ABSTRACT
This chapter presents an economic framework to understand the structure of the iron ore market and the ability of the market to adjust to a positive demand shock over the short and long run. It helps to systematically understand how the growth of the Chinese steel demand impacted on organisation and structure of the global iron ore market. The chapter describes how a marginal pricing mechanism provides producer surplus to intra-marginal producers; it then introduces the idea of supply security and the role of contracts. After that, it shows how the relative geographic closeness of trading partners and institutional rigidities create long-run bilateral trade advantages. The chapter outlines the theoretical impact of a positive demand shock and the structure of the market adjustment. Market access is the most important reason for the prevalence of long-term contracts (LTCs) in mineral markets.
