The development of the Asian iron ore market: A lesson in long-run market contestability

Abstract

This paper provides an historical analysis of how the growth of Japan's post-World War Two iron ore demand led to the development of the Asian iron ore market. The paper analyses bilateral advantages that geographic closeness provided to Japanese and Australian iron ore traders, and calculates how the bilateral quasi-profits arising from geographic closeness were divided between them.The model estimates that Australia's freight advantage to Japan was worth on average around US$124.8 million per year between 1985 and 2003-over that period iron ore trade between Australia and Japan was worth on average US$909.9 million per year. The freight sharing agreement between Australia and Japan provided US$32.3 million per year of the transport cost differential to Australian exporters, while Japanese importers received the remaining US$92.5 million.Despite the long-run nature of the Australia-Japan bilateral advantage, the development of the Asian iron ore market was influenced by strategic government interventions which aimed to capture shortrun rents. The short-run interventions by the Australian government threatened Japan's market access security and catalysed the development of Brazilian iron ore export capacity, which remains as Australia's largest competitor in the Asian market.