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How Does the Reform in Pricing Mechanism Affect the World’s Iron Ore Price: A Time-Varying Parameter SVAR Model

Author

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  • Yufeng CHEN

    (School of Economics and Management, Zhejiang Normal University, Jinhua, 321004, China. College of Business Administration, Capital University of Economics and Business, Beijing, 100070, China. Corresponding author.)

  • Shuo YANG

    (School of Economics and Management, Tsinghua University, Beijing, 100084, China. Research Center for Technological Innovation, Tsinghua University, Beijing, 100084, China.)

Abstract

This paper employs a time-varying parameter structural vector autoregressive (TVP-SVAR) model to examine the dynamic impact of the reform of the pricing mechanism on the world’s iron ore price, drawing on the data from January 2005 to December 2021. The empirical results indicate that (1) the volatility of iron ore price has increased dramatically since the introduction of quarterly pricing mechanism based on spot price; (2) the reform of pricing mechanism changes the environment of iron ore market, and the iron-ore trading market has been obviously a shift from a seller’s market to a buyer’s market; (3) during the quarterly pricing mechanism, the iron ore price responds quickly to the supply and demand situation of the global market, and the strong demand in China replaces the BIG-3 supply as the key factor of the price of iron ore. Furthermore, reducing effect of speculation can be attributed to a more transparent pricing mechanism based on spot price and the advancement of the technological level. Based on the findings, the policy should focus on decreasing the strong demand for iron ore by improving the utilization ratio of scrap steel and by increasing overseas investment.

Suggested Citation

  • Yufeng CHEN & Shuo YANG, 2022. "How Does the Reform in Pricing Mechanism Affect the World’s Iron Ore Price: A Time-Varying Parameter SVAR Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 83-103, April.
    • Handle: RePEc:rjr:romjef:v::y:2022:i:2:p:83-103
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    References listed on IDEAS

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    More about this item

    Keywords

    iron ore price; pricing mechanism; TVP-SVAR; time-varying effect; spot price;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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