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The Relationship Research between the International Futures Price and Spot Price of the Iron Ore

Author: LiQiong
Tutor: ZhuYiQiu
School: Ocean University of China
Course: International Trade
Keywords: The iron ore future International pricing power price discovering the empirical analysis
CLC: F416.1
Type: Master's thesis
Year: 2013
Downloads: 4
Quote: 0
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Abstract


The iron ore is always one of the most important industrial raw materials inChina.In recent years, with the soaring of China’s imports on iron ore and theexpansion of the spot market’s scale, the pricing pattern of the international iron ore isreflecting the characteristics of short-term、indexation and finance.What’s more,theforeign financial derivatives’ market of iron ore is booming. Facing the inevitabletrend of the new pricing pattern and the reality of the lack for international pricingunder the the supply-side monopoly, China should seize the opportunity to launchfutures on the iron ore and fight for her international pricing of iron ore that she shallhave. Now before the launch of iron ore futures,it’s necessary to master andunderstand the relationship between the futures prices and spot prices of iron ore.With the application of econometric methods，such as the Johansen cointegrationmodel、 the VECM model、 the impulse response function and the variancedecomposition model, It make a deep analysis on the long-term equilibriumrelationship and short-term fluctuations between iron ore future and spot price, as wellas the two market’s efficiency and price discovery ability. Finally,It can draw thefollowing conclusions based on the empirical results:(1)There are long-run equilibrium relationship between iron ore’s future and spotprice. Compared with the future market,spot market is easier to reach the equilibriumprice and has an important role in the price discovery.(2) In the short term, the future price play a one-way guiding role on the spot pricefluctuations. Moreover,the future’s market is more sensitive to the new information,and it’s faster on the speed of information dissemination,also more timely. Thisreflects the future market is more active and more efficient than the iron ore’s spotmarket.(3)The iron ore future market does not only achieve its price discovery function in theearly running period, but also exacerbate short-term fluctuations of the spot price.However, It can not be ignored of futures prices in the maintenance of long-termequilibrium. Although the level of development is not very high, it still plays no small role in the function of price discovery.The conclusions of the empirical analysis on the relationship research give usimportant revelation: The financialization of iron ore already start on the right track,and foreign iron ore future market has an important impact on the iron ore trade but isfar from mature,The future market is bound to play an important and irreplaceablerole in a new round of competition for international pricing of the iron ore. On theother side,the foreign future market has not yet realized its price discovery function,and there are still many problems to deal with, which is an important opportunity anda golden era for China to launch iron ore future. All in all,only China launch her owniron ore future market, relying on the advantage of the future market to get rid of themonopoly of the supply-side, She can send out her sound in the iron ore’sinternational pricing decision,which should belong to her as the largest iron oredemand side.After fixing the grand strategy that China must establish its own iron ore futuremarket, the most important thing before the implementation of the strategy is to carryout strategic analysis. So at the end of this article,to do the SWOT analysis on thestrategy of China launching the iron ore future market. the SWOT analysis consist ofthe opportunities and threats of the macroeconomic environment that the iron orefuture will face, as well as the strengths and weaknesses will be brought to microenterprise, Which is the basis of fully recognization of the situation and making fullpreparations for the launch and running of the China’s iron ore future market.

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