Saurav Mittal MIB

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

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

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

The quarterly contracts which last year replaced the 40-year-old benchmark system of annual negotiations are linked to the spot market. If Spot Prices rise then the prices of the next quarter is likely to rise.
Prices peaked in mid February just short of $200 a tonne and have since slipped 2.5%. Increasing steel production in China has driven up demand for iron ore, leading suppliers to consider changing the system to shorter contracts based more closely on market prices.

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

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

World Steel Scenario

1,600,000 1,400,000 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00%

1,200,000 1,000,000
800,000 600,000 400,000 200,000 0

1993

2009

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1994

1995

1996

1997

1998

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2000

2001

2002

2003

2004

2005

2006

2007

2008

World Steel Production

YOY Growth

The latest World Steel Association's short term forecast for world steel use anticipates a rise in steel use by 10.7 % in 2011. The Steel Industry over the past 20 years has grown by an average of 5%.

2010

Year

Price

Trend Observed The Price was relatively stable. Countries did not see the need to stock The price suddenly rose.

World Iron Ore World Steel Output Scenario Scenario Production was almost equal to consumption Production was almost equal to consumption Production exceeded consumption Production exceeded consumption Production exceeded consumption Production will exceed consumption Production will exceed consumption Increasing at an average of 8%.

Chinas Behaviour Chinas was not stocking and Chinas average share in World import was 27%.

2000-2006

60

2007

123.0

Increased by 10% YOY

China was not stocking.

2008

156

The price rose further

Decreased by 2%

Chinas steel output rose by a meagre 5% China increased its imports by 41% and raised its world import share to 70% from 58% in 2008 Chinas stocking created pressure on the world market. Chinas stocking is still creating pressure.

2009

80

The market corrected due to excess iron ore

Decreased by further 8%

2010

145.8

The price again rose

Increased by 15%

Post 2010

The price reached record level of 200

Expected to increase by 10%

Future Prices

Expected to increase by 5%

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

The R Square came out to be 99.04, which means these factors explain 99.04% of the variation in Price. The Standard Error was 9.3, which means there is a variation of plus minus $9 in the price.

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

Y (Price of Iron Ore) = Mining Cost + 7.19 Inflation + .19 China Imports - .146 Years of adjusted reserves.

Y (Price of Iron Ore) =Mining Cost + 7.19 Inflation + .19 China Imports - .146 Years of adjusted reserves. The model explains 99% of the variation in Price. The respective coefficient of the factors explains the effect it will have on the Price of Iron Ore with one unit change in the factor. The coefficient .19 of China imports means that the Price of Iron Ore will increase by $.19/ton if China imports increase by 1 million tonne.

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

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

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

Over the last twenty years:

seaborne trade in steam coal has increased on average by about 7% each year Seaborne coking coal trade has increased by 1.6% a year.

China is the largest produce and consumer of coal Australia is the largest exporter of Coal.

Coal

Peat

Lignite Coal/Brown Coal (17%)

Sub-Bituminous(30%)

Hard Coal/ Bituminous Coal (52%)

Anthracite Coal(1%)

Primarily used in power generation

Used in Power Generation and Cement Manufacture

Metallurgical/Coking Coal

Thermal /Steam Coal

Industrial and Domestic Uses

Used in Steel Production

Used in Power Generation

Type Of Coal
Steam Coal/Thermal Coal
Coking Coal/Metallurgical Coal

Specific Uses
Power Generation
Steel Production Alumina refineries, paper manufacturers, chemical & Pharmaceutical Industries. Chemicals

Other Uses

Refined Coal

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

FLUCTUATION IN OIL PRICES

TRANSPORTATION COSTS

A DEMAND AND SUPPLY VARIATION OF

INDUSTRIES WHICH USE COAL IN ITS

PRODUCTION PROCESS
GOVERNMENT REGULATIONS

The R square came out to be .975, which means that the analysis explains 97.5% of the variation in Price.

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

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

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