Microeconomics - Pricing in the Iron Ore Market - Assignment Example

Microeconomics_200_assignment a) Introduction During the past few years, Western Australia’s resources area particularly the mining sector proceeded to relish particular considerations produced by tough international demand for commodities. This assignment aims to test the impact of this commodity boom particularly the iron ore resources explosion, on the economy of Western Australia.1 The iron ore industry is currently the major individual commodity division in Western Australia by measure and represents a key role in the State’s export-driven economic system. In 2005, the iron ore industry reported for 29% of overall value of minerals and petroleum sales, up from 22% in 2004. Repelled by Chinese demand, iron ore gross sales attained record volumes for a 6th successive year, rising by an imposing 13% to 244.5 million tonnes (Mt). The solid boost in quantities sold jointly with an upsurge in iron ore prices forced sales values to a new record of $11.3 billion which is up by 83% as against the past year’s level. Pricing in the Iron ore market For the past 40 years, the prices of iron ore have been determined in private discussions among the small fistful of mineworkers and steelworkers which reign both spot and contract markets. By tradition, the first contract attained amongst these two groups places a yardstick to be adopted by the remainder of the industry.2 This yardstick scheme of pricing iron ore has on the other hand in current years started to collapse, with contributors along both demand and supply chains bidding for a change to short time pricing. Since most of the other commodities were already following a matured market based pricing system, it is likely for iron ore to go behind. Even though exchange-authorized iron ore exchange contracts have grew during the past few years, so far no switch over has instituted a good futures market for the mostly seaborne $88 billion a year iron ore trade (Financial Times, 2009). The need for change in the country The need for change in the country will be due to the following factors: i Economic growth in the long-run for Western Australia’s economic growth will carry on to be well-built for the next 20-30 years. ii The demand for labour under such circumstances will persist to develop more quickly than the ability of the state to supply. This demand will have to be met by the government from the states’ natural population or from the present migration plans. iii It is estimated that a whopping additional 224,000 workers will be needed by 2016 in Western Australia. iv This will result in demand for training people, housing requirements will be more, and there will be the need for drastic growth in infrastructure as well. The demand for production with reference to Isoquant and Isocosts curve theory The principle of substitution discloses a basic theory of neoclassical location theory. Without a doubt, it may be debated that in a neoclassic site, the position of factories is a practice in changeover as trade-offs are made amongst the different location elements. Thus procurement and allocation costs are interchanged for one another; for instance if a site is near the market then its procurement costs substitute for distribution costs. At the same time if a factory is situated near the sources of raw material substitutes, distribution costs for procurement costs. If a cheap labour location has to be considered then the factory needs to compare the impact of lesser labour costs for high transportation costs or vice versa that is lower transportation costs for higher labour costs. The theory is that in reality firms are boosted to scatter production to low wage areas to make precisely this form of permutation as productions grow. As the production matures, neither the low wage region or the least transport cost will provide a solution (Hayter, 2004). Figure showing all possible combinations of optimal input for a given output Source: Hayter, 2004 The above graph illustrates the production theory. In this specific theoretical position, an isoquant curve depicts how a manufacturing plant can use diverse mixture of two inputs, X and Y within convinced boundaries of substitution. Thus it is left to the factory to substitute X for Y or Y for X (Hayter, 2004). Based on the theory of production the selection of the best combination of inputs reckons on their proportional cost or price as disclosed by Isocost lines. These are lines of identical cost for diverse combinations of inputs. The deviation of the gradients of isocost lines depend on whether X is comparatively less costlier than Y (Figure 4b) of Y is relatively cheaper than X (Figure 4c). The optimal input combination for a given dimension of a factory is determined as that point on the isoquant where costs are lowest (Figure 4d). Thus in the above figure the optimal combination lies at the point of intersection of X* and Y* as any other combining will result in higher cost (Hayter, 2004). b) “…Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly-skilled) people and less-educated (or less-skilled) people-doctors versus call-center operators…The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not…” (Blinder, 2006, p. 118). The Australian mean wage is 15 times the mean wage of growing countries like China and India. There is a commanding encouragement for industries to decrease cost by hiring less costly foreign labour. This is particularly so for industries which go through a profit crunch during commodity uptrend. This can be achieved with the help of increase in imports of goods and services (Abhayaratna & Lattimore, 2006). Australia’s costly labour renders a suggestion of the departures in hourly labour returns across countries. Specifically comparison of the cost of Australian labour with that of China and India will show the differences. According to Jaumotte & Tytell (2007, p.163) “The labour cost differential between developed and less developed counties provides an attractive production environment and has attracted many manufacturing operations from around the world. The share of developing country products in advanced country manufacturing imports has doubled since the beginning of the 1990s.” Cross-country comparison of hourly labour compensation Labour market theory In Western Australia increasing real wages is the indication while inadequate labour is the issue. This presents a problem. Reasonably high wages draws in labour, supporting people to gain the requisite skills to take up the employment that renders a high income. Nevertheless, high wages entails high costs to employers. If the cost of labour can be reduced then it can lead to high profits under conditions when lower cost replaces are accessible. The bigger the cost deviations between changes, the quicker the long-run replacement rate (Abhayaratna & Lattimore, 2006). The requirement for change with regard to Labour Future economic growth will see the demand for substantial labour growth for which Western Australia is still to set up itself for. In spite of the affirmative prediction, the understanding of the period 2004-2008 depicts that there are unconstructive consequences of economic booms. The economic and social cost need to be improved. Thus it has to be realized that over the long period Western Australia’s economy will carry on to get bigger at or even beyond the past long-run rate (Olsen, 2006). Since the country is by now in short supply of labour, the demand-supply stability is expected to remain rigid. This elevates the outlook of continuing skill shortfalls and rising cost of labour that eventually jeopardizes the feasibility of non-resource segment industries, job safety and the welfare of many Western Australians. The important lesson is that Western Australia demands more valuable planning procedures which will lead to better reaction to economic development (Olsen, 2006). The need to add-on for skilled labour in the state will continue to depend on immigration. Unless cautiously handled, contrary results are potential that weaken motivators for young Western Australians to intensify their skills. According to Taylor, (2007) “Increased immigration intake for low-skilled and unskilled workers may provide relative abundance, leading to normalization of wages decreasing the incentive for school leavers to choose low-skilled employment over training and higher education.” Due to the shortage of labour in the mining industry it is very hard to develop. In reality people are undecided to change location since most of the mining industries are located in remote areas. As indicated by Hugo (2008), as income and job vistas are requisite considerations for migrators, they are not the exclusive elements regarded. Indeed, life-style, education and community security were observed more often than vocation and advancement. These elements are essential when thinking of moving to a secondary area. Wages as the balancing variable According to Spoonley & Bedford (2008) “The realities of physical constraints imposes economic trade-offs between alternatives. The fundamental choices are between increased job ‘off-shoring’, increased participation within the State’s labour force, and accelerated immigration. In all likelihood, all three factors will play a role in helping to balance the demand and supply of labour in Western Australia.” References 1. Blinder, A. 2006. Offshoring: The next industrial revolution? Foreign Affairs? 85 (2), 113-128. 2. Rostoker, William; Bronson, Bennet; Dvorak, James 1984. "The Cast-Iron Bells of China", Technology and Culture (The Society for the History of Technology) 25 (4): 750–767 3. http://www.foxbusiness.com/markets/2010/09/28/interview-singapores-smx-plans-launch-iron-ore-futures/ (accessed 15 May, 2011) 4. Roger Hayter 2004. The Dynamics of Industrial Location: The Factory, the Firm and the Production System Burnaby 5. Jaumotte, F., & Tytell, I. 2007. The Globalization of Labour. In T. I. Fund, World Economic Outlook (pp. 161-192). Washington DC: The International Monetary Fund. 6. OECD. 2005. OECD Employment Outlook. Paris: OECD. 7. Abhayaratna, J., & Lattimore, R. 2006. Workforce Participation Rates – How Does Australia Compare? Canberra: Productivity Commission Staff Working Paper. 8. Iron ore pricing war, Financial Times, October 14, 2009 9. Olsen, K. B. 2006. (March 6). Productivity Impacts of Offshoring and Outsourcing: A Review. STI Working Paper 2006/1, pp. 1-33. 10. Taylor, M. P. 2007. Tied migration and subsequent employment: Evidence from couples in Britain. Oxford Bulletin of Economics and Statistics, 69 (6), 795-818. 11. Hugo, G. 2008. Australia’s State-specific and regional migration scheme: An assessment of its impacts in South Australia. Journal of International Migration and Integration, 9, 125-145. 12. Spoonley, P., & Bedford, R. 2008. Responding to regional labour demand: International migration and labour markets in New Zealands regions. International Migration and Integration, 9, 203-223. Read More