The Demand and Supply of Iron Ore-Free-Samples for Students

Question: Discuss about the Demand and Supply of Iron Ore in Australia. Answer: Introduction One of the fundamental concepts in economics related to demand and supply which is used to determine not only the equilibrium price but also equilibrium quantity of a given product. When there is an increase in the demand of the underlying product, then the price tends to increase and so does the consumption assuming that supply in the short run remains constant. Similarly, the decrease in demand would lead to fall in the prices assuming no alteration in supply (Mankiw, 2014). This concept would be applied to the most critical export of Australia i.e. iron ore and explanation would be offered with regards to decrease in price of iron ore which has been witnessed in the last couple of years. The underlying economic concept and the iron ore price movement would be discussed in the form of a report. Demand and Supply Mechanism The demand curve for normal goods tends to be sloping downward on account of the inverse relationship with price while an opposite trend is observed for supply which tends to vary proportionally with price. The point at which there is meeting of the two curves (i.e. demand and supply) tends to provide the equilibrium point. It is imperative to note that the changes in demand and supply curve may arise due to non-price factors as well besides price. When the non-price factors are at play, there is shifting of the demand and supply curves. For instance, the increase in demand leads to right shifting of the demand curve while decrease in demand leads to left shifting of the demand curve. This is captured graphically as highlighted below (Nicholson, Snyder, 2014). Similarly, the increase in supply leads to downward shifting of the supply curve while decrease in supply leads to upward shifting of the supply curve. This is captured graphically as highlighted below (Mankiw, 2014). Iron Ore Demand Supply Australia is the largest exporter of iron ore in the world and imports mainly to China where it is used for manufacturing steel which is required to fuel the growing Chinese manufacturing rusk and better infrastructure. However, in the recent past there has been a drop in the iron ore prices which has led to drop in the iron ore exports from Australia both in terms of quantity and revenue. This is primarily on account of the slowing economic growth in China due to which there is lower demand of steel as infrastructure projects and real estate has seen significant slowdown (Allen Day, 2014). The lowering iron ore prices are also reflected in the following diagram which captures the movement of iron ore prices over the last decade or so (Eginton, 2015). `It is evident from 2014 onwards the iron ore prices have started plummeting as demand has been reduced on account of slowdown in China while the supply continues to remain the same. As a result, there is an excess supply. In economic terms, there has been a shift in the demand curve on the left which is leading to reduced equilibrium quantity and also reduced prices of iron ore. It is estimated that during 2013-2014, there was a fall in iron ore prices by more than 50% (Eginton, 2015). It is difficult to find alternate demand comparable to China from other countries as the global growth currently is tepid. Further, iron ore is majorly used for production of steel which forms the backbone of manufacturing industry. China is undoubtedly the global manufacturing king and thus has little by way of alternatives. Additionally, China incidentally also has large domestic iron ore production which further has adverse implications for Australian miners such as BHP Billiton and Rio Tinto (Allen Day, 2014). The domestic economy of Australia is essentially services based and manufacturing base in Australia is almost non-existent on account of higher labour cost and geographical isolation. As a result, the iron ore mining industry primarily depends on exports as local consumption is negligible. However, considering that these are cyclical fluctuations, it would be noteworthy that as Chinese economy comes back to track, the demand would increase which would lead to higher prices and higher quantities of exports from Australia. However, till that time the miners would have to face a tough time and would have to continuously enhance their operational efficiency to survive (Cauchi 2016). Conclusion Based on the above discussion, it would be appropriate to conclude that the demand supply theory plays a crucial role in determining the equilibrium price and quantity of a given product. In the recent years, due to slowing Chinese economy, there has been a decrease in global demand for iron ore which has adversely impacted the iron ore price which within a couple of years have plummeted. However, as the Chinese economy would revive in the near to medium term, this trend would reverse and the iron ore prices would again firm up thus providing an impetus to Australian GDP growth. References Allen, C. Day, G. (2014). Does China's demand boom curb Australian iron ore mining depletion?.Australian Journal of Agricultural and Resource Economics,58(2), 244-262. Cauchi, S. (2016).Iron ore gloom to continue in 2016. The Sydney Morning Herald. Retrieved on August 23, 2017 from https://www.smh.com.au/business/markets/iron-ore-gloom-to-continue-in-2016-20151217-glpulr.html Eginton, J. (2015).Iron Ore: Supply has arrived but where is the demand?. Nikko Management Global Site, Retrieved on August 23, 2017 from https://en.nikkoam.com/articles/2015/07/iron-ore-supply-has-arrived-but-where-is-the-demand Mankiw, G. (2014), Microeconomics (6th ed.), London: Worth Publishers Nicholson, W. Snyder, C. (2011), Fundamentals of Microeconomics (11th ed.), New York: Cengage Learning