An economic model of the iron ore trade

Tamvakis, Michael N. (1999). An economic model of the iron ore trade. (Unpublished Doctoral thesis, City University)

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Abstract

Iron ore is among the biggest, non-energy extractive industry in the world in terms of value, and the biggest in terms of the volumes of cargo it channels in international trade. Two key characteristics of the iron ore market are central to its study: firstly, there is only a small number of buyers and sellers; and secondly, there is a great degree of interdependence among buyers and sellers and both groups are aware of this interdependence. For buyers, security of supplies is crucial. For sellers, long-term commitment from importers is essential in order to maintain the long-run viability of mining projects. Since the 1960s, long-term contracts have been, and still are, the main vehicle used in international iron ore trade.

Under the light of the above peculiarities of the iron market, a non-competitive analytical framework is adopted. This thesis proposes an alternative profit maximising behaviour different to the solutions offered by oligopoly and bilateral monopoly theorists. In this case, the importer enters negotiations with complete knowledge of his own minimum acceptable price, a possible idea of his partner's maximum acceptable price and also an idea (which can be held with varying degrees of certainty) of what alternative suppliers may be able to offer. This will restrict the range of prices over which negotiations take place and will mitigate the bargaining power of the seller. A buyer is likely to act in a similar manner, knowing that the seller has alternative export outlets, but he can also use other bargaining tools to achieve a better deal. A quite common tool is the promise of long term commitment through the signing of contracts, acquisition of equity stakes in mines or provision of financing facilities.

The behaviour of the trading partners in such an oligopoly/oligopsony (or bilateral oligopoly) environment is also studied empirically with a relatively simple and tried econometric technique, borrowed from consumption and investment theory and applied for the first time for all top iron ore importers, who collectively have accounted for approximately 90% of world trade in the last 35 years. The model performs well in most cases and reveals: firstly, different results from previous research in the case of Japan; and secondly - and most importantly - substantial differences in the way Far East and West European importers behave.

Item Type: Thesis (Doctoral)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Divisions: Cass Business School
URI: http://openaccess.city.ac.uk/id/eprint/18322

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