_----.................................................... ---------------------- SIHTER FINES PeLLMS RAIL OCEAN REGION/ OPERATING OPERATING TRAHSPORTATIOt* FREICHT COUNTilY COSTS COSTS OST COST _ _ _ _ _ _ _ _ _ _ ___-- ----.------------------------------------------------------------------- ------ BHAZ I L PRODUCERS CANADA PRODUCERS /B EUROPE PRODUCERS HEX1CO PRODUCERS UNITED STATES LAKE SUPERIOR PRODUCERS 5.25-9.50 6.00-10.60 0.25-4.80 LAKE SUPERIOR WONPRODUCERS 6.00-13.50 7.30-12.90 0.25-4.80 OTHER NONPRODUCERS 5.5-22.25 6.50-14.00 0.25-4.80 / A TO WESTERN EUROPE. /B CANADIAN PRODUCERS INCLUDE MINES PROCESSING ONLY HWATITE ORES. /C TO WESTERN EUROPE. / D SWEDEN. /E FRW NORWAY TO WESTERN EUROPE. SOURCE: THE US BUREAU OF MINES. 1987, IRON ORE AVAILABILITY - XARKET ECONOMY COUKTRJ ES: A HIN~RALS~AVAIU\BILITYJ.L.APPRAISAL, BY BOLIS AND J.A. BI~KKALA, YASHIWCTON, DC. of one t o n of crude s t e e l . About 1.2 t o n s of i r o n o r e i s r e q u i r e d per ton of s t e e l u s i n g t h e s e processes, compared t o 1.6 tons f o r t h e almost economical ly- obsol e t e open h e s r t h furnace systems. Second, there were important changes i n t h e type of s t e e l being consumed and technological improvements i n s t e e l u t i l i z a t i o n . The use of high- s t r e n g t h s t e e l i n t h e automobile i n d u s t r y l e d t o weight savings and s m a l l e r c a r s . The evolvement of new techniques i n b u i l d i n g and c i v i l c o n s t r u c t i o n p e r m i t t e d g r e a t e r use of concrete and h i g h - t e n s i l e s t e e l s . These examples and o t h e r s , such a s t h e use o f s u b s t i t u t e m a t e r i a l a (e.g., aluminum f o r s t e e l i n a u t o m o b i l e s ) , o r improved manufacturing techniques (e.g., i n household d u r a b l e s ) have l e d t o decreased s t e e l u s e and u l t i m a t e l y reduced i r o n o r e demand. P a r t l y a s a r e s u l t t h e growth of i r o n o r e consumption slowed from 5.5% p.a. i n t h e 1960-69 period t o 1.8% p.a. i n t h e 1970-79 period; consumption d e c l i n e d by 1.2% p.a. i n t h e 1980-85 period ( s e e Table 5 ) . The development of t h e s t e e l i n d u s t r y i n Japan, B r a z i l , t h e Republic of Korea and China coincided w i t h t h e d e c l i n e of t h e s t e e l i n d u s t r y i n t h e United S t a t e s and t h e EEC. As a r e s u l t , t h e demand f o r i r o n c r e changed considerably among c o u n t r i e s i n t h e 1960-85 period. The s h a r e of apparent consumption held by t h e United S t a t e r d e c l i n e d from 26% i n 1960 t o 7.3% i n 1985. On t h e o t h e r hand, Japan's s h a r e i n c r e a s e d from 4.12 t o 15.1%. The demand f o r i r o n o r e i n c r e a s e d f a s t e s t i n Japan, Canada, B r a z i l , t h e Republic of Korea, India, South A f r i c a , Mexico, China and Spain. 11.3 International Trade The percentage of wcrld iron ore production traded i n t e r n a t i o n a l l y h a s r o s e from 302 i n 1961 t o 46% i n 1985. I n t e r n a t i o n a l t r a d e volume reached a peak o f about 234 m i l l i o n tons ( i n i r o n c o n t e n t ) i n 1985. Tabla: lROCJ OfE APPAPfNT COIJSWTION (FE CONTENT IN MILLION T W ) ---LEVEL ----------------------- -------- Of APfMNT CONSWTIW .................................. CROYTH RATE SHARE ff TOTAL. F C W S CONTENT -------- *- - - -- - --------------I-------------- CANAOA UNITED STATES G W Y , F.R. FMr(CE BELGIUM-LUX. SWEDEN SPAIN UNITED KINGOOC( JAPAN AUSTRALlA SOUTH M R lCA I W I A ' M I L C(EXIC0 USSR CZECHOSLOVAKI A CHINA /A ESTIMATED ON THE BAS S Of LEAST S W M S TEND FITTING. /B 1961. K 1960-1983. /D 1960-1969, /E ESTIMATED. I n 1985, s i x c o u n t r i e s ~ c c o u n t e d f o r more than 75% of i r o n o r e e x p o r t s . 'rncoe g r w p s , Japan, t h e EEC and t h e United S t a t e s , consumed about 70% of t h e i r o n o r e traded on the international market ( s e e Table 6). The Japanese s t e e l industry i s based on imported o r e because t h e r e are v i r t u a l l y no domestic i r o n o r e r*qources. The Western European s t e e l i n d u s t r y was e s t a b l i s h e d on t h e b a s i s ' domestic ores. Due to the present marginal q u a l i t y of t h e s e o r e s , with grades between 30-40% i r o n , and t h e a s s o c i a t e d increased c o s t s f o r pig-i ron product ion, t h e EEC c o u n t r i e s now import about 80% of t h e i r i r o n o r e requirelrants. There a r e a number of d i s t i n c t d i f f e r e n c e s betveen i n d u s t r i a l and developing c o u n t r i e s w i t h r e s p e c t t o i r o n o r e t r a d e . As an example, i n 1975, developing c o u n t r i e s furnished 952 of t h e i r e x p o r t s t o t h e i n d u s t r i a l c o u n t r i e s . T h i s c o n s t i t u t e d almost SOX of t h e t o t a l import needs of i r o n o r e of t h e i n d u s t r i a l c o u n t r i e s . The developing c o u n t r i e s a r e g e n e r a l l y l o c a t e d f a r t h e r avay from t h e i r markets than a r e t h e i n d u s t r i a l c o u n t r i e s vhich export i r o n o r e , Developing c o u n t r i e s , however, have increased steel production r a p i d l y , a s r e f l e c t e d i n t h e 5.7 p.a. i n c r e a s e i n i r o n o r e consumption during t h e 1970s. In c o n t r a s t , t h e consumption of i r o n o r e i n t h e i n d u s t r i a l c o u n t r i e s decreased a t a n annual r a t e of 0.7% during t h e same period. Long-term c o n t r a c t s cover t h e major p a r t of a l l i r o n o r e t r a n s a c t i o n s between t h e s t e e l m i l l s and t h e i r c a p t i v e mines a s well a s between t h e i r o n o r e producers and s t e e l mills i n general. A t p r e s e n t , t h e Japanese s t e e l i n d u s t r y meets 90% of its import requirements under t h i s t y p e of arrangement, -11 Exports a r e presented i r Table 6 i n terms of i r o n o r e c o n t e n t , Tabla: I f W O ( i E EXWRTS (FE CONTENT IN MILLION TONS) -------------------------------------------------------------------------------------------------------------------..----------..--------------- .................................. LEVEL Of EXPORTS GROWTH RATE ---------------------------- SItARf OF TOTAL fEfWOUS CONTCNT ----me------------------------- --------------f cNwA UNITED STATES FRANa SWEEN AUSTRAL lA SOUTH M RlCA L I E R I A MAURITANIA I W I A BRAZIL CHILE VEFEZlELA USSR fJf*!!u /A ESTIMATED ON THE BASIS OF LEAST SQUARS TRENO FITTING, /B 1965-1983. I C 1965-1069, /O I N 1965, /E 1963-1983. /F 1963-1969. X; IN 1963, SOURCES: W T A D , 1985 1-1 m T Y S m , JULY, 1986, GENEVA, MI M)RLD BAM ESTIMATES, whereas t h e European c o u n t r i e s receive 40% of t h e i r imports under long- tern c o n t r a c t s . The balance r e p r e s e n t s s a l e s on t h e spo: market o r under short-term c o n t r a c t s . The s t e e l producers have e s t a b l i s h e d very c l o s e r e l a t i o n s h i p e w i t h most i r o n o r e mines that began producing in the e a r l y 1969s. Examples include mines i n can ad^ and Western Africa which have p a r t i a l ownership by s t e e l companies, and t h e n i n e s i n A u s t r a l i a vhich v e r e e s t a b l i s h e d under long- term c o n t r a c t s t o Japanese s t e e l m i l l s . These r e l a t i o n s h i p s a s s u r e t h e s t e e l producers of a s t a b l e source and p r i c e f o r t h e i r ore. In t h e l a s t decade, l a r g e consumers have reduced t h e i r supply r i s k f u r t h e r through d i r e c t investment i n a d d i t i o n a l mines and/or long-tern c o n t r a c t s with o t h e r mines, r e s u l t i n g i n a d i v e r s i f i c a t i o n of sources f o r i r o n ore. I n a d d i t i o n , buyers have a s s u r e d themselves of a more- than- adequate supply of i r o n o r e by o f f e r i n g i n c e n t i v e s t o open new mines with long- term c o n t r a c t s o r w i t h p a r t i a l ownership. A l t e r n a t i v e l y , such guaranteed markets a r e necessary f o r t h e mine owners and t h e i r f i n a n c i a l backers t o j u s t i f y t h e l a r g e i n v e s t e n t s needed t o develop t h e mines. I n t h e p a s t , under t h e umbrella of long- term supply c o n t r a c t s , t h e i r o n o r e i n d u s t r y and t r a d e develop along a f a i r l y s t a b l e growth p a s t . However, i n r e c e n t y e a r s , a gradual r e d u c t i o n of t h e s t a b i l i t y provided by t h e s e long- term arrangemeyts has been witnessed. The breach of c o n t r a c t e d b a s i c q u a n t i t y couxnitments has become more t h e norm r a t h e r than t h e i r f u l f i l l m e n t . I n many c a s e s , s t e e l mills have accepted only 60%-70%of b a s i c ~ o n t r a c t u a ltonnages, making t h e usual 10% q u a n t i t y v a r i a t i o n c l a u s e s appear meaningless. This contractual breakdown has increased t h e tendency towards wider quantity margins and s h o r t e r contract durations. Pereistence of t h i s trend, coupled with the apparent l a t i t u d e in approach t o t h e quantity margina, v i l l g r e e t l y diminish t,he value of these contracts and can only r e s u l t i n increased competitiveness in iron ore mining o per at ions and in the shipping industry operations. 1 4 Price Structure Iron ore presently accounts f o r only 10-15% of the cost of a ton of s t e e l even though i t takes about 1.2 tons of iron ore t o produce one ton of steel. The p r i c e of iron o r e does not f l u c t u a t e automatically with the p r i c e of i r o n / s t e e l . The market f o r i r o n ore is essentially a bilateral oligopolimtic market, with r e l a t i v e l y few producers s e l l i n g t h e i r product t o r e l a t i v e l y f e w buyers, On t h e demand s i d e , Japanese and European s t e e l mskers dominate t h e market f o r i r o n ore, and, t o a great extent, control i r o n ore prices. However, individual s t e e l makers normally do not negotiate t h e i r own contracts: most negotiations a r e done through industry- oriented buying organizations. The majority of Japaneae purchases and shipping contracts a r e handled concurrently by t h e buying companies. The Federal Republic of Germany has two cooperating agencies t h a t a r e commissioned with t h e buying and transporting of raw m a t e r i a l s f o r t h e s t e e l industry, I n t h e United Kingdom and I t a l y , purchares of i r o n o r e a r e negotiated horizontally by industry-owned organization^. Because of t h e i r geographic and ownership relationships, Australia is t h e producer leader f o r o r e imports i n t o Japan, and Brazil (previously it was Sweden) i s t h e producer leader f o r i r o n o r e imported i n t o Western Europe. Host i r o n o r e is s o l d on an annual o r multi- year t e r n c o n t r a c t on a tonnage b a s i s , v i t h an gnnual o r s m e t imes semi- annual r e n e g o t i a t i o n of p r i c e s . These annual n e g o t i a t i o n s have a wide impact on t h e i r o n o r e i n d u s t r y; p r i c e s t h a t a r e n e g o t i a t e d y e a r l y by B r a z i l and Australia, the l a r g e s t e x p o r t e r s , a r e construed as t h e benchmark p r i c e s f o r t h e o t h e r a r e exp,, t e r s and consumers during t h e i r n e g o t i a t i o n s . S t e e l mills a r e involved i n t h e development of many i r o n o r e mine8 e i t h e r through v e r t i c a l i n t e g r a t i o n , p a r t i a l ownership, o r through f i n a n c i a l and t e c h n i c a l a s s i s t a n c e . Hany of t h e c o n t r a c t s a r e intercompany t r a n s a c t i o n s ; t r a d i t i o r r a l l y , t h e supply of i r o n o r e t o t h e s t e e l i n d u s t r y i n t h e United S t a t e s and Canada h a s been from c a p t i v e mines. US s t e e l companies c o n t i n u e t o i n v e s t i n o r e production f a c i l i t i e s and d e r i v e up t o 80% of t h e i r requirements through such t r a n s a c t i o n s . The European s t e e l i n d u s t r y h a s s i m i l a r ownership ties with mines i n West Africa and Latin America. Hwever, s e v e r a l of t h e mines i n t h e s e r e g i o n s have been n a t i o n a l i z e d and t h e supply of o r e through t h e s e t i e s h a s been s i g n i f i c a n t l y reduced. I r o n o r e is not a homogenous commodity with r e s p e c t t o contained i r o n , s i z e , cr d e l e t e r i o u s material. Consequently, t h e p r i c e s t r u c t u r e is complex; s a l e s of t h e d i f f e r e n t q u a l i t i e s of o r e s r e q u i r e a v e s t range of p r i c e s t o account f o r t h e s e q u a l i t y d i f f e r e n c e s . The p r i c e f o r i r o n o r e paid t o t h e mine, w i t h t h e exception of d o n e s t i c o r e s , is t h e c a l c u l a t e d FOB p r i c e . However, t h e FOB p r i c e is d e r i v e d from t h e CXP p r i c e which i s t h e p r i c e with which t h e s t e e l producerr a r e i n i t i a l l y concerned. CIF o r C+P p r i c e s f o r f u l l y comparable products tend t o be equal i n a given market. T h i s is because i r o n o r e buyers w i l l g e n e r a l l y n e g o t i a t e c o n t r a c t s s o that p r i c e s f o r i r o n o r e of t h z same q u a l i t y a r e a l l equal on a d e l i v e r e d b a s i s . The FOB p r i c e i s determined by s u b t r a c t i n g t h e e s t i m a t e d ocean f r e i g h t c o s t from t h e CIP p r i c e . The r e s u l t i n g FOB p r i c e is used a s a b a s i s f o r reimbursement t o t h e mine. Diffezences i n CIP p r i c e s between v a r i ~ u si r o n ores d e l i v e r e d t o a p a r t i c u l a r s t e e l m i l l a r e , t h e r e f o r e , due e i t h e r t o d i f f e r e n c e s in q u a l i t y o r type of t h e o r e o r t o d i f f e r e n c e s i n t h e type of c o r ~ t r a c tand d a t e of i t s n e g o t i a t i o n . 6asir.g t h e s a l e p r i c e of i r o n o r e on t h e FOB vblue has made t h e o t c e l mills responsible f o r p ~ y i n gocean f r e i g h t c o s t s and f o r price f l u c t u a t i o n r i n f r e i g h t r a t e s . S t e e l producers p r e f e r t o be r e s p o n s i b l e f o r ocean f r e i g h t c o s t s ; indeed, i t has been d i f f i c u l t f o r i r o n ore producers t o n e g o t i a t e c o n t r a c t s i n which t h e y a r e r e s p o n s i b l e f o r shipping d r r a n g e w n t s . Since ocean f r e i g h t r a t e s have been s t e a d i l y d e c l i n i n g f o r t h e past two decades, t h e a t e e l not t h e i r o n o r e producers, have b e n e f i t t e d ~ r o mreduced r a t e r though some af t h e b e n e f i t must accrue t o t h e exporter?. Although t h e buyers b e n e f i t from t h e r e d u c t i o n i n t r a n s p o r t c o s t s , t h e e x p o r t e r s i n v e s t t h e c a p i t a l f o r t h e p o r t f a c i l i t i e s t h a t have made t h e lower ocean t r a n s p o r t c o s t s p o s s i b l e through a c c o m d a t i n g l a r g e r v e s s e l s . The i n c r e l s e d abundance of i r o n o r e worldwide, over time, has placed t h e producers a t a g r e a t e r disadvantage during p r i c e n e g o t i a t i o n s . The oversupply of i r o n o r e c a p a c i t y i n t h e l a s t decade h a s made t h e market i n c r e a s i n g l y competitive and h a s c o n t r i b u t e d s i g n i f i c a n t l y t o d e c l i n i n g i n t e r n a t i o n a l p r i c e s i n r e a l tercra. I n c r e a s i n g l y s t r i n g e n t c o n d i t i o n s have been imposed upon t h e o r e producers by t h e s t e e l makers. Although steel companies have d i v e r s i f i e d t h e i r markets while a t t h e same time d i v e r s i f y i n g t h e i r i r o n o r e s u p p l i e s , i r o n o r e e x p o r t e r s have not been s u c c e s s f u l i n d i v e r s i f y i n g t h e i r markets ( s e e Table 7 ) . Each of t h e major e x p o r t i n g c o u n t r i e s r e l y mainly on one market, which weakens t h e i r p o s i t i o n with r e s ? e c t t o t h e o t h e r p o t e n t i a l buyers. Examples of t h i s dependency i n e x p o r t s a r e Canada t o t h e United S t a t e s , Sweden Lo Western Europe and A u s t r a l i a t o Japan. The f o r m t i o n of t h e Association of I r o n Ore Exporting Countries (APEF) has o n l y m a r g i c a l l y improved t h e n e g o t i a t i n g posture of t h e i r o n o r e producers. I t has not been very e f f e c t i v e s i n c e both Brazil and Canada have opted not t o j o i n . Although t h e determination of p r i c e s during t h e c o n t r a c t u a l n e g o t i a t i o n s remains r a t h e r complex, some b a s i c rr 'anisms have been e s t a b l i s h e d and i n gerreral a p p l i e d through t h e years. Up t o a few y e a r s ago, t h e annual European i r o n o r e p r i c e n e g o t i a t i o n s n o r m l l y s t a r t e d i n October/Hovember a ~ dended before Christmas. 3/ In some r e c e n t y e a r s t h e n e g o t i a t i o n s have had a tendency t o d r a g on w e l l i n t o t h e new year. I n c a s e s where no p r i c e agreenwrt had been reached before t h e end of t h e d e l i v e r y y e a r , t h e p a r t i e s normally agreed on a p r o v i s i o n a l p r i c e f o r shipments i n t h e new year. I n v i e u of t h e l a r g e o r e q u a n t i t i e s received v i a Rotterdam, it h a s f o r v e r y many y e a r s been t h e p r a c t i c e t o t a k e the CI? Rotterdam price as a r e f e r e n c e p r i c e f o r n e g o t i a t i o n s i n Europe. The p r i c e s f o r i r o n o r e d e l i v e r e d -11 The APEP was formed i n 1975 and c o n s i s t s of Algeria, A u s t r a l i a , C h i l e , I n d i a , L i b e r i a , Hauri t a n i a , Peru: Si errs Leone, Sweden, Trrnisia and Venezuela. The s t a t e d purpose of t h e APEF is t o improve information, marketing cooperation, and t o o b t a i n more s a t i s f a c t o r y p r i c i n g p o l i c i e s f o r i r o n o r e . -21 I n Europe t h e " iron o r e year" is t h e c a l e n d a r year whereas i n Japan i t is t h e f i s c a l y e a r (April 1 t o Harch 31). Tsble 7: VCIRLO T M C6 I K W CRE BY AREA 06 ORIGIN, 1984 ( a i l l l o n tons, a c t u a l w e i g h t ) --------------------------------------lrnTS------------------------------------- O W R XrEiOplrC; IMAJSTRIAL IrOvSTRIAL EASTERN OTHER ~ L ,awTYtES D OOUHTRlES USA JAPM EEC (XXHvRIES EUROeE C U M R I E S EXPWTS _________________-------------------------*----------------------------- - - ------ -- ---- --- - -- --- - - WORLD 338.7 22.4 278.9 7.4 125.4 118.8 17.3 53.9 3.5 DEVELOPIN(; COUNTRIES 57.6 13.0 1 32.3 6.0 55.9 64.4 600 11.8 0.5 BRAZIL CHILE I M l A L18ERIA MAURITANIA PERU V E N M L A O M R S AUSTRAL lA 66.0 8.5 74.5 - M.4 15.6 0.5 - 3a0 CANADA 29 .2 - 2 11.3 3.1 13.5 1.3 - - s - - -- -- EEC 4 05 4 -5 4.5 - SWEEN 14.5 0.5 13.0 0.1 - 10.9 2.O 1.0 O M R S 24.0 0.4 23.3 - 8.0 9.8 5.5 0.3 - EASTERN E U R C E Am USSR 42.9 - 2.1 - - 0.1 2a0 40m - a SOURCE: Tt YORLD E M , I N T E W T I W A L ECXXMICS OEPARMNT, t o small European p o r t s have been determined i n r e l a t i o n t o CIP p r i c e Rotterdam a f t e r t a k i n g i n t o account s e a f r e i g h t and p o r t c o s t d i f f e r e n c e s between Rotterdam and t h e port i n q u e s t i o n . \ Up t o 1974-75 t h e C!F Rotterdam r e f e r e n c e p r i c e was decided i n n e g o t i a t i o n s betvccn t h e Swedish i r o n o r e s e l l e r s and t h e s t e e l m i l l s of t h e F e d e r a l Republic of Germany. I n subsequent years, t h i s r e f e r e n c e p r i c e was n e g o t i a t e d between t h e same s t e e l mills and t h e t r a z i l i a n company CVRD. The p r i c e i s defined i n US$ per Fe u n i t / D M ~ (dry m e t r i c t o n ) . The p r i c e d i f f e r e n t i a l s f o r o r e q u a l i t y d i f f e r e n c e s a r e expressed a9 premia o r d i s c o u n t s on t h e c a l c u l a t e d g e n e r a l FOB p r i c e i n U S ~ / Pu n~i t . A/ I n Japan, p r i c e is defined i n US$ per Fe unit/^^^ ( d r y long ton). 2 1 - In t h z p a s t , Japanese s t e e l m i l l s agreed t o pay f o r " ~ t l a n t i c " Barin o r e s t h e FOB p r i c c v a l i d f o r d e l i v e r y t o European buyers, p l u s t h e f r e i g h t f o r t r a n s p o r t t o Japan. A s t h e expansion o f s t e e l c a p a c i t y slowed down i n Japan, Japanese s t e e l m i l l s f e l t more s e c u r e i n t h e i r s u p p l i e s of i r o n o r e . The p r i c i n g p o l i c y was g r a d u a l l y replaced by a " f r e i g h t sharing" system under which t h e s e l l e r and t h e buyer shared t h e d i f f e r e n c e between t h e f r e i g h t c o s t s t o Europe and Japan on an equal basis. Japanese s t e e l m i l l s now seem t o be i n c l i n e d t o change t h i s " f r e i g h t sharing" system and t o f o l l o w t h e European system with equal CIF p r i c e s f o r t h e v a r i o u s imported i r o n o r e s . In view of t h e oversupply and t h e r e l a t i v e s i m p l i c i t y of r e p l a c i n g one source of supply -1/ I r o n o r e products a r e s o l d on a n " iron u n i t basis." For example, a c o n c e n t r a t e of 66% c o n t a i n r 66 i r o n u n i t s . -21 One long t o n = 1.016 m e t r i c ton. with a n o t h e r , i r o n ore markets have become q u i t e competitive and i n c r e a s i n g l y i r o n o r e i s traded o n a spot b a s i s . . ' 11.5 Government Role I n many of t h e producing c o u n t r i e s , governments f u l l y o r p a r t i a l l y own i r o n ore p l a n t s . B r a z i l , C h i l e , France, India, L i b e r i a , Mauritania, Mexico, Norway, Peru, S i e r r a Leone, South A f r i c a , Sweden and Venezuela a r e some of t h e c o u n t r i c e where t h i s -occurs. I r o n o r e i s a major source of f o r e i g n exchange and an important source of t a x revenue f o r many c o u n t r i e s . In view of t h e perceived economic and s t r a t e g i c importance of t h e i r o n o r e i n d u s t r y through i t s l i n k t o t h e s t e e l i n d u s t r y , governments o f t e n choose t o p r o t e c t and i n t e r v e n e i n its o p e r a t i o n s , p a r t i c u l a r l y i n p e r i o d s of r e s t r u c t u r i n g and change such aa a t present. Governmental i n t e r v e n t i o n s appear i n many forms. f o r example, t h e Swedish i r o n o r e mines, which have teen i n s e r i o u s f i n a n c i a l t r o u b l e f o r a number of y e a r s , a r e being supported by t h e C ~ v e r n m e n t through monetary payouts. Sydvaranger, a Norwegian i r o n o r e company, has been r e c e i v i n g g r a n t s from t h e Government f o r t h e p a s t few years. I n France, most i r o n o r e mines a r e a s s i s t e d by t h e Covernment, based on t h e r a t i o n a l e of e n s u r i n g a supply of feedstock f o r t h e doarestic s t e e l i n d u s t r y and t o provide employment. The Peruvian Covernment, i n t h e l a t t e r p a r t cf 1980, provided e x p o r t t a x r e l i e f on s a l e s by g r a n t i n g exemption from t h e 17.5% e x p o r t t a x . Trade i n i r o n o r e b e n e f i t s from duty- free treatment under two major p r e t e r e n c e systems. F i r s t , t h e r e i s t h e g e n e r a l i z e d system of p r e f e r e n c e s (CSP) which h a s suspended t a r i f f b a r r i e r s f o r imports from developing c o u n t r i e s i n i n d i v i d u a l country p r e f e r e n t i a l schemes. Second, t h e s p e c i a l p r e f e r e n c e s o f f e r e d by t h e EEC t o African, Caribbean and P a c i f i c (ACP) S t a t e s under t h e om& Convention which a c c o r d s d u t y - f r e e t r e a t m e n t t o some primary and i n d u s t r i a l p r c d u c t s i n c l u d i n g i r o n o r e . N o n t a r i f f b a r r i e r s a r e r e l a t i v e l y few and g e n e r a l l y apply t o s t e e l products r a t h e r than i r o n ore. Scch n o n t a r i f f b a r r i e r s i n c l u d e import l i c e n s e s , s u r c h a r g e s , v a l u a t i o n procedures, custorna fees and d e p o s i t s . L/ A t p r e s e n t such i n t e r v e n t inns are s p o r a d i c and l i m i t e d t o v e r y few c o u n t r i e s . -I/ See United Nations, he Iron Ore and Steel industry," ~ ~ / ~ / 6 . 2 / 1 7 6 / ~ e v . l , S a l e s No. E.78.II.D.1, 1978, New York. 111.1 An O v e r v i w of t h e b i n Features of t h e Model For a very long time t h e n e g o t i a t e d p r i c e between r e p r e s e n t a t i v e s of Swedish and 1a t e r B r ~ z i li a n i r o n ore c o m p & ~ i o sand representative^ of a t e e l mills o f Continental Europe (mainly of t h e F e d e r a l Republic of Germany) h a s been c o n s i d e r e d r h e g e n e r a l r e f e r e n c e i r o n o r e p r i c e on t h e b a s i s of which or-her i r o n o r e and steel producers n e g o t i a t e d t h e i r c o n t r a c t s . Over t h e l a s t few y e a r s , however, c o m p e t i t i o n h a s i n c r e a s e d . Consumers and amall p r o d u c e r s have s t a r t e d t o n e g o t i a t e p r i c e s and q u a n t i t i e s b e f o r e t h e c o n c l u s i o n of t h e n e g o t i a t i o n s between t h e r e p r e s e n t a t i v e s of C o n t i n e n t a l Europe and B r a z i l . The aim of consumers i n doing oo i a t o i n f l u e n c e t h e outcome of negotiation11 w i t h B r a z i l , A u s t r a l i a and o t h e r major producers, v h e r e a s t h e aim o f amall p r o d u c e r s is t o l o c k i n t h e i r s h a r e of e x p o r t s e a r l y i n t h e year. I n t h e p a s t , based on t h e p r i n c i p l e o f e q u a l t r e a t a w n t f o r a l l customers, J a p a n e s e s t e e l m i l l s succeeded i n s e c u r i n g agreement on p r i c e changes w i t h B r a z i l i a n and A u s t r a l i a n supp1:ers s i m i l a r t o t h o s e n e g o t i a t e d between C o n t i n e n t a l I!urope and B r a z i l . I n t h e f u t u r e , however, Japanese steel mills a r e expected t o a c t more i n d e p e n d e n t l y w h i l e t a k i n g i n t o c o n s i d e r a t i o n t h e outcome o f n e g o t i a . t i o n r between B r a z i l and C o n t i n e n t a l Europe. We w i l l assume h e r e t h a t f o r a l l p r a c t i c a l purposes t h e g e n e r a l r e f e r e n c e i r o n o r e p r i c e ( t h e CIF North Sea f o r B r a z i l i a n 65% Fe s i n t e r f i n e s ) is being negotiated and s e t between representatives of Brazil and Continental Europe. l-/ T h i s r e f e r e n c e p r i c e i s assumed t o a f f e c t t h e n e g o t i a t i o n s of a l l o t h e r i r o n o r e p r i c e e ( i n a nonhomgenous way). Under t h e s e n e g o t i a t i o n s we assurne t h a t market p a r t i c i p a n t s recognize t h e i r mutual interdependence and r e a c h mutually r a t i s f a c t o r y agreement ( c o n t r a c t ) a s t o t h e r e f e r e n c e p r i c e and t h e q u a n t i t y t h a t Brazil w i l l export t o most EEC c o u n t r i e s (namely, t h e F e d e r a l Republic of Germany, France, United Kingdom, I t a l y , Belgium, Luxembourg and t h e Netherlands). The procers of s e t t i n g p r i c e s and q u a n t i t i e s is r e p a r a t e d i n t o two s t e p s . Thc f i r s t r t e p i s t h e p r e p a r a t i o n f o r t h e n e g o t i a t i o n s by t h e two p a r t i e s . During t h i s r t e p , the i r o n o r e producers and s t e e l mills s p e c i f y t h e i r d e s i r e d p r i c e m d q u a n t i t y l e v e l s and t h e i r n e g o t i a t i n g s t r a t e g i e s independently of each o t h e r . The second s t e p involves t h e bargaining process. I t is assumed t h a t t h e p a r t i c i p a n t s n e g o t i a t e t h e d i s t r i b u t i o n of t h e i r j o i n t p r o f i t s v i t h t h e corrmon o b j e c t i v e of a g r e e i n g on a p r i c e t h a t w i l l n o t put e i t h e r p a r t i c i p a n t out of business. The preparation f o r n e g o t i a t i o n by B r a z i l i a n i r o n o r e producers i n v o l v e s e s t i m a t i n g t h e p r i c e and q u a n t i t y of i r o n o r e t h a t w i l l maximize t h e i r p r o f i t s . The producers know well t h e demand f o r t h e i r products and t h e c o s t i m p l i c a t i o n s of t h e i r operations. To s a t i s f y t h e f i r s t - o r d e r c o n d i t i o n of t h e p r o f i t maximization problem, t h e i r o n ore producers w i l l have t o e q u a t e marginal revenue w i t h marginal c o s t . The s o l u t i o n of t h i s problem (which i s -I/ The l o g i c t h a t a p p l i e s i n t h e determination of iron o r e p r i c e s between Brazil and Continental Europe may be a l s o applied t o other i r o n o r e c o n t r a c t u a l n e g o t i a t i o n s , such a s n e g o t i a t i o n s between B r a z i l and Japan, A u s t r a l i a and Japan, e t c . that of a discriminating monopolist) will provide a price and a quantity for each market that will maximize iron ore ~roducers'profite. The pre-negotiation preparation by Continental Europe's steel mills is assumed to be similar to that of Brazil. It involves estimating the price and qsantity of iron ore that will minimize their cost of production or that will maximize their profits from operating the mills. The steel producers knov well their productioll and cost functions. The first order condition of the profit maximization problem involves equating marginal revenue with respect to iron ore with the marginal cost. The solution of this pr~blem(which is that of a discriminating monopsonist) vill provide a price and quantity of iron ore for each market that maximizes the profits of the steel producers. Both participants in the negotiations know that their desired price and quantity maximize their own profit but not the profit of the otk.zr party. During the negotiations they will apply their bargaining power in order to achieve an outcome (i.e., a set of price and quantity) as favorable au possible to their operations. The participants agree first on the quantity to be traded. Usually the allotment is greater than the actual traded quantity. The agreed quantity is not binding on either party. The existence of a spot market makes the quantities of iron ore competitively determined. Moreover, the competitive determination of the output results from the theory of bilateral amnopoly and the analysis of the collusion and bargaining process of negotiating parties. 11 Under this theory, the participants first negotiate a -11 The analysis here follows that of J. Henderson and R. Quandt, Hicroeconomic Theory, McGraw Hill, New York, 1971, pp 244-249. The same notation is used here as in Henderson and Quandt. q u a n t i t y t h a r maximizer t h e i r j o i n t p r o f i t and they determine a p r i c e that d i s t r i b u t e s t h e i r j o i n t p r o f i t among them. The buyer (i.e., t h e steel producer) uses q2 ( i . e m , i r o n o r e ) .a ur i n p u t t o produce q l ( i . e . , s t e e l ) according t o h i s production f u n c t i o n qi=h(q2). He sells t h e ateel q1 a t the fixed price pl. The s e l l e r (i..., th. i r o n o r e producer) uaes a r i n g l e input x f o r t h e production of q2. Ha buy# 8 a t t h e fixed p r i c e r. Ye asaume that h i s production function can be erpre##.d i n i n v e r s e form as x = 8(q2). The j o i n t p r o f i t of t h e buyer and r e l l e r then would be: h e r e r = j o i n t p r o f i t p r o f i t of buyer ( s t e e l producer) xb = t = p r o f i t of reller ( i r o n o r e producer) 8 a e t t i n g dw/dq2 equal t o z e r o and Joint p r o f i tis vxinized a t an output a t which the value of the buyer's marginal product e q w l r the s e l l e r ' s marginal coat. This i r t h e aamc solution as t3e conpetitive solution, i.e., a8 i f both buyers and r e l l e r s were p r i c e takers. l h u r ue nay conclude t h a t the o p t i a r l bargaining output level i r * the same a s the competitive output level of q 'Ihe bargaining rolution of the 2 ' b i l a t e r a l monopoly d w r not lead, however, t o t h e competitive price. Ar noted e a r l i e r , f o r t h e prescribed iron ore rupply (q2 ) the iron ore producer d e r i r e r a r hi@ r price a8 posrible and the buyar d r r i r e r a r low a price a r porrible. Thua, i f th. upper lidt of the price i r the price that would f o r c e t h e r t e e l producer'r p r o f i t t o u r o and the lover l i m i t is the p r i c e t h a t vould force t b e i r o n ore producer'r p r o f i t t o zero we would have: Since r negative p r o f i t vould force one of t h e partier t o discontinue operationr, t b t p r i c e cannot k s e t beyond t h e r e l i m i t 8 i f t h e operationr of t h e buyer o r t h e rellrr a r e not r u p p o t t d o t k m t i r e . An alternative i r to I assume t h a t t h e r t e e l producer can do no wrrr than t h e monopoly solution, and t h a t t h e i r o n o r e producar can do no worse thoa t h e mnoprony ~ o l u t i o ni.e., solving each i n e q u a l i t y for p2 * -k * If mgg ( ~ r o f i tof the buyer h e n q2 i s uned) and mSg ( p r o f i t of the * seller when q2 i s produced) are positive then ( 3 ) provides a narrovcr range f o r bargaining than ( 2 ) . In e i t h e r case the determination of a s p e c i f i c price within the bargaining l i m i t s w i l l depend upon the r e l a t i v e bargaining p o w r of t h e i r o n o r e supplier and the s t e e l consumer. Wash, Shapley and p a r t i c u l a r l y tlarsanyi 1/ (who generalizes the S b p l e y approach t o an n-person game without t r a n s f e r a b l e u t i l i t y ) derive equilibrium solutions t h a t a r e functions of t h e fixed point (iota,here t h e two ranges), t h e s e t of weights and s t r a t e g i e s and the associated payoffs. A similar approach is used here t o deternine iron o r e p r i c e r within t h e h r g a i n i c g limits (2) o r ( 3 ) and the derived p r i c e s from t h e s o l u t i o n of t h e p r o b l w of diacriminat ing monopolist and of discriminating We allow the two t'pliyera", i.e., the buyer and t h e s e l l e r of iron ..., o r e t o s e l e c t t h e i r r t r a t e g i e s on a p r o b a b i l i s t i c basis and we l e t ri rrn be t h e p r o b a b i l i t i e s with which the r e l l e r w i l l employ each of h i s m . s t r a t e g i e s where 0 5 ri51 (i-1, ..m) and ri = 1. The buyer can randomize ill hi. s t r a t e p y s e l e c t i o n of assigning t h e p r o b a b i l i t i e s sj, ..., s, t o h i s ..ld n s t r a t e g i e s , where 0 5 s 1 1 , a 1. t W player8 a r e j j.1 j then concerned with expected returns. The return t o the s e l l e r w i l l be equal -11 See JOY. Friedman, 1999, Oligopoly and t h e Theory of Games, North Holland, Amsterdam, -21 I t .may k sham that in -st cases (2) o r (3) provide a narrower range than that provided from t h e s o l u t i ~ nof t h e problem of the discriminating monopolist o r monopaoniat. to t h e sum of the p o s s i b l e outcomes where each outcome i s muLtipLied by t h e p r o b a b i l i t y of i t s occbrrence. I f t h e buy r employs h i s j t h s t r a t e g y with a p r o b a b i l i t y of one and the s e l l e r s e l e c t s t h e p r o b a b i l i t i e s r l , ..., r,, t h e s e l l e r ' s expected r e t u r n i s (where a i , i s the s e l l e r ' s return if a i ~i r i s 1 t h e s e l l e r employs h i s ::h s t r a t e g y ~ n dt h e buyer employs his j t h s t r a t e g y ) . The d e c i s i o n problem cf each player is to s e l e c t an optimal a e r cf p r o b a b i l i t i e s . The s e l t e r f e a r s t h a t t h e buyer v i l l discover h i s s t r a t e g y and t h a t t h e buyer w i l l s e l e c t a strategy of h i s own t h a t w i l l maximize h i s expected outcome, i.e., minimize t h e expected r e t u r n of the s e l l e r . The buyer ha8 s i m i l a r f e a r s about t h e s e l l e r . The p r o b a b i l i t i e s vhich t h e two p l a y e r s employ a r e defined as optimal i f and where V is t h e value of t h e t r a d e between t h e s e l l e r and t h e buyer ( i .e., t h e e x p o r t e a r n i n g s of B r a z i l from t r a d e with t h e EEC). The f i r s t r e l a t i o n s t a t e s t h a t t h e seller's expected r e t u r n is a t l e a s t a s g r e a t a s V if t h e buyer employs any of his pure s t r a t e g i e s v i t h a p r o b a b i l i t y of one. The second r e l a t i o n s t a t e s t h e buyer's expected l o s s is a t l e a s t as small as V i f t h e seller employs any of h i s pure s t r a t e g i e s with a p r o b a b i l i t y of one. A fundamental theorem of game theory s t a t e r t h a t a s o l u t i o n always e x i e t s and t h a t V i s unique. -1 1 If both "playerr" s e l e c t t h e i r s t r a t e g i e s on a p r o b a b i l i s t i c basis, t h e s e l l e r ' s expected net r e t u r n El and t h e buyer's expected n e t o u t l a y E2 can be shorn t o be which proves t h a t Regardless of t h e o t h e r " p l a ye r ' s w choice, i f t h e buyer O F t h e u e l l e r employs h i s optimal p r o b a b i l i t i e s , hi:^ expected o u t l a y and r e t u r n w i l l not be l e s s o r g r e a t e r than V , r e s p e c t i v e l y . I n the following c h a p t e r we w i l l uue r e l a t i o n ( 4 ) to estimate f u t u r e expected returns. A number of uitnplifying assumptions r e g a r d i n g t h e intertempor.sl fcrm of t h e two p l a y e r s ' p r o b a b i l i t y d e n s i t i e s and t h e i r i n t e r r e l a t i o n s h i p w i l lmake t h e e s t i m a t i o n of expected r e t u r n s and t h e i r o n o r e r e f e r e n c e p r i c e possible. 111.2 Node1 Linbger Figure 1 and Table 8 present t h e flowchart and t h e s t r u c t u r e o f t h e i r o n o r e model, r e s p e c t i v e l y . The i r o n ore p r i c e ( B r a z i l i a n s i n t e r f i n e s 65% Fe CIF otterd dam) is t h e outcome of bargaining between Brazili&-8 and European r e p r e s e n t a t i v e s . Each p a r t i c i p a n t d e s i r e s d i f f e r e n t p r i c e s (P1 and P2). These -11 See, i n t e r a l i a , J. R o s e m u l l e r , 1981, The Theory of Games and Xarkets, North Holland, AMterdam. Consuape ion C i = f2i(~*i' Pli' eaci Psi, Pni) Prices P1- EH if P1>PJ and P2d Luxeabourg. A l l seven countries increasz t h e i r consump:ion and ~ m p ~ r tof iron ore. The Federal Republic of Germany, b t h e United Kingdom, I t a l y and :he Hethezlanda :ncrease t h e i r consumption by 0.96%, 0.79X, 0.76: and 0.69% p.a., respectively (see Table 13). Belgium and 'Luxembourg izcreasrr t h e i r conswnption by 0.4X, while Prance increases i t s iron ore consumption by a mere 0.012. These d i f f e r e n t ?crcentage'chacges show t h e d i f f e r e n t r e s t r u c t u r i n g plans o! t h e steel i n d * ~ n t r yof each country. Prance and Belgium are expected t o gu a o r e rhe lclectric furnace/scrap-use route r a t h e r than t h e b l a s t iurnscc/iron ore- use rocte. Overa'l, a 1%increase i n EEC crude rteel production i s expected t o increase iron o r e consumption by -- T z b l e 1 3 : - 3iNXYfC HULTIPLIE8 ANALYSIS: A SUSTAINED INCREASE IN EEC- 7 CRUDE STEEL PRODUCTION ( I N z P . A . ) .._____ ______--- ------------------- --------------------------------------------- IRON ORE IRON ORE COU?l'l'ii ':' nPPARENT CONSNIPTION PRODUCTION _ _ _-__-_--_-------- ._ -----------------------..--------------------- ------------- AUSrI'?..4i.! :i i3ZI.G' i C.'.! BRA2 ;I. CXNAlIrl Cfl I !.E CIi I HA FRANCE CEWANY, FED. dE2. CF IKDIA 1TAI.Y JAPAN KOREA, REP. 3F MAURITANIA HEXi CO N E T ~ ~ E R L A G ~ S PERU SOUTH A F R I ' X SPA1t! SWEDEN UNITED KIHCDOY UNITED STATES IRON ORE PRICE REFERENCE PRICE ------------------------------ BRAZIL/COHT. EUROPE -------1.23-----------------.--------------- --- SOURCE: THE WORLD BM'K, 1NTEE.NATIONAL FCONOHICS DZPUR(ENT. l e s s t h a n 1%. I n c r e a s e d i r o n o r e demand c a u s e s i r o n ore p r i c e s :o r i s e . T h e i r o n o r e r e f e r e n c e p r i c e grows by 1.23: p . a . Higher i r o n o r e p r i c e s c a u s e p r o d u c t i o n of i r o n o r e t o i n c r e q s e nrld consumption of i r o n ore t o dc.c!ine. Among t h e p r o d u c e r s , C a n a d a , C h i l t r , S o u t h A!rica and t 2 u s t r a l incrtltist~ t h e i r o u t p u t t h e most ( i . e . , between O.48r and 1.!2:), while P e r u , H ~ b r i t n n i nand B r a z i l i n c r e a s e t h e i r output r e l a t i v e l y t h e l e a s t ( i . e . , between 0.16% and 0.20%). Among t h e consumers, t h e Republic of Korea, t h e United S t a t e s and Japan reduce t h e i r i r o n o r e consurnpt ion t h e most ( i . e . , between - 1.56% and -0.77%) and Canada and China the least (-0.!8X and - 0.20%). V.5 S u s t a i n e d I n c r e a s e i n S c r a p P r i c e s The s c e n a r i o t r a c e s t h e r e s p o n s i v e n e s s of behavior in t h e i r o n o r e model t o changes i n s c r a p p r i c e s . The impact of a 1% s u s t a i n e d i n c r e a s e i n s c r a p p r i c e s on the i r o n o r e markets i s p r e s e n t e d i n Table 14. Higher s c r a p p r i c e s make i r o n o r e p r i c e s more c o m p e t i t i v e i n t h e s t e e l p r o d u c t i o n p r o c e s s i n t h e s h o r t run. As a r e s u l t , i r o n o r e consumption increases i n almost a l l c o u n t r i e s . The i n - r e a s e s i n consumption a r e s m a l l , however- - they range between 0.01% i n Japan and 0.331 i n t h e Netherlands 11. In view of the i n c r e a s e d demand f o r i r o n o r e (see previous s e c t i > n ) , t h e B r a z i l i a n n e g o t i a t i n g p o s i t i o n p r e v a i l s and t h e i r o n o r e r e f e r e n c e p r i c e i n c r e a s e s by 0.35% p.a. Higher i r o n o r e p r i c e s c a u s e i r o n o r e p r o d u c t i o n t o i n c r e a s e , Production i n c r e a s e s v a r y between 0.06X i n B r a z i l and Peru and 0.36X i n Canada. Higher i r o n c r e p r i c e s a l s o c a u s e t h e c o m p e t i t i v e advantage of i r o n o r e p r i c e s vis- a- vis t h a t of s c r a p p r i c e s t o d e c l i n e . T h i s i s t h e reason L-hy t h e m u l t i p l i e r of consumption is r e l a t i v e l y small over a ten- year period. -11 I n t h r e e c o u n t r i e s (Belgium, t h e United S t a t e s and t h e Republic of Korea) consumption i n c r e a s e s a t f i r s t and d e c l i n e s a f t e r some y e h r s . Table 14: DYNAMIC WLTIPLIE?R ANALYSIS: A SUSTAINED INCRFJ.SE I N SCRAP PRICES (IN z P.A.) ___----------- ------------------ ------------------------.------------------- IRON ORE IRON OEE COUNTRY _----------------------------------------------------------------------------- APPARENT CONSWPTION PROtHICTION AUSTRALIA BELGIUM BRA2I L CANADA CHILE CHINA PRANCE CERHANY, FED. REP. OF INDIA ITALY JAPAN KOREA, REP. OF MAURITANIA HEXI CO NETHFALANDS PERU SOUTH AFRICA SUEDP;N UNITED K I N C W UNITED STATES SCRAP PRICE 1.00 IRON ORE REFERENCE 0.35 PRICE BRAZIL/COHT. ELROPE ---------.-.---)-IC-._-----I-.-.-----------------'--UI---- SOURCE: THE WORLD BANK, IReBWrIOWAL ECONOMICS DEPARTUENT. V.6 Sustained Increase i n t h e NUV Deflator Th2 irnpact of a 1Z sustained increase in prices of nuinufactured exports as measured by t h e World Bank's HW d e f l a t o r on the iron ore markets i s presented i n Tab> 15. The increase in the M I V index is not accompanied by s i m i l a r increases i n the CDP d e f l a t o r s of industrial and developing countries. This scenario does not thus show the impact of an increase of world i n f l a t i o n ?n t h e iron ore markets. The HUV d e f l a t o r is ausurned here t o have a d i r e c t impact on the i r o n ore reference price. A 1% increase i n t h e WV d e f l a t o r i r t r a n s l a t e d i n t o 0 . 7 7 X increase in t h e iron ore reference price. Higher iron o r e p r i c e s cause production t o increase and consumption t o dec:Line. The production e f f e c t ranges from 0.03X in the case of India t o 0.72% i n t h e care of Canada. The consumption e f f e c t ranges from -1.47% i n the case of t h e Republic of Korea t o - 0.04% in the case of South Africa. V.7 Sustained Depreciation of t h e US d o l l a r vis- a- vis the European Currencies and the Japanese Yen This scenario focuses on t h e impact of a 33.3% depreciation of t h e US d o l l a r vis-a-vi s t h e currencies of t h e Federal Republic of Germany, France, I t a l y , United Kingdom, the Netherlands, Belgium, Sweden, Spain and Japan on t h e iron o r e markets. The r e s u l t s of t h i s scenario a r e presented i n Table 16. The impact of t h e US d o l l a r depreciation on t h e iron o r e markets is traced f o r t h e f i r s t four years, the following four years and t h e following two ./cars. A/ -11 Dynamic m u l t i p l i e r s that show t h e impact on the i r o n o r e markets of a 1% depreciation i n t h e US d o l l a r may be estimated by dividin& t h e numberr presented i n Table 17 by 33.3. -- Table 15: DYNAHIC W L T I P L I E R ANALYSIS: A SUSTAINED IKCREASE I N THE HW DEFLATOR(IN x P.A.) _____------------_-----------------------------------------------------. --.----- IRON ORE IRON ORE COUNTRY ___-_ -------------------------------------------------------------.--- :fPPA.RENT CONSUMPTION PRODUCTION ----- ---- AUSTRAL1 A BELGIUM BRA2 I L CANADA CHILE CHINA FRANCE GERMANY, FED. REP. O F INDIA ITALY JAPAN KOREA, REP. OF MAURITANIA MEXI co NETHERLANDS PERU SOUTH AFRICA S P A I N SWEDEN UNITED KINCDOH UNITED STATES PRICES HUV 1 . 0 0 IRON ORE REFERENCE PRICE: BRAZIL/CONTIN~BTAL EUROPE 0.77 --------------- ------ -----I--------------------------------------- SOURCE: THE WORLD BANK, INTERNATIONAL ECONOHICS DEPARTMENT. Table 16: DYNAHIC MULTIPLIER ANALYSIS: A SUS'I4-:HEL" ..I3 : $ X C £ 'I; EI:IA'IION OF THE US DOLLAR VIS- A- VIS ALL EUROPFAN C!IRRE;4'(Z!: !; 4YI 'IF,:' (I N Z: P . A . ) _ ____------ -----------------------------------------.---.--.-. _-_ -.--I- *--. ---.---- IRON ORE I R O N (RE COUNTRY APPARENT CONSUWPTION-- :?K21)UC: IUM (YEARS) "(;!+hi 5 AUSTRALIA BELCIUH BRA2 I L CANADA CHILE CHINA PRANCE CERWANY, FED. REP. OF I N D I A ITALY JAPAN KOREA, REP. OF MAURITANIA HEX1CO NETHERLANDS PERU SOUAHAFRICA S P A i N SWEDEN UNITED KINCDOn UNITED STATES PRICE IRON @RE REFERENCE PRICE BRAZIL/ CONT. EUROPE - 1.40 -0.40 5 . 9 7 ------------------------------LI-----------------CI---C---.---L--- ------, SOURCE: THE WORLD BANK, INTERNATIONAL ECONOMICS DEPrUt'IMENT. The depreciation of the US d o l l a r nukes the cost oE ircn ore .ess expensive i n terms of t h e European and Japanese currencies. l s -eslllt, apparent: consumption increases. Growth i n demand f o r iron or ! miike I i?uropean ~ t e e l . mills amenable t o accepting higher iron ore prices. I I view of over- capacity and competition among i ton ore producers t o increa: e t hcti r market share, B r a z i l i a n i r o n ore producers a r e willing t o accept lolrer i r c n clre p r i c e s f o r increased exports. Overall, irorr ore reference prices decline by 1.4% t h e f i r s t f o u r years. Lower iron ore prices cause product:.orn t c decline and consumption t o increase. Some consumer countries find, hcuever, thdt Pcr,ap becornerr l e s s expensive than i r o n ore; they then s t a r t s u b s t i t u t i n g s r r a p f c r iron ore. Aa a r e s u l t , conrumption of iron ore .'.ncreases l e s s i n years 5-8 and much l e e s i n years 9-10. In view of the stance of Brazilian producer5 and the reduced needs of s t e e l mills, t h e European negotiators change thei.. p o s i t i o r ~and a s k f o r reduction8 i n i r o n o r e prices. Iron ore prices a r e agreed t o decline by 0.4% i n years 5-8. Further reductions i n t h e consumption and production of iron o r e cause t h e European and the Brazilian positions t o strengthen. The decline i n production i n the f i r s t eight years a f f e c t s iron ore prwicespositively i n t h e l a s t two )ears of t h e simulation. Higher iron ore ~ r i c e scause output t o i n c r e a s e i n years 9-10. VI. 001JCLUSI~ This paper has presented t h e s t r u c t u r e of a world i r o n o r e model. Theories of p e r f e c t competition and b i l a t e r a l o l i g a ~ o l yand p r i n c i p l e s of game t h e o r y have been used t o determine t h e price formation of i r o n o r e d u r i n g c o n t r a c t u a l n e g o t i a t i o n r . Model v a l i d a t i o n showed t h a t che model i s s u i t e d f o r p o l i c y a n a l y s i s . Mu1 t i p 1 i e r a n a l y s i s traced t h e channels of tranernission of exogenDua shocks i n t h e i r o n o r e markets. This anfllysis showed t h a t an i n c r e a s e i n B r a z i l i a n i r o n o r e c a p a c i t y w i l l reduce i r o n p r i c e r , while an i n c r e a s e i n EEC crude r t e e l production w i l l i n c r e a r e i r o n o r e p r i c e s . Exogenous i n c r e a s e s i n r c r a p prices o r t h e UUV index will a l s o tend t o i n c r e a s e i r o n o r e p r i c e s . The impact of d e p r e c i a t i o n of t h e US d o l l a r vis- a- vis t h e European and J a p r n e r e c u r r e n c i e s is expected t o a f f e c t i r o n o r e p r i c e s n e g a t i v e l y t h e f i r s t e i g h t y e a r s and p o s i t i v e l y t h e next two years. However, t h e o v e r a l l e f f e c t i r expected t o be very s r u l l over a ten- year period. - H )EX OF VARIABLES - '.-.- Prclduct i o n , i r o n o r e metal content of country 6 , t h . m. t orls, UNCTm C a ~ a c i t y ,e f f e c t i v e i r o n ore metal content of country b , th,,m. tons, World Bank Appartrt consumption, i r o n o r e metal content of c o u r t r y 6 , th. rn. t o n s , UNCTAD Ekport u n i t value, i r o n o r e , country &, c u r r e n t d o l l a r s , World Bank Import u n i t value i r o n o r e , country 6 , c u r r e n t d o l l a r s , World Bank Crude s t e e l production, country &, th. m, t o n s , UNCTAD, I I S I OPEC p i t roleum priceJexport u n i t value, c o u n t r y I, r a t i o , World Sank Investment d e f l a t o r * ( d e p r e c i a t i o n r a t e + U.S, t r e a s u r y b i l l 3 months) / (1 - c o r p o r a t e t a x r a t e ) Export mit value, domestic currency, i r o n o r e /CDP o r CNP d e f l a t o r , country &, index, World Bank DPEXWDPI: Export wit value, domestic currency, i r o n ore! CPI, country &, index, World Bank PDHCL: Metal content (production), country &, X , World Bank PKI~EXWDPL: PKl&/ex;lort u n i t value, i r o n o r e , country &, index, World Bank Dumies with 1 i n 1972, 1976, 1971, and 1983, r e s p e c t i v e l y , and 0 elsewhere I n t e r n a t i o n a l i r o n o r e p r i c e / ~ ~ Icountry &, , index, World Sank U t i l i z a t i o n r a t e , country &, i r o n o r e , X , World Bank Import u n i t value, i r o n o r e / G ~ P o r GNP d e f l a t o r , count-ry &, domestic currency, index, World Bank Scrap p r i c e , domestic currency, country 6 , index, World Bank Iron o r e p r i c e , B r a z i l , 65% Pe, North P o r t , CIP, $ / t o n , m u l t i p l i e d by 0.65, World Bank PIO: Iron o r e p r i c e , B r a z i l , 65% Pe, North P o r t , CIP, $ / t o n , World Bank Desired i r o n o r e EEC p r i c e , CIP, $ / t o n , World Bank Logarithm of product of B r a z i l production w i t h PIO, m i l l $, World Bank COUNTRY cODE (s) USA: United S t a t e r USR: USSR DEU: Germany, Federal Republic of FRA: Prance JPN: Japan CBR: United Kingdom NDL: bletherlandr EEL: Belgium AUS: A u a t r r l i a SUE: Sweden ESP: Spain ITA: I t a l y IND: I n d i a BRA: Braz i1 LBR: L i b e r i a nRN: )Iruritan;a SAP: South Africa CAN : c8nada ma: Peru CHL: C h i l e HEX: Mexico CHN: China KOR: Korea, Republic of CSK: Czechorlovakia -- ANVEX 11 LIST 3F ZQUATIONS - 22.2363 PTF'R/EXUVCAH(-11 t 2 7 . 3 1 8 5 DFEYUVDPCAH (-4.8433) (2.2011) D A T E OF ESTIRATIOH: 31 3 / 8 6 2103: IOPDHCFRA = 2.2397 t 0.3093 IOCAPRCFRA (0.5666) (1.6528) R-SOUARED!CORR*): 0,957 SEE: 1.0723 PERIOD OF FIT: 1961 1984 DATE OF ESTIMATION: 3/ 3/06 2104: IOPDHCSUE -10.9952 t 0.4169 IOPURGSUE(-l) ( - 1 e9388) ( 1 e7762) + 0.9335 IOCAPHCSUE t 010197 IOE/GPSUE (2.2880) (1.7915) R-SQUARED(C0RRe): 0.761 SEE: 1.8960 PERIOD OF FIT: 1961 1984 2107:' IOPDHCAUS = -43.2351 t 0.4380 IOPDHCPIUS(-1) (-3.2595) (3.6067) R-SQU&RED(CORR.): 0,968 SEE: 4.1156 DY: 2.44 PERIOD OF fITt 1961 1904 F( 3 r 2 0 ) : 235.477 DATE 05 ESTIHATION: 3/ 3/86 P E R [ O D G F F I T : 6 1 1'334 D A T E OF E S f I r t A T 1 3 N : 3/ 1/36 PERIOD OF F I T : 1961 1 S O 4 F ( 39 19): 109.370 D A T E O r ESTIWATION: 3/ 3/86 2110: IOPDFCIHD = -1.0074 t 1.0560 10i4PnCIND (-0,6560) (22.2640) PERIOD CF FIT: 19JO I984 2112: IOPDNCtlkW = -0,7818 t 0.8379 IOCAPHCHRN t 0.0980 IOE/GPHRW (-L*Bt35) (9.9427) (1.9613) R-SOUASED(C0kR.): 0.890 SEE: 0,60464 DY: 2.06 PERIOD OF FIT: 1960 1904 DATE QF ESTIMATION: 3/ 3/86 2 1 1 7 i IOi'DHCE?? * -4,309j t 1.6956 IOCAVHCESY 0.0040 IOE,GFESP '-5.86'7) ( 8 1 . o 4 ; 6 r (Sa(6027) R - S O U A R E 3 ( C O R R . j : 0 . 3 ' 9 S E E :0.20543 IIU; 1.90 P-:R100 Of FIT: IS43 1984 F ( 21 2 2 ) : i37.644 3nfE il~S r I n a i ? O N : E 31 41e6 R-S~UARED(CORR.J: 6 . 5 3 9 SEE: 0.13?16 ttY: 1.34 PERIOD OF FJ?' 1961 1 9 P t P-SOUAFiEI1(COkk. 1 : 3.EloS SEE: 0.413t10 fib: 2 . 2 4 P E R I O D OF F l y : 1 9 6 1 1 9 8 4 R - S O U A R E D ( C 0 P R . ) : 0 . 9 8 6 SEE: 21t8482 D l i : 1 . 2 3 DATE OF E S T I t l k l I O N : LI' 7 / 2 4 P E R I O D OF F I T : 1 9 6 1 1 9 0 4 DATE OF E S T I I ~ P T I O N : 3,' 3 / 8 6 3147; IOFCXCUSA 2 0 . 1 5 4 4 + 0 . 3 1 8 3 I O U T L n C U S A f - I ? ( 2 . 3 7 0 7 ) ( 3 . 7 0 4 6 ) R-SUUARED(C0RR.): 0 . 6 1 0 SEE: 5.7476 DU: 2 . 1 2 P E R I O D O F F I T : 1 9 6 1 1 9 8 4 PERIOD OF F I T : 1960 :384 DATE OF E S l l f l A f I O N : 3/ 4/66 R-SOUARED(C0RR. ): 0.911 SEE: 4,4574 CY: 2 . 4 5 PERIOD 'If FIT: 196t 1983 DATE OF ESTIHATION: 3/ 4/86 2154: IOACHCDEU = -3.0980 t 0.5628 CRSTPD2EU - 0.0149 IONDEU (- 1.44212 (9.5105) ( -0 s 8230 1 R-SQUARED(C0RR.): 0.954 SEE:0.88845 DY: 1.66 PERIOD OF FIT: 1961 :984 2lSSI IOACHCFRA = 3.5525 + 0.2701 CRSTPDFRA - 0.0219 IOHFRA (1.6239) (2.2471) (-3.3502) R-SOUARED(C0RR.): 0.854 SEE: 0.86845 DY: 2.32 PERIOD OF F I T t 1961 1984 F( 4 , 19): 74.766 DATE OF ESTINATION1 3/ 4/86 a-SOUAkED(C0kR.): 0.863 S E E : 0 . 8 6 7 3 8 DU: 1.85 F E R I O D OF F I T : 1961 1984 DATE OF E!iTIHATION: 3 1 4 / 8 6 R-SGUAEED(C0kR.): 0.974 SEE: 0.4434i t d :1.93 PERIOD OF F I T : 1961 1984 DATE O f ESTIHATION: 5 / 4/86 R-SOUARED(C0RR.): 0.963 SEE: 0.36006 DYt 2.14 PERIOD OF F I T : 1961 1984 DATE OF ESTIHATION: 3/ 4/86 2169: IOACHCAUS - 1 -1.8527 t 1-2315 CkSTPDAUS 5.5405 D83 (-1.0552) (4.5891) (-2.9788) R-S2U4RED((ORR*): 0.620 SEE: 1.7453 D Y t2.12 PERIOD OF F I T : 1960 1984 f ( 2 r 2 2 i I 20*610 DATE OF E s T I n A T I o n l 31 4 / 0 6 A-SOUARED(CORR.): 0 . 8 9 2 S E E : 0.151c+8 p u : 1.87 PERIOD OF FIT: 1961 1984 D A T E OF E S T i R A T I O N : 3 / 4/06 21761 IOACHCIND m -3.3423 + 1.5337 CRSTPDIND - 0.0710 IOEIND (-1.6581) (3.2716) (-1.6429) R-SOUARLD(CORR,): 0,760 SEE: 1.4283 D Y :2.06 PERIOD OF FIT: 1961 1984 DATE OF ESTIHATION: 3/ 4/86 R-SOUARED(CORR,): 0.981 SEE: 1.6818 IiUt 2.33 PERIOD OF FIT: 1961 1984 DATE OF ESTIHATI3N: 3/ 4/86 2183: IOACRCMDL = -0.2405 t 0.4262 CRSTPDNDL - 010017 IOHNDL (-0.6404) (3.8766) (-0.3205 R-SQUARED(C0RR.): 0.918 SEE: 0.30609 DY1 3.29 PERIOD OF FIT: 1961 1984 DATE OF ESTIUATION: 3/ 4/86 2186; IOACHCKOR * 0.1358 t 0 . 5 9 4 2 CRSTf'llKOR - 0.0001 IClfiKOR (1.0799) (5.2129) (-4.4837) P E R I U D O F F I T : 1961 1984 DATE OF E S T I W A T I O ~ : 3 1 4/86 + 0.0175 SCPRDPCHN ( 1e1295) R-SQUARED(C0RR.): 0.9S9 SEE: 2.1986 PERIOD OF F I T : 1960 1984 DATE O f ESTItIATlON: 3/ 4/86 R-SGUARED(C3RR.l: 0.954 SEE: 0159048 PERIOD OF FIT: 1960 1984 DATE Of ESTIHATION: 31 4/86 2194: IOACHCJPM = -3.8594 + 0.5617 CRSTPDJPH t 0.0001 SCPRDPJPN (-0.7916) (6.7391) (0.5935 R-SOUARED\CORRs): 0.984 SEE: 3.2087 PERIOD OF F I T : 1961 1984 . . f ( 4r 19); 359,186 DATE OF ESTIMATION: 3 1 4 / 8 6 1198: LM IOACHCCSU = 0.6136 t 0.5423 L H C R S T P D C S k 1 . ( 4 . 0 0 4 ~ 3 ) k-SOUARED(C0Rk.): 0 . 9 1 4 S E E : 0 . 5 8 1 7 6 E - 0 1 DU: 1.93 RHO(1): 0.787 PERIODOF F I T : 1960 1984 DATE Of ESTInATIOn: 3 1 4 / 8 6 R-SQUARfD(C0RRa): 0.990 S E E : 2.1641 DY1 1.79 PERIOD OF F I T : 1961 1964 DATE OF ESTItIAllON: 3 1 4/86 R-SQUARED(CORRe):0.957 SEE: 2.5601 DY: 2.11 P E R I O D O F F I T : 1961 1'84 DATE OF ESlIHATION: 3/ 418s - 24051 IOEXUVCDSUE -3.0832 t 0.5560 IOfRCDHC2 (-1.8037) ( 4 . 4 9 7 4 ) R-SQUARED(C0RR.): 0.910 SEE: 2.0892 DY: 1.34 PERIOD OF FIT: 1961 L984 DATE OF ESTIHATION: 3/ 4/96 R-SOlIARED( CORR. : 0.888 SEE : 2.5487 DU: 1.96 R-SOUARED(C0RR.): 3.934 SEE: 1.4304 DU:2.13 DATE OF ESTIHATION: 3/ 4/86 R-SOUARED(C0RRo): 0.982 SEE: I t 0 0 0 8 DU1 0 . 9 3 P E R I O D OF FIT: 1961 1984 R-SOUARED(C0RR.): 0.943 SEE; 1,4665 D Y :2.76 PERIOD OF FIT: 1961 1984 DATE OF ESTIHAlION1 31 4 / 8 3 - 2413: IOEXUVCDVEN -9.2002 + 0.6538 IOFRCDHCZ ( - 2 . 8 5 2 3 ) (4.1608) R-SOUARED(C0RR.): 0.081 SEE: 3.0600 IrY: 1.52 PERIOD OF FIT: 1961 1984 DATE OF ESTIHATION: 3/ 4/86 2414: IOEXUVCDCHL -3.3571 t 0.4213 IOPkCDRC2 (-1.0006) (2.2510) R-SOUARED(C0RR.): 0.771 SEE: 3.8346 PERIOD OF FIT: 1961 1984 F 2r 21): 390717 DATE OF ESTIHATION: 3/ 4/86 2416: IOEXUVCDPER = -3.0418 t 0.3631 IOPRCDBC2 (-1.8511) (3.7165) R-SOUARED(C0RRe): 0.910 SEE: 1.9458 CY: 2.22 PERIOD OF FIT: 1961 1984 DATE OF ESTINATIONt 31 4/86 2 4 1 7 1 IOEXUVCDLbR m -5.79O1 + 0.8272 IOPRCDHC2 ( - 3 . 4 1 9 7 ) ( 1 4 . 0 2 0 2 ) R-SQUfiRED(C0RR.): 0 . 8 9 1 SEE: 2.1177 D Y : 1 . 4 7 PERIOD OF F I T : I960 1984 F( l r 23): 196.565 DATE OF ESTINATIOH: 3 1 4 / 6 6 2 4 1 8 1 IOEXUVCDHRN - 0 . 2 2 3 2 t 0 . 2 2 3 0 IOPRCDNC2 ( - 0 . 0 0 6 0 ) ( 1 . 8 4 0 3 ) P E R I O D O F F I T : 1 9 6 1 1 9 0 4 DATE OF ESTIHATION: 3 1 4/R6 R-SOUARED(C0RR.): 0.984 SEE: 2 . 1 8 8 2 DU: 1 . 3 0 P E R I O D O F F I T : 1961 1 9 8 4 F ( 2 1 2 1 ) : 7 0 7 . 8 5 2 DATE OF ESTIHATION: 31 4 / 8 6 R-SOUARED(C0RRe)I 0.983 SEE: 2 . 7 3 4 2 DU: 1.99 PERIOD O F F I T : 1961 1 9 8 4 DATE OF E S T I H A T I O N t 3/ 4 / 8 6 2422: IOINUVCDDLU m -4.0OSS t 0.6498 IOPRCDHCZ ( - 2 . 7 3 7 0 ) (3.9112) R-84UARED(CORR*)I 0 - 9 6 3 SEE: 2.2487 PERIOD Of FIT2 1961 1984 R-SOU4RCD(COIR*)2 0.970 SEE: 1.6261 DATE 01 ESTIR4fIOMt 3/ 4/86 2424: IOIRUVCDBIL m -7.0167 t 0.6043 IOPRCDRC2 4 7 (3e0593) R-SOUARLD(CORR.)l 0 - 9 0 9 SEEI 3.1506 W - S O U A R E L ( C I ] R R . ) : 0.914 SEE: 3.2098 DU: 1.00 PERIOD OF Fir: 1961 1984 F ( 21 21): 123.063 R-SOUARED(C0RRo): 00915 SEE: 2.4825 DY:1.22 PERIOD OF FIT: 1961 1984 2430: IOIHUVCDKOR m -8.3223 t 0.7359 IOPRCDMC2 (-202966) (3.3861) R-SOUARED(CORR.)1 0.838 SEE: 4.1977 DU1 1.44 PERIOD OF FIT: 1961 1984 DATE OF ESTIRATIOW: 3 1 4/66 R-SOUARED(C0RR.): 0.982 SEE: 1.4767 DMZ 2-01 PERIOD OF FITt 1961 1984 R-SOUARED(C0KR.): 0 . 9 5 8 SEE: 2 . 0 1 1 5 DY: 1 . 1 8 PERIOD OF F I T : 1 9 6 1 1904 R-SJUARED(C0RR.): 0.973 SEE: 1.6875 DU: 1 . 3 0 PERIOD OF f I T : 1 9 6 1 1984 DATE OF E S t I H 6 t I O M : 3/ 4;Pb PERIOD O F F I T : 1 9 6 1 1984 D A T E OF STIHATIOl4: 31 4/86 R-SOUARED(C0RRe): 0 . 8 3 8 SEE: 1 . 8 3 7 5 Dil! 1 1 5 3 DATE OF E S T I H A T I O N l 8 / 2 9 / 8 6 Bolis, J;L. and J.A. 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Uoatgoecry, 1982, " Factors Influencing Mine Location: An I r o n Ore ~ r a m p l e ,Land Economics, Madison, Wisconsin, no. 58, pp. 524- ~ 36. Klinger, F.L., 1986, " Iron Ore Sec. i n Bunines Minet.sl Cormodity ~u~raarier," pp. 78-?9. Leary, R.J. and D.J. Kusler, 1975, Capital and 'La-bor Requirements f o r Iron Ore Mining and Beneficiating, U.S. Bureau of Mines, Pittsburgh, no. 4, pp. 101. . , 1974, "The Y ~ r i t i m eTransportaticn of Iron ore," N w York, pp. 95 Metal Bulletin, 1977, Iron and Manganese Ores Survey, London, pp. 141. 1Q88, P.C., 1983, "World I r o n Ore supply," S k i l l i n g s Min. Rev., v. 72, no. 23, pp. 4-6. l i l r o n , D. and K. Burgher, 1981, "Energy Consumption i n Hypothetical Medium - S i z e Open pit," S k i l l i n g Hin. Rev., v. 70, no. 49, pp. 10-18. Priovolos, T., 1987, Investment P o l i c i e s f o r S t e e l Producing. Countries: An Empirical Analysis of t h e Use of Iron Ore by Xajor S t e e l Producin Countries, The Uorld Bank, International Economics Department: I n t e r n a t i o n a l Commodity Markets Division, Working Paper 1987-2, Uashington, DC. b* F . ,k, D., 1982, "Managing Resource Dependency: The United S t a t e s and Japan i n t h e Markets f o r Copper, Iron Ore and Bauxite," Wolrld Development, Oxford, no. 10, pp. 541-60. Rogers, C. and K. Robertson, March 1987, "Long Term Contracts and Market s t a b i l i t y , " Resources Policy, Washington, DC, pp. 3-18. Rosenmuller, J., 1981, The Theory of Cames and Markets, North Holland, Amsterdam. The TEX Report, Ltd., 1982-83, Iron Ore Manual, Tokyo, Japan, pp. 331. UNCTAD, 1985, Yearbook of International Comnodity S t a t i s t i c s , Geneva. United Nations I n d u s t r i a l Development Organization, 1980, " ~ i n e r a lProcessing I n Developing C o u n t r i e ~ ,New York, pp. 27-37. ~ United - ~ a t i o n s ,1970, Survey of World Iron Ore Resources: Occurrence and Appraisal; Report of a Panel of Experts Appointed by t h e Secretary- General, New York, no. 6, pp. 479. United Nations, 1950, '%orld Iron Ore Resources and Their U t i l i z a t i o n , With Special Reference t o t h e Use of Iron Ores i n Under-Developed ~ r e a , " Lake Success, no. 8, pp. 74. World Bank, 1986, P r i c e Prospects f o r Xaior Primary Comodities, Volume IV: Metals and Minerals, I n t e r n a t i o n a l Economics Department, I n t e r n a t i o n a l Comnodity Markets Division, Report 814 186, pp. 146-190. World Bank, 1964, The World Market f o r Iron Ore, Dept. of Technical Operations, International Bank f o r Reconstruction and Development, Uashington, DC.