Author Description

This paper presents a model of the world iron ore industry that uses game theory principles to determine iron ore prices. The boundaries of the range of price negotiations are specified through bilateral oligopolistic theory and are further constrained so that the negotiating parties are not put out of business. The validation of the model indicates that it is suitable for policy analysis as well. Multiplier analysis is used to trace the channels of transmission of exogenous shocks in the iron ore markets. The simulations show that an increase in Brazilian iron ore capacity will reduce iron ore prices and lead to a redistribution of market shares among the producers. Increases in EEC crude steel production and exogenous increases in scrap prices or in the inflation index will tend to increase iron ore prices. The simulations also indicate that depreciation of the U.S. dollar relative to European and Japanese currencies will have a negative effect on iron ore prices in the first years and a positive effect in the next two. But the overall effect of the U.S. dollar depreciation is found to be very small over a ten-year period.