China's impact on the global iron ore market

Abstract

The scale and pace of China's iron ore demand shock is unprecedented. This study sets out to answer the question of how the rapid growth in China's iron ore demand has impacted on the organisation and structure of the global iron ore market. In this context, it makes a corollary contribution to the analysis of bulk commodity market adjustment and the impact of short-run strategic interventions on long-term market outcomes. To answer the question of how China's growth has impacted the iron ore market, an economic framework is introduced to understand the theoretical structure of a bulk commodity market (like the iron ore market) and how it might be expected to adjust to a positive demand shock under competitive assumptions over the short- and long-run. The market adjustment framework is then applied to understand the historical development of the Asian iron ore market and the structure of the market in the lead up to China's demand shock. The competitiveness of the iron ore supply response to China's demand shock is analysed along with the impact of strategic short-run interventions by the Chinese state. The study examines the impact of Chinese state support for iron ore procurement and the short- and long-run effects of this support on the competitiveness of market outcomes; the examination of Chinese state support for vertical integration into African ore procurement is complemented by field observations of the redevelopment of Liberia's iron ore industry. The study suggests that although the iron ore market adjusted to China's demand shock in a competitive way over the long run, strategic interventions have also shaped outcomes in the market. The analysis concludes that short-run strategic interventions in the iron ore market have not been costless due to the long-run contestability of the market despite the bilateral advantages Australia has with the Asian market, such as geographic closeness. Over the long run, the study shows that supply-side interventions have led to the development of a competitive fringe to the Asian market and recent demand side interventions have led to the collapse of the benchmark pricing mechanism, which subsequently cost Asian importers from Australia considerable bilateral quasi-rents.