Iron ore price hike explained in simple terms

On the morning of November 12, 2014, the China Mining Association announced its intention to raise mining taxes by 10 percent and increase tariffs by 13 percent. The association was confident that the hike would result in an increase in mining profits and that investors would respond by investing in mining machinery to fill the gap in output at existing mines. This was a prediction that was borne out as the price of ore had risen by 7 percent over the preceding months, and the association announced the hike, the first since 2013, that day. The reason for the unexpected impact on prices has since been clarified by Zhou Hongqi, CME Group’s head of mining. He explained the rationale for this surge in the prices:

The demand for iron ore has not been growing as the demand for coal has been increasing. When iron ore became more expensive, demand for coal plummeted. The supply side has not shown the same kind of reaction as the supply side. If the price of ore is too high, there’s a greater risk of losing money. In addition, Chinese consumers want to buy what they can afford. The demand for coal has dropped precipitously, whereas supply has grown over the last year. As for iron ore, it’s only about 9-10 percent of the world’s output, so we’re still able to produce enough for the demand for iron ore.

The real question is, what exactly caused the price increase in iron ore, if any? According to Zhou, “some miners had taken advantage of a price freeze for their production. This caused prices to go up rapidly, and some miners were taking advantage of an oversupply as they waited to supply the demand with lower prices.” The real reason is no mystery. It is this demand, however, that is a problem.

As demand for commodities goes up in China and beyond, the cost of production goes down, forcing workers to move further into the production process to save on wages. This is why mining towns with high labor costs such as Zhejiang are experiencing unemployment as their residents are forced to go find work elsewhere. As these towns are able to hire foreign laborers and have no local labor force to hire on, they continue to lose wealth, jobs, and income to the local economy as they cannot produce enough for the demand to continue to increase.

Why does all this happen? A fundamental problem in the Chinese economy lies in an oversupply of low-cost labor, and as such, in an overcapacity of the labor market at times. As many as 10 million people are unemployed in China, and it will take China until the end of 2015 before that number is reduced. To combat the oversupply of cheap labor, the government has stepped up its efforts to improve the market incentive

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