Demand and Supply of Iron Ore in China

Question: Discuss about the Demand and Supply of Iron Ore in China. Answer: Introduction Iron ore is a very important natural resource that is used primarily in the production of iron, which is further processed to produce steel. Steel is a very versatile metal that is widely used across the world. Its uses ranges from manufacturing, building and construction, transportation and other wide variety of uses. China is the biggest producer of iron ore in the world followed by Australia and Brazil. Although the country produces the most iron ore, it also is the number one global importer of the resource. When compared to other producers, the iron ore from china is of a lesser quality. China produces crude ore that is of a lesser quality when compared to other countries that produce usable ore (Ironorefacts.com, 2017). This essay is based on the article written by Ranjeetha Pakiam that was posted on the Financial Review Website on March 9 2017. In this article, Ranjeetha Pakiam wrote that chains demand for iron ore hit the highest mark ever recorded in February of 2017. In this article, we shall discuss the demand and supply of iron ore in china, the factors that affect demand and supply, and how this affects the equilibrium prices and quantity. Information on the demand and supply of iron is important to both the importers and suppliers of iron ore. It assists them to understand the nature of the market and the best price and quantity to operate on and avoid losses. Furthermore, the information assists policy makers such as the government to come up with god importation policies that will benefit both the suppliers of the resource and the country. Demand for Iron Ore in China The demand for a product or service is the quantity that a buyer of the said product or service is willing and able to pay for at a particular price in time(Salvatore, 2011). The quantity demanded of a commodity is inversely related to the price of the commodity. When the price of the commodity increases, the buyers will demand less of the commodity. The reverse is true where more of the commodity will demanded when the prices are low. The importers of iron ore in china are many so the demand in this case will be an aggregate of the individual demands by the importers(Farmer, 2007). The aggregate demand here is the quantity of iron ore that the importers are willing and able to bring into the country for the price in the market at that particular time. The relationship between price and the quantity demanded is shown in the figure below. The line DD is the demand curve. Mining and transportation conditions affect the final price of the iron ore and hence will affect the demand. These conditions are determined by security and the cost of fuel. Another factor is the economic activity in china and the countries to which china exports iron and steel. Economic growth and urbanization in developing countries requires iron and steel for construction and manufacturing. The developing countries need the resources for building roads and homes for the growing industries and population. Therefore, the demand for iron ore in china can be used as an indicator of economic activity in the countries around the world. Changes in seasons can affect the demand, and regional situations such as political stability and taxation policies will affect the eventual cost of the ore. Other factors include the prices of stock and the conditions of mines that can lead to unpredictability of the prices hence directly affecting demand (wiseGEEK, 2017). Supply of Iron ore in China Supply refers to the amount of a commodity that a seller is willing and able to bring to the market at a particular price. The quantity of the commodity supplied is directly related to its price. This implies that when the price of the commodity increases, sellers will be willing to bring more of it to the market and they will bring less to the market when the prices are low. Similar to the demand for iron ore to china, supply is also an aggregate of the individual suppliers. The figure below shows the relationship between the quantity of iron ore supplied and the price. The line SS is the supply curve. Apart from the price, supply of iron ore to china is determined by the future expectations of changes in both demand and price. For instance in 2005, the Chinese economic activity was growing at a fast rate. The suppliers of iron ore regarded this as an indicator of a bright future in the mined commodities sector. In response, they invested in developing new mines and the results of these investments are evident now (Lichtenstein, 2017). Other factors that will affect supply include discoveries and development of new mines that will add the supply to the exiting supplies. Political and seasonal conditions in the supply countries will also affect the quantity and prices of the eventual supply. When we combine demand and supply of this resource, we get an equilibrium price and quantity. Equilibrium in demand and supply is the point where the demand and supply curves intersect. At this point, the quantity demanded equals the quantity supplied at the same price hence the market will clear i.e. all the commodities brought into the market will be bought. The figure below shows equilibrium in the iron ore market. P* is the price equilibrium while Q* is the quantity equilibrium. Conclusion Both exporters and importers of iron ore in the Chinese market need to understand the dynamics of demand and supply, and also how these economic phenomena interact to give rise to the equilibrium price and quantity. This information will help the relevant parties make good decisions on demand and supply to avoid deficiencies and surpluses in the market. 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